# Sustainability, Innovation, and Entrepreneurship, v. 1.0

by Andrea Larson

Andrea Larson, PhD, is an associate professor of business administration. She has served for more than twenty years on the faculty of the Darden School of Business at the University of Virginia teaching in the MBA program and in executive education in the areas of entrepreneurship, strategy, ethics, innovation, and sustainable business. She currently teaches the required MBA elective for students concentrating in sustainability. Professor Larson has taught about entrepreneurship, innovation, and sustainability innovation by invitation at Stanford Graduate School of Business (2007 and 2010) and the Bainbridge Institute (MBA in sustainable business).

Larson’s Flat World Knowledge book, Sustainability, Innovation, and Entrepreneurship, examines the wave of innovation spreading across the world today as entrepreneurial individuals and organizations incorporate concern for ecological, human health, social equity, and community prosperity into product design, operations, strategy, and supply chain management. Building on earlier research on economic development, entrepreneurial innovation, alliances, and network organizations, her current research, teaching, and curriculum development focus on innovation by companies engaged in sustainable business as a strategic and competitive advantage. Her research publications have appeared in journals including Administrative Science Quarterly, Journal of Business Venturing, Entrepreneurship Theory and Practice, Business Strategy and the Environment, and Interfaces. Her work has also appeared as chapters in edited volumes on sustainability and innovation, green chemistry, ethics, and entrepreneurship. She has produced more than fifty teaching materials (cases and background notes) on entrepreneurship and sustainability topics.

Larson was cofounder in 2002 of The Ingenuity Project, a multifaceted program to integrate theory and practice on entrepreneurship and innovation together with sustainable business practices and to encourage their use in management education, as well as corporations. Entrepreneurship theory and practice, green chemistry and engineering design, industrial ecology, and cradle-to-cradle design were illustrative of the core approaches. She has testified before Congress on green innovation as a national strategy and contributed to a National Research Council study of sustainability innovation in the chemical industry. Among her current projects are collaboration on an National Science Foundation green building technology innovation study, an interdisciplinary study of sustainable development in Panama, and collaborative work with the Reynolds Program on Social Entrepreneurship at New York University.

Prior to starting her academic career, Professor Larson was active in political work and nongovernmental organization research and lobbying, and she served in federal and state government environmental and product safety agencies, thus bringing a rich diversity of sector experience to her current work on private sector innovation. She holds a PhD from Harvard University.

### Acknowledgements

Thanks to everyone at Flat World Knowledge for your willingness to take on the challenge of an innovative publishing start-up. Special thanks to Jeff Shelstad for inviting me to be an FWK author (and huge debt to the late Jeff Timmons for encouraging Jeff Shelstad to contact me). Jenn Yee has been a pleasure to work with through the entire experience. Claire Hunter was the essential editing partner who guided production at a critical time. Mark Meier, independent writer and consultant, was my indispensible associate throughout the entire process demonstrating reliability and unsurpassed attention to detail to ensure the quality and integrity of the output. This work draws from earlier work on a manuscript for which Karen O’Brien was my valued writing colleague.

### Dedication

For Kai and Peter, to help improve their future. For Jeff Timmons and Howard Stevenson who mentored and inspired my work. For Doug, my husband, who supported me through it all. For my parents, who believed in me and worked so hard to give me the opportunities that have been open to me.

### Preface

This book offers students and instructors the opportunity to analyze businesses whose products and strategies are designed to offer innovative solutions to some of the twenty-first century’s most difficult societal challenges. A new generation of profitable businesses is actively engaged in cleantech, renewable energy, and financially successful product system design and supply chain strategies that attempt to meet our economic development aspirations while addressing our social and ecological challenges. This textbook offers background educational materials for instructors and students, business cases illustrating sustainability innovation, and teaching notes that enable instructors to work effectively and accelerate student learning.

The industrial revolution marked an era of tremendous growth, innovation, and prosperity in many parts of the world—but those achievements also have had unintended consequences that are increasingly obvious. Climate change, pollution, water scarcity, toxins in products and food, and loss of ecosystem services and biological diversity, among other problems, pose serious threats that may undermine the remarkable human progress achieved. Major forces behind these challenges are the unprecedented global population explosion and advances in technology that have caused dramatic increases in industrial production, energy use, and material throughput. As a consequence, technology races to keep pace with the demand for land, water, materials, energy, and food. At the same time, technology is being applied to address the growing volume of waste that disrupts and impairs natural systems worldwide, including our bodies and physical health. These burdens fall most heavily on those least able to avoid the adverse impacts, fight for resources, or protest: children and the poor.

We know that those same natural systems being undermined by industrialization provide the critical ecological services on which we depend for life, health, and the pursuit of prosperity. Furthermore, it is implicitly assumed our health must be sacrificed in the name of economic growth, as evident in growing environmental health problems and chronic health threats such as asthma, diabetes, and cancer that accompany expanded economic activity worldwide.

While some people observe the entrenched business paradigm and the deteriorating state of natural systems with a resigned, “what can I do?” mentality, innovative entrepreneurial individuals and firms naturally see opportunity. The resulting entrepreneurial activity, what we discuss as sustainability innovation, represents a wave of change that is moving rapidly into mainstream business. Pioneers, whether building enterprises within large organizations or starting new ventures, aim for the profitable provision of needed goods and services to meet demand while at the same time contributing to ecological and human health and larger community prosperity. This book is about these innovators. Studying them, through example and analyses, helps us to understand alternative business models, a new-century mind-set, and a future in which prosperity can be extended to greater numbers of global citizens.

The book was written in response to the paucity of teaching materials that enable instructors to integrate sustainability concepts in their business courses. Business students are poorly served by an education that omits the useful scholarly literature and advances made over the past few decades. Nor is their education complete if they are not aware of global ecological and environmental health trends and their implications for business. Available business cases that touch on larger societal and ecological challenges often view the problems as ethical concerns or as unavoidable Environmental, Health, and Safety (EH&S) expenses, or even exclusively the concern of regulators, policy folks, and corporate lawyers. A gap exists in management curricula between conventional business practices that assume infinite resources and safe waste disposal on the one hand, and the sustainability innovation that today’s new market conditions demand. There are now well-developed and vetted frameworks, analyses, and tools, such as cradle-to-cradle design, green chemistry, industrial ecology, The Natural Step, and markets for ecological services, as well as newly forged and creative ways of collaborating and organizing to maximize innovative outcomes. These ideas are explored. Emphasis in the collection is on private sector examples, but social enterprise and entrepreneurship cases are also included.

## Case Examples

• As the first company to deliver aesthetically appealing, ecologically friendly home-cleaning products to mainstream retailers (as opposed to just natural products stores), Method, created in the early 2000s, has changed the rules of that game to such an extent that major consumer packaged goods global companies followed the lead of these upstart entrepreneurs.
• Project Frog was formed to fill the market gap between the expensive conventional school buildings that school districts could no longer afford and the less-than-adequate and sometimes toxic trailers often seen next to public schools to accommodate growth in student populations. FROG’s buildings are less expensive, naturally lit, monitored with custom-adjusted, state-of-the-art climate control technology, and far superior and healthier learning environments for children.
• Frito-Lay’s (owned by PepsiCo) Casa Grande manufacturing facility in Arizona provides a systems innovation example of a large firm experimenting with one site to demonstrate strategic and operating benefits from going off-grid. A carbon footprint analysis, extensive eco-efficiency measures, and renewable energy for process heating and electricity needs combine to create cutting-edge innovation in production facility management.

The sustainability pioneers that we spotlight throughout this book represent a small subset of a much larger pool of entrepreneurial activity and innovation whose ranks are rapidly expanding. They are forging viable commercial paths that optimize across financial goals, strategic thinking, operating protocols, and high-quality goods and services with ecological stability, human health, and community prosperity considerations built in. These efforts are the company’s strategy to succeed. Collectively, though not necessarily visible from their dispersed locations around the world, these creative individuals and firms are fueling a massive wave of innovation. This innovation is even more essential today than it was a decade ago to meet the rapidly growing needs of global markets, as billions more people aspire to higher prosperity and quality of life within the limits of finite resources.

# Chapter 1 History

## 1.1 Environmental Issues Become Visible and Regulated

### Learning Objectives

1. Gain an understanding of environmental issues’ historical antecedents.
2. Identify key events leading to regulatory action.
3. Understand how those events shaped eventual business actions.

Sustainability innovations, currently driven by a subset of today’s entrepreneurial actors, represent the new generation of business responses to health, ecological, and social concerns. The entrepreneurial innovations we will discuss in this book reflect emerging scientific knowledge, widening public concern, and government regulation directed toward a cleaner economy. The US roots of today’s sustainability innovations go back to the 1960s, when health and environmental problems became considerably more visible. By 1970, the issues had intensified such that both government and business had to address the growing public worries. The US environmental regulatory framework that emerged in the 1970s was a response to growing empirical evidence that the post–World War II design of industrial activity was an increasing threat to human health and environmental system functioning.

We must keep in mind, however, that industrialization and in particular the commercial system that emerged post–World War II delivered considerable advantages to a global population. To state the obvious: there have been profoundly important advances in the human condition as a consequence of industrialization. In most countries, life spans have been extended, infant mortality dramatically reduced, and diseases conquered. Remarkable technological advances have made our lives healthier, extended education, and made us materially more comfortable. Communication advances have tied people together into a single global community, able to connect to each other and advance the common good in ways that were unimaginable a short time ago. Furthermore, wealth creation activity by business and the resulting rise in living standards have brought millions of people out of poverty. It is this creative capacity, our positive track record, and a well-founded faith in our ability to learn, adapt, and evolve toward more beneficial methods of value creation that form the platform for the innovative changes discussed in this text. Human beings are adept at solving problems, and problems represent system feedback that can inform future action. Therefore, we begin this discussion with a literal and symbolic feedback loop presented to the American public in the 1960s.

Widespread public awareness about environmental issues originated with the publication of the book Silent SpringThe book Silent Spring was a direct challenge to the chemical industry and to the prevalent societal optimism toward chemicals. Written by biologist Rachel Carson in 1962, it argued that the spraying of the synthetic pesticide DDT was causing a dramatic decline in bird populations and poisoning the food chain and thus humans. by Rachel Carson in 1962. Carson, a biologist, argued that the spraying of the synthetic pesticide dichlorodiphenyltrichloroethane (DDT) was causing a dramatic decline in bird populations, poisoning the food chain, and thus ultimately harming humans. Similar to Upton Sinclair’s 1906 book The Jungle and its exposé of the shocking conditions in the American meatpacking industry, Silent Spring was a dramatic challenge to the chemical industry and to the prevalent societal optimism toward technology and post–World War II chemical use. Its publication ignited a firestorm of publicity and controversy. Predictably, the chemical industry reacted quickly and strongly to the book’s threat and was critical of Carson and her ideas. In an article titled “Nature Is for the Birds,” industry journal Chemical Week described organic farmers and those opposed to chemical pesticides as “a motley lot” ranging from “superstition-ridden illiterates to educated scientists, from cultists to relatively reasonable men and women” and strongly suggesting Carson’s claims were unwarranted.“Nature Is for the Birds,” Chemical Week, July 28, 1962, 5, quoted in Andrew J. Hoffman, From Heresy to Dogma: An Institutional History of Corporate Environmentalism (San Francisco: New Lexington Press, 1997), 51. Chemical giant Monsanto responded directly to Carson by publishing a mocking parody of Silent Spring titled The Desolate Year. The book, with a “prose and format similar to Carson’s…described a small town beset by cholera and malaria and unable to produce adequate crops because it lacked the chemical pesticides necessary to ward off harmful pests.”Andrew J. Hoffman, From Heresy to Dogma: An Institutional History of Corporate Environmentalism (San Francisco: New Lexington Press, 1997), 51. Despite industry’s counteroffensive, President Kennedy, in part responding to Carson’s book, appointed a special panel to study pesticides. The panel’s findings supported her thesis.Andrew J. Hoffman, From Heresy to Dogma: An Institutional History of Corporate Environmentalism (San Francisco: New Lexington Press, 1997), 57. However, it wasn’t until 1972 that the government ended the use of DDT.A ban on DDT use went into effect in December 1972 in the United States. See US Environmental Protection Agency, “DDT Ban Takes Effect,” news release, December 31, 1972, accessed April 19, 2011, http://www.epa.gov/history/topics/ddt/01.htm.

Figure 1.1 "DDT Accumulation in the Food Chain" shows how toxins concentrate in the food chain. Humans, as consumers of fish and other animals that accumulate DDT, are at the top of the food chain and therefore can receive particularly high levels of the chemical. Even after developed countries had banned DDT for decades, in the early part of the twenty-first century the World Health Organization reapproved DDT use to prevent malaria in less developed countries. Lives were saved, yet trade-offs were necessary. Epidemiologists continue to associate high concentration levels with breast cancer and negative effects on the neurobehavioral development of children.Brenda Eskenazi, interviewed by Steve Curwood, “Goodbye DDT,” Living on Earth, May 8, 2009, accessed November 29, 2010, http://www.loe.org/shows/segments.htm?programID=09-P13-00019&segmentID=3; Theo Colburn, Frederick S. vom Saal, and Ana M. Soto, “Developmental Effects of Endocrine-Disrupting Chemicals in Wildlife and Humans,” Environmental Health Perspectives 101, no. 5 (October 1993): 378–84, accessed November 24, 2010, http://www.pubmedcentral.nih.gov/articlerender.fcgi?artid=1519860. DDT, along with several other chemicals used as pesticides, is suspected endocrine disruptors; the concern is not just with levels of a given toxin but also with the interactive effects of multiple synthetic chemicals accumulating in animals, including humans.

Figure 1.1 DDT Accumulation in the Food Chain

DDT levels, shown in nanograms per gram of body fat for animals in Lake Kariba in Zimbabwe, accumulate in the food chain.

Throughout the 1960s, well-publicized news stories were adding momentum to the call for comprehensive federal environmental legislation. The nation’s air quality had deteriorated rapidly, and in 1963 high concentrations of air pollutants in New York City caused approximately three hundred deaths and thousands of injuries.G. Tyler Miller and Scott Spoolman, Living in the Environment: Principles, Connections, and Solutions, 16th ed. (Belmont, CA: Brooks/Cole, 2009), 535. At the same time, cities like Los Angeles, Chattanooga, and Pittsburgh had become infamous for their dense smog. Polluted urban areas, once considered unpleasant and unattractive inconveniences that accompanied growth and job creation, were by the 1960s definitively connected by empirical studies to a host of respiratory problems.

Urban air quality was not the only concern. Questions were also being raised about the safety of drinking water and food supplies that were dependent on freshwater resources. In 1964, over a million dead fish washed up on the banks of the Mississippi River, threatening the water supplies of nearby towns. The source of the fish kill was traced to pesticide leaks, specifically endrin, which was manufactured by Velsicol.Andrew J. Hoffman, From Heresy to Dogma: An Institutional History of Corporate Environmentalism (San Francisco: New Lexington Press, 1997), 52. Several other instances of polluted waterways added to the public’s awareness of the deterioration of the nation’s rivers, streams, and lakes and put pressure on legislators to take action. In the mid-1960s, foam from nonbiodegradable cleansers and laundry detergents began to appear in rivers and creeks. By the late 1960s, Lake Erie was so heavily polluted that millions of fish died and many of the beaches along the lake had to be closed.G. Tyler Miller and Scott Spoolman, Living in the Environment: Principles, Connections, and Solutions, 16th ed. (Belmont, CA: Brooks/Cole, 2009), 535. On June 22, 1969, the seemingly impossible occurred in Ohio when the Cuyahoga River, which empties into Lake Erie, caught fire, capturing the nation’s attention. However, it was not the first time; the river had burst into flame multiple times since 1968.

### Cuyahoga River Fire

Chocolate-brown, oily, bubbling with subsurface gases, it oozes rather than flows. “Anyone who falls into the Cuyahoga does not drown,” Cleveland’s citizens joke grimly. “He decays.” The Federal Water Pollution Control Administration dryly notes: “The lower Cuyahoga has no visible life, not even low forms such as leeches and sludge worms that usually thrive on wastes.” It is also—literally—a fire hazard. A few weeks ago, the oil-slicked river burst into flames and burned with such intensity that two railroad bridges spanning it were nearly destroyed. “What a terrible reflection on our city,” said Cleveland Mayor Carl Stokes sadly.“America’s Sewage System and the Price of Optimism,” Time, August 1, 1969, accessed March 7, 2011, http://www.time.com/time/magazine/article/0,9171,901182,00.html#ixzz19KSrUirj.

Figure 1.2 Earth as Photographed from Outer Space“Apollo 8 hand-held Hasselblad photograph of a half illuminated Earth taken on 24 December 1968 as the spacecraft returned from the first manned orbit of the Moon. The evening terminator crosses Australia, towards the bottom. India can be seen at upper left. The sun is reflecting off the Indian ocean. The Earth is 12,740 km in diameter, north is at about 1:00. (Apollo 8, AS08-15-2561)”; NASA, “Earth—Apollo 8,” Catalog of Spaceborne Imaging, accessed March 7, 2011, http://nssdc.gsfc.nasa.gov/imgcat/html/object_page/a08_h_15_2561.html.

Adding to air and drinking water concerns was the growing problem of coastal pollution from human activity. Pollution from offshore oil drilling gained national attention in 1969 when a Union Oil Company offshore platform near Santa Barbara, California, punctured an uncharted fissure, releasing an estimated 3.25 million gallons of thick crude oil into the ocean. Although neither the first nor the worst oil spill on record, the accident coated the entire coastline of the city of Santa Barbara with oil, along with most of the coasts of Ventura and Santa Barbara counties. The incident received national media attention given the beautiful coastal location of the spill. In response to the spill, a local environmental group calling itself Get Oil Out (GOO) collected 110,000 signatures on a petition to the government to stop further offshore drilling. President Nixon, a resident of California, complied and imposed a temporary moratorium on California offshore development.Andrew J. Hoffman, From Heresy to Dogma: An Institutional History of Corporate Environmentalism (San Francisco: New Lexington Press, 1997), 57–58.

Influenced by these events and the proliferation of environmental news stories and public discourse, citizens of industrialized countries had begun to shift their perceptions about the larger physical world. Several influential books and articles introduced to the general public the concept of a finite world. Economist Kenneth Boulding, in his 1966 essay “The Economics of the Coming Spaceship Earth,” coined the metaphors of “spaceship EarthCoined by Kenneth Boulding in his 1966 essay “The Economics of the Coming Spaceship Earth,” this term suggests that the earth is a closed system with finite resources and capacities.” and “spaceman economy” to emphasize that the earth was a closed system and that the economy must therefore focus not on “production and consumption at all, but the nature, extent, quality, and complexity of the total capital stock.”See Kenneth E. Boulding, “The Economics of the Coming Spaceship Earth,” in Environmental Quality in a Growing Economy, ed. Henry Jarrett (Baltimore: Johns Hopkins University Press, 1966), 3–14. Paul Ehrlich, in the follow-up to his 1968 best seller The Population Bomb, borrowed Boulding’s metaphor in his 1971 book How to Be a Survivor to argue that in a closed system, exponential population growth and resource consumption would breach the carrying capacity of nature, assuring misery for all passengers aboard the “spaceship.”Philip Shabecoff, A Fierce Green Fire: The American Environmental Movement (New York: Hill & Wang, 1993), 95–96. Garrett Hardin’s now famous essay, “The Tragedy of the Commons,” was published in the prestigious journal Science in December 1968.Kenneth E. Boulding, “The Economics of the Coming Spaceship Earth,” in Valuing the Earth, Economics, Ecology, Ethics, ed. Herman Daly and Kenneth Townsend (Cambridge, MA: MIT Press, 1993), 297–309; Paul Ehrlich, The Population Bomb (New York: Ballantine Books, 1968); Paul Ehrlich, How to Be a Survivor (New York: Ballantine Books, 1975). It emphasized the need for new solutions to problems not easily addressed by technology, referring to pollution that involved public commons such as the air, water, soil, and oceans. These commonly used resources are shared in terms of access, but no single person or institution has formal responsibility for their protection.

Figure 1.3 Blue Marble

This image shows South America from September 2004.

Another symbolic turning point came in 1969 during the Apollo 11 mission, when the first photograph of the earth was taken from outer space. The image became an icon for the environmental movement. During that time period and subsequently, quotations proliferated about the new relationship between humans and their planetary home. In a speech at San Fernando Valley State College on September 26, 1966, the vice president of the United States Hubert H. Humphrey said, “As we begin to comprehend that the earth itself is a kind of manned spaceship hurtling through the infinity of space—it will seem increasingly absurd that we have not better organized the life of the human family.” In the December 23, 1968, edition of Newsweek, Frank Borman, commander of Apollo 8, said, “When you’re finally up at the moon looking back on earth, all those differences and nationalistic traits are pretty well going to blend, and you’re going to get a concept that maybe this really is one world and why the hell can’t we learn to live together like decent people.”

### Key Takeaways

• By the 1970s, the public began to recognize the finite resources of the earth and to debate its ability to sustain environmental degradation as environmental catastrophes grew in size and number.
• Chemical contaminants were discovered to accumulate in the food chain resulting in much higher concentrations of toxins at the top.
• Key events and publications educated citizens about the impact of human activities on nature and the need for new approaches. These included the Santa Barbara oil spill, Silent Spring, and “The Tragedy of the Commons.”

### Exercises

1. How do you think Americans’ experience of abundance, economic growth, and faith in technology influenced perceptions about the environment?
2. How did these perceptions change over time and why?
3. Compare your awareness of environmental and health concerns with that of your parents or other adults of your parents’ generation. Name any differences you notice between the generations.
4. What parallels, if any, do you see between today’s discussions about environmental issues and the history provided here?

## 1.2 Business Shifts Its Focus

### Learning Objectives

1. Understand the initial framework for US environmental regulation.
2. Explain why and how companies changed their policies and practices.

In response to strong public support for environmental protection, newly elected president Nixon, in his 1970 State of the Union address, declared that the dawning decade of the 1970s “absolutely must be the years when America pays its debt to the past by reclaiming the purity of its air, its waters and our living environment. It is literally now or never.”Richard Nixon Foundation, “RN In ‘70—Launching the Decade of the Environment,” The New Nixon Blog, January 1, 2010, accessed March 23, 2011, http://blog.nixonfoundation.org/2010/01/rn-in-70-the-decade-of-the-environment. Nixon signed into law several pieces of legislation that serve as the regulatory foundation for environmental protection today. On January 1, 1970, he approved the National Environmental Policy Act (NEPA)Signed into law January 1, 1970, the act is the cornerstone of environmental policy and law in the United States. NEPA states that it is the responsibility of the federal government to improve and coordinate federal plans, functions, programs, and resources such that the present generation acts as trustee of the environment for succeeding generations. In doing so, NEPA requires federal agencies to evaluate the environmental impact of an activity before it is undertaken. Further, NEPA established the Environmental Protection Agency., the cornerstone of environmental policy and law in the United States. NEPA states that it is the responsibility of the federal government to “use all practicable means…to improve and coordinate federal plans, functions, programs and resources to the end that the Nation may…fulfill the responsibilities of each generation as trustee of the environment for succeeding generations.”See National Environmental Policy Act of 1969, 42 U.S.C. § 4321–47. GPO Access US Code Online, “42 USC 4331,” January 3, 2007, accessed April 19, 2011, http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=browse_usc&docid=Cite:+42USC4331, Jan 3, 2007. In doing so, NEPA requires federal agencies to evaluate the environmental impact of an activity before it is undertaken. Furthermore, NEPA established the Environmental Protection Agency (EPA), which consolidated the responsibility for environmental policy and regulatory enforcement at the federal level.

Also in 1970, the modern version of the Clean Air Act (CAA) was passed into law. The CAA set national air quality standards for particulates, sulfur oxides, carbon monoxide, nitrogen oxide, ozone, hydrocarbons, and lead, averaged over different time periods. Two levels of air quality standards were established: primary standards to protect human health, and secondary standards to protect plant and animal life, maintain visibility, and protect buildings. The primary and secondary standards often have been identical in practice. The act also regulated that new stationary sources, such as power plants, set emissions standards, that standards for cars and trucks be established, and required states to develop implementation plans indicating how they would achieve the guidelines set by the act within the allotted time. Congress directed the EPA to establish these standards without consideration of the cost of compliance.Walter A. Rosenbaum, Environmental Politics and Policy, 2nd ed. (Washington, DC: Congressional Quarterly Press, 1991), 180–81.

To raise environmental awareness, Senator Gaylord Nelson of Wisconsin arranged a national teach-in on the environment. Nelson characterized the leading issues of the time as pesticides, herbicides, air pollution, and water pollution, stating, “Everybody around the country saw something going to pot in their local areas, some lovely spot, some lovely stream, some lovely lake you couldn’t swim in anymore.”Gaylord Nelson, interview with Philip Shabecoff, quoted in Philip Shabecoff, A Fierce Green Fire: The American Environmental Movement (New York: Hill & Wang, 1993), 114–15. This educational project, held on April 22, 1970, and organized by Denis Hayes (at the time a twenty-five-year-old Harvard Law student), became the first Earth Day.Hayes organized Earth Day while working for US Senator Gaylord Nelson. Hayes, a Stanford- and Harvard-educated activist with a law degree, helped found Green Seal, one of the most prominent ecolabeling systems in the United States, and directed the National Renewable Energy Laboratory under the Carter administration. On that day, twenty million people in more than two thousand communities participated in educational activities and demonstrations to demand better environmental quality.Tyler Miller Jr., Living in the Environment: Principles, Connections, and Solutions, 9th ed. (Belmont, CA: Wadsworth, 1996), 42. The unprecedented turnout reflected growing public anxiety. Health and safety issues had become increasingly urgent. In New York City, demonstrators on Fifth Avenue held up dead fish to protest the contamination of the Hudson River, and Mayor John Lindsay gave a speech in which he stated “Beyond words like ecology, environment and pollution there is a simple question: do we want to live or die?”Joseph Lelyveld, “Mood Is Joyful Here,” New York Times, April 23, 1970, quoted in Philip Shabecoff, A Fierce Green Fire: The American Environmental Movement (New York: Hill & Wang, 1993), 113. Even children’s books discussed the inability of nature to protect itself against the demands, needs, and perceived excesses associated with economic growth and consumption patterns. The 1971 children’s book The Lorax by Dr. Seuss was a sign of the times with its plea that someone “speak for the trees” that were being cut down at increasing rates worldwide, leaving desolate landscapes and impoverishing people’s lives.

Figure 1.4 The Lorax

The Lorax, written by Dr. Seuss and first published in 1971, illustrated the importance of speaking up on behalf of the environment.

Earth Day fueled public support and momentum for further environmental regulatory protection, and by 1972 the Federal Water Pollution Control Act (FWPCA) had set a goal to eliminate all discharges of pollutants into navigable waters by 1985 and to establish interim water quality standards for the protection of fish, shellfish, wildlife, and recreation interests by July 1, 1983.Walter A. Rosenbaum, Environmental Politics and Policy, 2nd ed. (Washington, DC: Congressional Quarterly Press, 1991), 195–96. Growing concern across the country about the safety of community drinking water supplies culminated in the Safe Drinking Water Act (SDWA) of 1974. This legislation established standards for turbidity, microbiological contaminants, and chemical agents in drinking water.Walter A. Rosenbaum, Environmental Politics and Policy, 2nd ed. (Washington, DC: Congressional Quarterly Press, 1991), 206–7. The Endangered Species Act (ESA) of 1973 forbade the elimination of plant and animal species and “placed a positive duty on the government to act to protect those species from extinction.”Philip Shabecoff, A Fierce Green Fire: The American Environmental Movement (New York: Hill & Wang, 1993), 175. Ten years after the publication of Silent Spring, the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) was updated to prohibit or severely limit the use of DDT, aldrin, dieldrin, and many other pesticides. As a result, levels of persistent pesticides measured in human fatty tissues declined from 8 parts per million (ppm) in 1970 to 2 ppm by the mid-1980s.Philip Shabecoff, A Fierce Green Fire: The American Environmental Movement (New York: Hill & Wang, 1993), 46–47.

## Corporate Response: Pollution Control

Pollution control typified the corporate response to environmental regulations from the genesis of the modern regulatory framework in the 1970s through the 1980s. Pollution controlA method to prevent the release of emissions and other by-products into the environment after those wastes have been generated. Typical techniques include scrubbers and filters to trap pollutants. is an end-of-the-pipe strategy that focuses on waste treatment or the filtering of emissions or both. Pollution control strategies assume no change to product design or production methods, only attention to air, solid, and water waste streams at the end of the manufacturing process. This approach can be costly and typically imposes a burden on the company, though it may save expenses in the form of fines levied by regulatory agencies for regulatory noncompliance. Usually pollution control is implemented by companies to comply with regulations and reflects an adversarial relationship between business and government. The causes of this adversarial attitude were revealed in a 1974 survey by the Conference Board—an independent, nonprofit business research organization—that found that few companies viewed pollution control as profitable and none found it to be an opportunity to improve production procedures.Andrew J. Hoffman, From Heresy to Dogma: An Institutional History of Corporate Environmentalism (San Francisco: New Lexington Press, 1997), 81. Hence, from a strictly profit-oriented viewpoint, one that considers neither public reaction to pollution nor potential future liability as affecting the bottom line, pollution control put the company in a “losing” position with respect to environmental protection.

The environmental regulatory structure of the United States at times has forced companies into a pollution control position by mandating specific technologies, setting strict compliance deadlines, and concentrating on cleanup instead of prevention.Michael Porter and Claas van der Linde, “Green and Competitive: Ending the Stalemate,” Harvard Business Review 73, no. 5 (September/October 1995): 120–34. This was evident in a 1986 report by the Office of Technology Assessment (OTA) that found that “over 99 percent of federal and state environmental spending is devoted to controlling pollution after waste is generated. Less than 1 percent is spent to reduce the generation of waste.”US Congress, Office of Technology Assessment, Serious Reduction of Hazardous Waste (Washington, DC: US Government Printing Office, 1986), quoted in Stephan Schmidheiny, with the Business Council for Sustainable Development, Changing Course (Cambridge, MA: MIT Press, 1992), 106. The OTA at that time noted the misplaced emphasis on pollution control in regulation and concluded that existing technologies alone could prevent half of all industrial wastes.Stephan Schmidheiny, with the Business Council for Sustainable Development, Changing Course (Cambridge, MA: MIT Press, 1992), 100.

Economists generally agree that it is better for regulation to require a result rather require a means to accomplishing that result. Requiring pollution control is preferred because it provides an incentive for firms to reduce pollution rather than simply move hazardous materials from one place to another, which does not solve the original problem of waste generation. For example, business researchers Michael Porter and Claas van der Linde draw a distinction between good regulations and bad regulations by whether they encourage innovation and thus enhance competitiveness while simultaneously addressing environmental concerns. Pollution control regulations, they argue, should promote resource productivity but often are written in ways that discourage the risk taking and experimentation that would benefit society and the regulated corporation: “For example, a company that innovates and achieves 95 percent of target emissions reduction while also registering substantial offsetting cost reductions is still 5 percent out of compliance and subject to liability. On the other hand, regulators would reward it for adopting safe but expensive secondary treatment.”Michael Porter and Claas van der Linde, “Green and Competitive: Ending the Stalemate,” Harvard Business Review 73, no. 5 (September/October 1995): 120–34. Regulations that discouraged innovation and mandated the end-of-the-pipe mind-set that was common among regulators and industry in the 1970s and 1980s contributed to the adversarial approach to environmental protection. As these conflicts between business and government heated up, new science, an energy crisis, and growing public protests fueled the fire.

## Global Science, Political Events, Citizen Concern

In 1972, a group of influential businessmen and scientists known as the Club of Rome published a book titled The Limits to Growth. Using mathematical models developed at the Massachusetts Institute of Technology to project trends in population growth, resource depletion, food supplies, capital investment, and pollution, the group reached a three-part conclusion. First, if the then-present trends held, the limits of growth on Earth would be reached within one hundred years. Second, these trends could be altered to establish economic and ecological stability that would be sustainable far into the future. Third, if the world chose to select the second outcome, chances of success would increase the sooner work began to attain it.Philip Shabecoff, A Fierce Green Fire: The American Environmental Movement (New York: Hill & Wang, 1993), 96. Also see Donella H. Meadows, Dennis L. Meadows, Jørgen Randers, and William W. Behrens III, The Limits to Growth (New York: Universe Books, 1972), 23–24. Again, the notion of natural limits was presented, an idea at odds with most people’s assumptions at the time. For the people of a country whose history and cultural mythology held the promise of boundless frontiers and limitless resources, these full-Earth concepts challenged deeply held assumptions and values.

### Film Footage from Bhopal, India

This video, made in 2006 by Encyclomedia, shows images of victims of the Union Carbide chemical leak being treated in 1984.

This disaster produced the community “right to know” provision in the Superfund Amendments and Reauthorization Act (SARA) of 1986, requiring industries that use dangerous chemicals to disclose the type and amount of chemicals used to the citizens in the surrounding area that might be affected by an accident.Walter A. Rosenbaum, Environmental Politics and Policy, 2nd ed. (Washington, DC: Congressional Quarterly Press, 1991), 80. The right to know provision was manifested in the Toxics Release Inventory (TRI), in which companies made public the extent of their polluting emissions. This information proved useful for communities and industry by making both groups more aware of the volume of pollutants emitted and the responsibility of industry to lower these levels. The EPA currently releases this information at http://www.epa.gov/tri; other pollutant information is available at http://www.epa.gov/oar/data.

In 1990, Thomas Lefferre, an operations vice president for Monsanto, highlighted the sensitizing effect of this new requirement on business. He wrote, “If…you file a Title III report that says your plant emits 80,000 pounds of suspected carcinogens to the air each year, you might be comforted by the fact that you’re in compliance with your permit. But what if your plant is two blocks from an elementary school? How comfortable would you be then?”Andrew J. Hoffman, From Heresy to Dogma: An Institutional History of Corporate Environmentalism (San Francisco: New Lexington Press, 1997), 179.

Figure 1.6 Emissions of Various Pollutants for Virginia under TRI in 2009

Until the mid-1980s, environmental disasters were perceived to be confined to geographically limited locations and people rarely feared contamination from beyond their local chemical or power plant. This notion changed in 1986 when an explosion inside a reactor at a nuclear plant in Chernobyl in the Ukraine released a gigantic cloud of radioactive debris that standard weather patterns spread from the Soviet Union to Scandinavia and Western Europe. The effects were severe and persistent. As a result of the explosion, some 21,000 people in Western Europe were expected to die of cancer and even more to contract the disease as a result. Reindeer in Lapland were found to have levels of radioactivity seven times above the norm. By 1990 sheep in northwest England and Wales were still too radioactive to be consumed. Within the former Soviet Union, over 10,000 square kilometers of land were determined to be unsafe for human habitation, yet much of the land remained occupied and farming continued. Approximately 115,000 people were evacuated from the area surrounding the plant site, 220 villages were abandoned, and another 600 villages required “decontamination.” It is estimated that the lives of over 100,000 people in the former Soviet Union have been or will likely be severely affected by the accident.Clive Ponting, A Green History of the World (New York: Penguin Books, 1991), 377; World Health Organization, “Health Effects of the Chernobyl Accident: An Overview,” Fact sheet no. 303, April 2006, accessed April 19, 2011, http://www.who.int/mediacentre/factsheets/fs303/en/index.html.

Other environmental problems of an international scale made headlines during the 1980s. Sulfur dioxide and nitrogen oxides from smokestacks and tailpipes can be carried over six hundred miles by prevailing winds and often return to ground as acid rain. As a result, Wheeling, West Virginia, once received rain with a pH value almost equivalent to battery acid.Tyler Miller Jr., Living in the Environment: Principles, Connections, and Solutions, 9th ed. (Belmont, CA: Wadsworth, 1996), 436. As a result of such deposition, downwind lakes and streams become increasingly acidic and toxic to aquatic plants, invertebrates, and fish. The proportion of lakes in the Adirondack Mountains of New York with a pH below the level of 5.0 jumped from 4 percent in 1930 to over 50 percent by 1970, resulting in the loss of fish stocks. Acid rain has also been implicated in damaging forests at elevations above two thousand feet. The northeastern United States and eastern Canada, located downwind from large industrialized areas, were particularly hard hit.Clive Ponting, A Green History of the World (New York: Penguin Books, 1991), 367. Rain in the eastern United States is now about ten times more acidic than natural precipitation. Similar problems occurred in Scandinavia, the destination of Europe’s microscopic pollutants.

A 1983 report by a congressional task force concluded that the primary cause of acid rain destroying freshwater in the northeastern United States was probably pollution from industrial stacks to the south and west. The National Academy of Sciences followed with a report asserting that by reducing sulfur oxide emissions from coal-burning power plants in the eastern United States, acid rain in the northeastern part of the country and southern Canada could be curbed. However, the Reagan administration declined to act, straining relations with Canada, especially during the 1988 visit of Canadian Prime Minister Brian Mulroney.Walter A. Rosenbaum, Environmental Politics and Policy, 2nd ed. (Washington, DC: Congressional Quarterly Press, 1991), 184. Acid rain was finally addressed in part by the Clean Air Act Amendments of 1990.

The CAA, a centerpiece of the environmental legislation enacted during what might be called the first environmental wave, was significantly amended in 1990 to address acid rain, ozone depletion, and the contribution of one state’s pollution to states downwind. The act included a groundbreaking clause allowing the trading of pollution permits for sulfur dioxide and nitrogen oxide emissions from power plants in the East and Midwest. Plants now had market incentives to reduce their pollution emissions. They could sell credits, transformed into permits, on the Chicago Board of Trade. A company’s effort to go beyond compliance enabled it to earn an asset that could be sold to firms that did not meet the standards. Companies were thus enticed to protect the environment as a way to increase profits, a mechanism considered by many to be a major advance in the design of environmental protection.

This policy innovation marked the beginning of market-oriented mechanisms to solve pollution problems. The Clean Air Interstate Rule (CAIR) expanded the scope of the original trading program and was reinstated after various judicial challenges to its method. The question of whether direct taxes or market solutions are best continues to be debated, however. With President Obama’s election in 2008, the question of federal carbon taxes in the United States versus allowing regional and national carbon markets to evolve became a hot topic for national debate.

Another problem that reached global proportions was ozone depletion. In 1974, chemists Sherwood Rowland and Mario Molina announced that chlorofluorocarbons (CFCs) were lowering the average concentration of ozone in the stratosphere, a layer that blocks much of the sun’s harmful ultraviolet rays before they reach the earth. Over time, less protection from ultraviolet rays will lead to higher rates of skin cancer and cataracts in humans as well as crop damage and harm to certain species of marine life. By 1985, scientists had observed a 50 percent reduction of the ozone in the upper stratosphere over Antarctica in the spring and early summer, creating a seasonal ozone hole. In 1988, a similar but less severe phenomenon was observed over the North Pole. Sensing disaster, Rowland and Molina called for an immediate ban of CFCs in spray cans.

Such a global-scale problem required a global solution. In 1987, representatives from thirty-six nations met in Montreal and developed a treaty known as the Montreal Protocol. Participating nations agreed to cut emissions of CFCs by about 35 percent between 1989 and 2000. This treaty was later expanded and strengthened in Copenhagen in 1992.Tyler Miller Jr., Living in the Environment: Principles, Connections, and Solutions, 9th ed. (Belmont, CA: Wadsworth, 1996), 317–27. The amount of ozone-depleting substances close to Earth’s surface consequently declined, whereas the amount in the upper atmosphere remained high. The persistence of such chemicals means it may take decades for the ozone layer to return to the density it had before 1980. The good news was that the rate of new destruction approached zero by 2006.World Meteorological Organization, Scientific Assessment of Ozone Depletion: 2006, Global Ozone Research and Monitoring Project—Report No. 50 (Geneva, Switzerland: World Meteorological Organization, 2007), accessed November 29, 2010, http://www.wmo.ch/pages/prog/arep/gaw/ozone_2006/ozone_asst_report.html. It is interesting to note that businesses opposed restrictions on CFC use until patent-protected alternative materials were available to substitute for CFCs in the market.

The increasingly global scale of environmental threats and the growing awareness among nations of the interrelated nature of economic development and stable functioning of natural systems led the United Nations to establish the World Commission on Environment and Development (WCED) in 1983. The commission was convened the following year, led by chairwoman Gro Harlem Brundtland, former prime minister of Norway. In 1987, the so-called Brundtland Commission produced a landmark report, Our Common FutureOur Common Future is a report produced in 1987 by the so-called Brundtland Commission, or the UN World Commission on Environment and Development (WCED), created in 1983 and led by chairwoman Gro Harlem Brundtland, former prime minister of Norway. The landmark report tied together concerns for human development, economic development, and environmental protection with the concept of sustainable development. Although this was certainly not the first appearance of the term sustainable development, to many the commission’s definition became a benchmark for moving forward., which tied together concerns for human development, economic development, and environmental protection with the concept of sustainable development. Although this was certainly not the first appearance of the term sustainable development, to many the commission’s definition became a benchmark for moving forward: “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” Around that same time, the phrase environmental justice was coined to describe the patterns of locating hazardous industries or dumping hazardous wastes and toxins in regions predominantly home to poor people or racial and ethnic minorities.

## Pollution Prevention

By the mid-1970s, companies had begun to act to prevent pollution rather than just mitigate the wastes already produced. Pollution preventionA method to reduce the generation of waste and other by-products in the first place so that they cannot accumulate in the environment. Typical techniques include dramatic improvements in the efficiency of production. refers to actions inside a company and is called an in-the-pipe as opposed to an end-of-the-pipe method for environmental protection. Unlike pollution control, which only imposes costs, pollution prevention offers an opportunity for a company to save money and implement environmental protection simultaneously. Still used today, companies often enter this process tentatively, looking for quick payback. Over time it has been shown they can achieve significant positive financial and environmental results. When this happens it helps open minds within companies to the potential of environmentally sound process redesign or reengineering that contributes both ecological and health benefits as well as the bottom line of profitability.

There are four main categories of pollution prevention: good housekeeping, materials substitution, manufacturing modifications, and resource recovery. The objective of good housekeeping is for companies to operate their machinery and production systems as efficiently as possible. This requires an understanding and monitoring of material flows, impacts, and the sources and volume of wastes. Good housekeeping is a management issue that ensures preventable material losses are not occurring and all resources are used efficiently. Materials substitution seeks to identify and eliminate the sources of hazardous and toxic wastes such as heavy metals, volatile organic compounds, chlorofluorocarbons, and carcinogens. By substituting more environmentally friendly alternatives or reducing the amount of undesirable substances used and emitted, a company can bypass the need for expensive end-of-the-pipe treatments. Manufacturing modifications involve process changes to simplify production technologies, introduce closed-loop processing, and reduce water and energy use. These steps can significantly lower emissions and reduce costs. Finally, resource recovery captures waste materials and seeks to reuse them in the same process, as inputs for another process within the production system, or as inputs for processes in other production systems.Stephan Schmidheiny, with the Business Council for Sustainable Development, Changing Course (Cambridge, MA: MIT Press, 1992), 101–4.

One of the earliest instances of pollution prevention in practice was 3M’s Pollution Prevention Pays (3P) program, established in 1975. The program achieved savings of over half a billion dollars in capital and operating costs while eliminating 600,000 pounds of effluents, air emissions, and solid waste. This program continued to evolve within 3M and became integrated into incentive systems, rewarding employees for identifying and eliminating unnecessary waste.Joseph Fiksel, “Conceptual Principles of DFE,” in Design for Environment: Creating Eco-Efficient Products and Processes, ed. Joseph Fiksel (New York: McGraw-Hill, 1996), 53. Other companies, while not pursuing environmental objectives per se, have found that total quality management (TQM) programs can help achieve cost savings and resource efficiencies consistent with pollution prevention objectives through conscious efforts to reduce inputs and waste generation.

Though pollution prevention is a significant first step in corporate environmental protection, Joseph Fiksel identifies several limitations to pollution prevention as typically practiced. First, it only incrementally refines and improves existing processes. Second, it tends to focus on singular measures of improvement, such as waste volume reduction, rather than on adopting a systems view of environmental performance. Renowned systems analyst Donella Meadows offered a simple definition of a system as “any set of interconnected elements.” A systems view emphasizes connections and relationships.Donella H. Meadows, “Whole Earth Models and Systems,” Coevolution Quarterly 34 (Summer 1982): 98–108, quoted in Joseph J. Romm, Lean and Clean Management (New York: Kodansha, 1994), 33. Third, as most of the gains are often in processes that were not previously optimized for efficiency, the improvements are not repeatable. Fourth, pollution prevention is detached from a company’s business strategy and is performed on a piecemeal basis.Joseph Fiksel, “Conceptual Principles of DFE,” in Design for Environment: Creating Eco-Efficient Products and Processes, ed. Joseph Fiksel (New York: McGraw-Hill, 1996), 54.

According to a 1989 National Academy of Engineering report by Robert Ayres, 94 percent of the material used in industrial production is thrown away before the product is made.Robert U. Ayres, “Industrial Metabolism,” in Technology and Environment, ed. Jesse H. Ausubel and Hedy E. Sladovich (Washington, DC: National Academy Press, 1989), 26; Robert Solow, “Sustainability: An Economist’s Perspective,” in Economics of the Environment, 3rd ed., ed. Robert Dorfman and Nancy S. Dorfman (New York: W. W. Norton, 1993), 181.

### Key Takeaways

• In the 1970s, the federal government mandated certain standards and banned some chemicals outright in a command-and-control approach.
• Pollution prevention provided the first significant opportunity to reconcile business and environmental goals.
• Environmental problems grew in geographic scale and intensity through the 1980s, creating a growing awareness that more serious measures and new thinking about limits to growth were required.

### Exercises

1. Compare and contrast pollution control and pollution prevention based on (a) their effectiveness and ease of administration as regulations, and (b) their effects on business processes and opportunities.
2. How did trends in environmental issues and regulations change and stay the same in the 1970s and 1980s as compared to earlier decades?
3. Do you see any overlap in circumstances today and the events and perspectives in the 1980s?

## 1.3 Pressures on Companies Continue

### Learning Objectives

1. Understand how business opportunities arise from changes in environmental regulation as well as from the growing public demand to protect the environment and health.
2. Analyze how globalization and environmental hazards contributed to the development of sustainability as a framework for business and government.

In the United States, the slow pace of government action on environmental protection during the 1980s began to change with the Superfund reauthorization in 1986. The following year, Congress overrode President Reagan’s veto to amend the Clean Water Act to control nonpoint sources of pollution such as fertilizer runoff.Philip Shabecoff, A Fierce Green Fire: The American Environmental Movement (New York: Hill & Wang, 1993), 230. As America’s economy continued to expand during the 1980s, so did its solid waste problem. The issues of America’s bulging landfills and throwaway economy were captured by the image of the Mobro 4000, a barge carrying 3,168 tons of trash that set sail from Islip, Long Island, New York, on March 22, 1987.William Rathje and Cullen Murphy, Rubbish! (New York: Harper Perennial, 1992), 28. The barge spent the next fifty-five days in search of a suitable location to deposit its cargo while drawing significant media attention.Philip Shabecoff, A Fierce Green Fire: The American Environmental Movement (New York: Hill & Wang, 1993), 271. Meanwhile, New York City’s Fresh Kills Landfill became the largest landfill in the world. The following summer, the issue of waste returned to the headlines when garbage and medical waste, including hypodermic needles, began washing onto beaches in New York and New Jersey, costing coastal counties in New Jersey an estimated $100 million in tourist revenue. Public outcry spurred the federal government to ban ocean dumping of municipal waste. The states of New York and New Jersey subsequently closed several coastal sewage treatment plants, upgraded others, and enacted laws for medical waste disposal.Andrew J. Hoffman, From Heresy to Dogma: An Institutional History of Corporate Environmentalism (San Francisco: New Lexington Press, 1997), 120–21. America’s reliance on fossil fuels was brought to the forefront once again when the Exxon Valdez supertanker ran aground in Prince William Sound, Alaska, on March 24, 1989. Over 10 million gallons of crude oil spilled from the ship, polluting 1,200 miles of coastline. Approximately 350,000 sea birds, several thousand rare otters, and countless other animals were killed. In 2010, lasting damage from the spill was still documented. The accident coincided with and helped to further a generational peak in environmental awareness. Figure 1.7 Exxon Valdez Leaking Oil into Prince William Sound Legal judgments against Exxon exceeded$5 billion, and the incident single-handedly led to the enactment of the Ocean Pollution Act of 1990, which mandated safety measures on ocean crude oil transport.Andrew J. Hoffman, From Heresy to Dogma: An Institutional History of Corporate Environmentalism (San Francisco: New Lexington Press, 1997), 121–22. By the early 1990s, the chemical and energy industries were becoming increasingly proactive on environmental matters, looking beyond regulatory compliance toward crafting a specific environmental management strategy. The nature of government regulation began to change as well, with increasing emphasis on goals rather than technology-forcing to achieve those goals (e.g., the Clean Air Act Amendments of 1990). This allowed industry more flexibility in selecting approaches to emissions reductions that made financial sense.

Compliance was still the primary goal, and companies combining forces to set industry standards became a method of forestalling regulation. Unless they were singled out due to their industry’s visibility or poor reputation, most companies continued to see health and environmental issues as a burden and additional cost. Environmentalism was associated with tree-huggers, altruists, overhead cost burdens, and public sector fines and regulation.

As if on a parallel yet nonintersecting path, in 1989, a special issue of the Scientific American journal articulated the state of scientific understanding of the growing global collision and the urgency of addressing the clashes among human economic growth patterns, ecological limits, and population growth. For the first time, the need to address dominant policies and economic growth models was being raised in a leading US scientific journal.

In fact, debate on scientific evidence and necessary global action was expanding to challenge the one-dimensional view held by most corporate leaders. With the rise in environmental problems at the global scale, the United Nations (UN) convened a conference on the environment in Rio de Janeiro in June of 1992, which became known as the Rio Earth SummitA United Nations conference on the environment held in Rio de Janeiro in June 1992. More than 100 heads of state, representatives from 178 nations, and 18,000 people from 7,000 nongovernmental organizations attended this unprecedented forum. Major results included a nonbinding charter for guiding environmental policies toward sustainable development, a nonbinding agreement on forestry management and protection, the establishment of the UN Commission on Sustainable Development, and conventions on climate change and biodiversity that have not yet been ratified by enough nations to go into effect.. Attending this unprecedented forum were more than 100 heads of state, representatives from 178 nations, and 18,000 people from 7,000 NGOs. Major results included a nonbinding charter for guiding environmental policies toward sustainable development, a nonbinding agreement on forestry management and protection, the establishment of the UN Commission on Sustainable Development, and conventions on climate change and biodiversity that have not yet been ratified by enough nations to go into effect. Despite the lack of binding treaties, the Rio Earth Summit succeeded in articulating general global environmental principles and guidelines in a consensus-driven setting involving participation by most of the world’s nations.Tyler Miller Jr., Living in the Environment: Principles, Connections, and Solutions, 9th ed. (Belmont, CA: Wadsworth, 1996), 706.

While there may have been less activity in the United States at the time, a new era was under way internationally. Creation of the World Business Council for Sustainable Development (WBCSD) marked a turning point in global business engagement. In preparation for the Rio Earth Summit, Swiss industrialist Stephan Schmidheiny organized the WBCSD in 1990. The council featured over fifty business leaders from around the world. Their task was without precedent, as Schmidheiny explained: “This is the first time that an important group of business leaders has looked at these environmental issues from a global perspective and reached major agreements on the need for an integrated approach in confronting the challenges of economic development and the environment.”Stephan Schmidheiny, with the Business Council for Sustainable Development, Changing Course (Cambridge, MA: MIT Press, 1992), xxi.

It made sense. World population growth trajectories predicted emerging economies growing at an accelerating rate. Their societies’ legitimate aspirations to live according to Western developed economies’ standards would require a tremendous acceleration in the throughput of raw materials, massive growth in industrial activity, and unprecedented demand for energy. People were beginning to wonder how that growth would be achieved in a way that preserved ecological systems, protected human health, and supported stable, viable communities. Figure 1.8 "Actual and Predicted Global Population Growth, 1750–2050 (billions)" shows the significant increases in emerging economy populations compared to developed countries after 1950.

Figure 1.8 Actual and Predicted Global Population Growth, 1750–2050 (billions)

Of no small significance, certain publications emerged and within a few years were read widely by those interested in the debates over economic growth and population trajectories. In 1993, Paul Hawken authored The Ecology of Commerce, which brought to the public’s attention an alternative model of commerce without waste that relies on renewable energy sources, eliminates toxins, and thrives on biodiversity. Hawken moved beyond the WBCSD goals of minimization (eco-efficiency) by suggesting a restorative economy “that is so intelligently designed and constructed that it mimics nature at every step, a symbiosis of company and customer and ecology.”Paul Hawken, The Ecology of Commerce (New York: Harper Business, 1993), 12, 15. Written for a broad audience, Hawken’s book became a must-read for those trying to grasp the tensions among economic growth, the viability of natural systems, and the possibilities for change. An entrepreneur himself, Hawken looked to markets, firms, and an entrepreneurial mind-set to solve many of the problems.

Even as the relationship among conventional business perspectives and environmental, health, and social issues shifted, albeit slowly, global problems continued to mount. Climate change debate moved from exclusively scientific conversations to mainstream media outlets. In the summer of 1988, an unprecedented heat wave attacked the United States, killing livestock by the thousands and wiping out a third of the country’s grain crop. The issue of global warming or, more appropriately, global climate change entered the headlines with new force.Kirkpatrick Sale, The Green Revolution: The American Environmental Movement, 1962–1992 (New York: Hill & Wang, 1993), 71. During the heat wave, Dr. James E. Hansen of the National Aeronautics and Space Administration (NASA) warned a Senate committee that the greenhouse effect—the process by which excessive levels of various gases in the atmosphere cause changes in the world’s climate—had probably already arrived.Philip Shabecoff, A Fierce Green Fire: The American Environmental Movement (New York: Hill & Wang, 1993), 196. The United Nations and the World Meteorological Organization established the Intergovernmental Panel on Climate Change (IPCC) in 1988 to study climate change. With input from over nine hundred scientists, the IPCC published its first report in 1995, which concluded that by the year 2100, temperatures could increase from 2°F to 6°F, causing seas to rise from 6 to 38 inches with changes in drought and flooding frequency. Citing a 30 percent rise in atmospheric carbon dioxide since the dawn of the Industrial Age, the IPCC reported that “the balance of evidence suggests a discernable human influence on global climate.” Twenty-four hundred scientists endorsed these findings.Paul Raeburn, “Global Warming: Is There Still Room for Doubt?” BusinessWeek, November 3, 1997, 158.

Figure 1.9 Retreating Montana Glacier

Upper picture taken 1913; bottom picture taken 2008

As with the issue of ozone depletion, an international conference was convened in December 1997 in Kyoto, Japan, to address the problem of global climate change. Representatives from over 160 nations hammered out an agreement known as the Kyoto ProtocolThe Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) is an agreement hammered out by over 160 nations during an international conference in December 1997 in Kyoto, Japan, to address the problem of global climate change. The protocol required developed nations to reduce their emissions of greenhouse gases by an average of 5.2 percent below 1990 levels by 2012. The United States declined to abide by the protocol. to the United Nations Framework Convention on Climate Change (UNFCCC). The protocol, seen as a first step in addressing climate change issues, required developed nations to reduce their emissions of greenhouse gases by an average of 5.2 percent below 1990 levels by the years 2008 to 2012. Regulated greenhouse gases included carbon dioxide, nitrogen oxides, methane, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride. To date, the US Senate has not ratified the agreement, and President Bush rejected the Kyoto Protocol.

The first IPCC report was followed by subsequent IPCC reports to refine the predictions for particular regions of the world; the last one was published in 2007. Other materials followed, such as the National Academy Press publication The Industrial Green Game in 1997, as leading scientists and business experts spoke out together about a need for new thinking. The book highlighted issues of national if not international concern, such as product redesigns and management reforms whose intent was to avoid environmental and health problems before they arose. A full life-cycle approach and systems thinking, deemed essential to the new industrial green game, were fundamental to the evolving alternative paradigm.

Figure 1.10 Our Stolen Future

The cover of Our Stolen Future, first published in 1996.

The global environmental threat from industrial chemicals was brought to the public’s attention with the 1996 publication of a book titled Our Stolen FutureWritten by Theo Colborn, John Peterson Myers, and Dianne Dumanoski in 1996, this book built on decades of scientific research to raise the prospect that the human species, through a buildup of certain synthetic chemicals in human cells, might be damaging its ability to reproduce and properly develop. These chemicals, called “endocrine disrupters,” mimic natural hormones and thus disturb reproductive and developmental processes., which quickly became known as the sequel to Silent Spring. The authors, Theo Colborn, John Peterson Myers, and Dianne Dumanoski, building on decades of scientific research, raised the prospect that the human species, through a buildup of certain synthetic chemicals in human cells, might be damaging its ability to reproduce and properly develop. These chemicals, called “endocrine disrupters,” mimic natural hormones and thus disturb reproductive and developmental processes. Initial studies linked these chemicals to low sperm counts, infertility, genital deformities, neurological and behavioral disorders in children, hormonally triggered human cancers, and developmental and reproductive abnormalities in wildlife.Theo Colborn, Dianne Dumanoski, and John Peterson Myers, Our Stolen Future (New York: Dutton, 1996), vi. The buildup of chemical contaminants in the human body was documented in research reported in 2010 by the US Centers for Disease Control.From the US Centers for Disease Control and Prevention, “National Report on Human Exposure to Environmental Chemicals,” accessed December 29, 2010, http://www.cdc.gov/exposurereport; “The Fourth National Report on Human Exposure to Environmental Chemicals is the most comprehensive assessment to date of the exposure of the U.S. population to chemicals in our environment. CDC has measured 212 chemicals in people’s blood or urine—75 of which have never before been measured in the U.S. population. What’s new in the Fourth Report: The blood and urine samples were collected from participants in CDC’s National Health and Nutrition Examination Survey, which is an ongoing survey that samples the U.S. population every two years. Each two year sample consists of about 2,400 persons. The Fourth Report includes findings from national samples for 1999–2000, 2001–2002, and 2003–2004. The data are analyzed separately by age, sex and race/ethnicity groups. The Updated Tables, July 2010 provides additional data from the 2005-2006 survey period for 51 of the chemicals previously reported through 2004 in the Fourth Report and the new addition of four parabens and two phthalate metabolites in 2005–2006.” New science showing the transfer of chemicals from mother to fetus through the umbilical cord and from mother to child through breast milk brought new attention to chemicals and human health in 2009.Sara Goodman, “Tests Find More Than 200 Chemicals in Newborn Umbilical Cord Blood,” Scientific American, December 2, 2009, accessed March 7, 2011, http://www.scientificamerican.com/article.cfm?id=newborn-babies-chemicals- exposure-bpa.

Unfortunately, most leaders in the business community and business schools were not ready to discuss the scientific evidence and its implications. In the US business community, where the prior politics of environmentalism and business resistance to the threat of regulation had polarized debate, the conversations were not productive. Top business schools followed mainstream business thinking well into the first decade of the twenty-first century, marginalizing the topics as side issues to be dealt with exclusively by ethics professors or shunting them to courses or even other schools that focused on regulation, public policy, or nonprofit management.

### Endocrine Disrupters

Men with higher levels of a metabolite of the phthalate DBP [dibutyl phthalate] have lower sperm concentration and mobility, low enough to be beneath levels considered by the World Health Organization to be healthy. Exposures were not excessive, but instead within the range experienced by many people.Our Stolen Future, “Semen Quality Decreases in Men with Higher Levels of Phthalate,” http://www.ourstolenfuture.org/newscience/oncompounds/phthalates/2006/2006-1101hauseretal.html.

Slowly, however, the groundwork was laid for significant and prevalent changes in how businesses relate to the environment. In the 1987 Our Common Future report discussed in Chapter 1 "History", Chapter 1, Section 2 "Business Shifts Its Focus", the commission wrote, “Many essential human needs can be met only through goods and services provided by industry.…Industry extracts materials from the natural resource base and inserts both products and pollution into the human environment. It has the power to enhance or degrade the environment; it invariably does both.”World Commission on Environment and Development, Our Common Future (New York: Oxford University Press, 1987), 206.

Embedded within the statement was a particular linkage among previously conflicting interests. This would usher in a new way of doing business. As Mohan Munasinghe of the IPCC explained, “sustainable development necessarily involves the pursuit of economic efficiency, social equity, and environmental protection.”Mohan Munasinghe, Wilfrido Cruz, and Jeremy Warford, “Are Economy-wide Policies Good for the Environment?” Finance and Development 30, no. 3 (September 1993): 40. Thus, beginning in the 1990s, thanks to the efforts of a small number of pioneering firms and spokespersons able to span the science-business gap, sustainability as a business strategy was emerging as a powerful new perspective to create value for multiple stakeholders. A sustainable business perspective—and the sustainability innovations created by entrepreneurs—is the current evolutionary stage in an increasingly sophisticated corporate response to environmental and social concerns.

### Key Takeaways

• In the 1980s and 1990s, population growth and the scale of industrialization and concomitant environmental concerns led to the pursuit of “sustainable” business models that acknowledged health and ecological system constraints.
• Pressure on companies grew due to scientific discoveries about pollutants, waste disposal challenges, oil spills, and other accidents.
• Proliferation and diffusion of reports educated the public and government officials, resulting in increased pressure for regulatory action and corporate response.

### Exercises

1. What opportunities for business innovation and entrepreneurship can you identify given the trends and historical information?
2. What implications can you deduce from the population growth trends projected for the next fifty years?
3. If entrepreneurial opportunity is a response to inefficiencies in the market, what inefficiencies can you identify?
4. Summarize the mind-set of someone born in the 1960s with respect to knowledge and attitudes about sustainability compared to someone born in the late 1980s or 1990s.

Table 1.1 An Overview of the Historical Context for Sustainable Business in the United States, 1960–2000

Year Event Legislation Environmental Framework for BusinessSee Richard R. Johnson, Andrea Larson, and Elizabeth Teisberg, The Path to Sustainable Business: Environmental Frameworks, Practices and Related Tools, UVA-ENT-0033 (Charlottesville, VA: Darden Business Publishing, University of Virginia, 1997); updated by author Andrea Larson to 2009. See comprehensive update: Andrea Larson, Sustainability and Innovation: Frameworks, Concepts, and Tools for Product and Strategy Redesign, UVA-ENT-0138 (Charlottesville, VA: Darden Business Publishing, University of Virginia, January 2010). (Full Discussions Appear in Chapter 3 "Framing Sustainability Innovation and Entrepreneurship")
1962 Silent Spring
1963 New York City smog-related fatalities
1964 Mississippi River fish kills
1969 Cuyahoga River fire; Santa Barbara oil spill; Moon landing
1970 First Earth Day National Environmental Policy Act (NEPA); Clean Air Act (CAA) Pollution control
1972 The limits of growth Federal Water Pollution Control Act (FWPCA; became Clean Water Act); Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA)
1973 “Oil shock” Endangered Species Act (ESA)
1974 Safe Drinking Water Act (SDWA)
1975 Pollution prevention
1976 Seveso explosion Toxic Substance Control Act (TSCA); Resource Conservation and Recovery Act (RCRA)
1977 Clean Air Act Amendments of 1990; Clean Water Act amendments
1978 Love Canal; Second “oil shock”
1979 Three Mile Island
1980 Global 2000 Report Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA, a.k.a. Superfund)
1983 Federal acid rain studies
1984 Bhopal
1985 Ozone hole over Antarctica discovered
1986 Chernobyl Superfund Amendments and Reauthorization Act (SARA)
1987 Mobro 4000 trash barge; Montreal Protocol; Our Common Future Clean Water Act amendments Sustainable development
1988 Medical waste on NY and NJ beaches; Global warming
1989 Exxon Valdez Industrial ecology; The Natural Step (a framework discussed in Chapter 3 "Framing Sustainability Innovation and Entrepreneurship")
1990 World Business Council for Sustainable Development (WBCSD) formed Clean Air Act Amendments of 1990
1992 Rio Earth Summit;Changing Course Design for Environment (DfE); Eco-efficiency
1993 The Ecology of Commerce Sustainable design
1996 Our Stolen Future
1997 Kyoto Protocol
2001 Toxic dust from World Trade Center and Pentagon attacks
2002 Cradle to Grave: Remaking the Way We Make Things Eco-effectiveness
2005 Capitalism at the Crossroads; EU begins greenhouse gas emission trading scheme Beyond greening
2006 An Inconvenient Truth
2007 Melamine-tainted pet food and leaded toys from China Supreme Court rules in Massachusetts v. Environmental Protection Agency (EPA) that EPA should regulate carbon dioxide and greenhouse gases under CAA
2008 Summer gas prices exceed $4 per gallon Consumer Product Safety Act 2009 Regional Greenhouse Gas Initiative begins trading # Chapter 2 Sustainability Innovation in Business ## 2.1 Energy and Materials: New Challenges in the First Decade of the Twenty-first Century and Limits to the Conventional Growth Model ### Learning Objectives 1. Appreciate the scope and complexity of the challenges that have recently spurred sustainability innovation with respect to energy and materials. 2. Gain insight into the fundamental drivers creating opportunities for entrepreneurs and new ventures in the sustainability innovation arena. Sustainability innovators create new products and services designed to solve the problems created by the collision of economic growth, population growth, and natural systems. They seek integrated solutions that offer financial renumeration, ecological system protection, and improved human health performance, all of which contribute to community prosperity. Sustainability innovation, growing from early ripples of change in the 1980s and 1990s, now constitutes a wave of creativity led by a growing population of entrepreneurial individuals and ventures. This form of creativity applies to raw materials selection, energy use, and product design as well as company strategies across supply chains. It encompasses renewable energy technologies to reduce pollution and climate impacts as well as the safer design of molecular materials used in common household products. Today’s tough economic times and need for job creation, while seemingly detracting from environmental concerns, in fact underscore the importance of monitoring energy and material input and waste cost-reduction measures; these are made visible through a sustainability lens. In addition, because the environmental health and ecological system degradation issues will only increase with economic growth, and public concern is unlikely to fade, those firms that explore sustainability efficiencies and differentiation opportunities now will be better positioned to weather the economic downturn. Research indicates that individuals and ventures that pursue these objectives often work through networks of diverse supply-chain collaborations to realize new and better ways of providing goods and services. As a result, a plethora of substitute products, technologies, and innovative ways of organizing that address pollution, health, resource use, and equity concerns are being introduced and tested in the marketplace. This is the challenge and the excitement of sustainability innovation. In this chapter we look more closely at sustainability innovation. What forces have driven it, and how is it being defined? Two areas, energy and materials, provide useful entry points for exploring why businesses are increasingly using sustainability frameworks for thinking about the redesign of their products and operations. However, in the first decade of the twenty-first century, the media and public increasingly focused on climate change as the top environmental issue. Severe storms and other extreme weather patterns predicted by climate change scientists had become more evident. Hurricane Katrina in New Orleans, accelerated Arctic and Antarctic warming, rising ocean levels, and increasing carbon dioxide (CO2) concentrations were discussed widely in the scientific reports and the mainstream media as examples of how human actions shaped natural systems’ dynamics. At the biological level, accumulating industrial chemicals in adults’ and children’s bodies were reported as one of the wide-ranging examples of system equilibrium disruptions. There was growing discussion of tipping points and ways to contain change within an acceptable range of variation for continued human prosperity. Partly in response to this growing concern, globally and within nation-states, markets for carbon; clean and more efficient energy; and safer, cleaner products have grown rapidly. These markets will continue to expand given economic growth trajectories, the rapid movement of more people into a global middle class, and the constrained capacities of natural systems, including our bodies, to absorb the impacts. While some hear only negative news in these words, entrepreneurs and innovators typically do not spend much time on the negative messages. They use innovation to create alternatives. They envision new and better possibilities. They take action to address perceived inefficiencies and to solve problems. Health and environmental problems, the inefficiencies related to pollution, and the newly understood health threats are viewed as opportunities for entrepreneurially minded individuals and ventures to offer substitutes. The shift in perception about industrial and commercial pollution and adverse impacts has been augmented by a new appreciation of the scale and scope of human activity. For example, a short time ago pollution was considered a manageable local problem (and even a visible indicator of economic progress). Today our scientific knowledge has advanced to see not just visible acute pollution challenges as health problems but also molecular depositions far from their source; in other words, problems stretching across local, regional, and even global scales are major unintended effects of industrialization. Table 2.1 Changes in the Character of the Ecological and Health Challenges, Pre-1980s versus Post-1980s Pre-1980s Post-1980s Minor Systemic Localized Global Dispersed and separate Tightly coupled Simple Complex Isolated Ubiquitous Stable and visible Turbulent and hard to discern Slow-moving Accelerated By 2010 there was a scientific and policy acknowledgement about the physical impossibility of maintaining ecosystems’ stability in the face of the existing and the anticipated scale and scope of pollution levels. A biosphere that seemed a short time ago to be infinite in its capacity to absorb waste and provide ecosystem services showed growing evidence of limits. Thus today, satisfying the legitimate material and energy demands of billions of upwardly mobile people in the global community, without severely disrupting ecosystem functions and exacting harsh human costs, is a first-order challenge for economic and business design. This problem is soluble, but it requires creativity that reaches beyond conventional thinking to imagine new models for economic growth and for business. In fact, in increasing numbers companies are now adopting sustainability principles in their product designs and strategies. Recognizing the problem-complexity shift represented by the second column in Table 2.1 "Changes in the Character of the Ecological and Health Challenges, Pre-1980s versus Post-1980s", companies are taking on what can be called a sustainability view of their world. The changes under way are captured in Table 2.2 "Traditional View versus Sustainability View", which compares the old business approach, defined by more narrowly framed environmental issues, and leading entrepreneurial innovators’ perspectives on sustainability challenges. Table 2.2 Traditional View versus Sustainability View Traditional view Sustainability view Rhetoric and greenwash Operational excellence Cost burden Efficiencies Compliance Cost competitiveness/strategic advantage Doing good/altruism Strong financial performance Peripheral to the business Core to the business Technology fix Frameworks, tools, and programs Reactive Innovative and entrepreneurial Let’s start at a more macro level of analysis that allows us to track the reframing of what historically have been called environmental concerns. To better understand the functioning and interdependencies of the natural and human-created systems of which we are a part, we can look at basic energy and material flows. Even a cursory look reveals some of the major challenges. Fossil fuel energy consumption is closely linked to local and global climate modification, ocean acidification (and consequently coral reef degradation that undermines ocean food supplies), and ground-level air pollution, among other problems. Materials extraction and use are tightly coupled with unprecedented waste disposal challenges and dispersed toxins. Furthermore, in our search for energy and materials to fuel economic growth and feed more people, we have been systematically eliminating the habitat and ecosystems on which our future prosperity depends. Figure 2.1 Changing Conditions for Business In 1900 a business did not have to think about its impact on the larger natural world. However, with population growth, a rapidly expanding global economy, and greater transparency demanded from civil society, firms feel increasing pressure to adapt to a more constrained physical world. The existing business model is being challenged by entrepreneurial innovations offering different ways of thinking about business in society. Thus, by studying sustainability innovation, we are able to look at alternative business models for the future. Americans have long voiced support for environmental issues in public opinion polls. That concern has grown, especially as human-influenced climate change became increasingly apparent and a harbinger of broader ecological and health challenges. Even as the US economy faltered dramatically in late 2008, 41 percent of respondents to a survey for the Pew Research Center stated in January 2009 that the environment should remain the president’s top priority, while 63 percent thought the same when President Bush was in office in 2001.Pew Research Center for the People and the Press, “Economy, Jobs Trump All Other Policy Priorities in 2009,” news release, January 22, 2009, accessed March 27, 2009, http://people-press.org/report/485/economy-top-policy-priority. In a different series of polls conducted by Pew between June 2006 and April 2008, over 70 percent of Americans consistently said there is “solid evidence” that global warming is occurring, and between 41 and 50 percent said human activity is the main cause. Independents and Democrats were one and one-half times to twice as likely as Republicans to agree to the statements, indicating ongoing political divisions over the credibility or impartiality of science and how it should inform our response to climate change.Pew Research Center for the People and the Press, “A Deeper Partisan Divide over Global Warming,” news release, May 8, 2008, accessed March 27, 2009, http://people-press.org/reports/pdf/417.pdf. Regardless of climate change public opinion polls, however, by 2010 energy issues had gained national attention for an ever-broadening set of reasons. In fact, by 2010 climate change often was linked to energy independence and energy efficiency as the preferred strategy to get both liberals and conservatives to address global warming. This approach emphasized saving money by saving energy and deploying innovative technology rather than relying on federal mandates and changes to social behavior to curb emissions. The federal government was asked to do more under President Obama. Energy independence included reduced reliance on imported oil as well as nurturing renewable energy and technologies and local solutions to electricity, heating and cooling, and transportation needs. The Energy Security and Independence Act of 2007, among other things, increased fuel economy standards for cars, funded green job training programs, phased out incandescent light bulbs, and committed new and renovated federal buildings to being carbon-neutral by 2030. Meanwhile, renewable energy sources continue to inch upward. By 2007, just over 71 quadrillion British thermal units of energy were produced in total in the United States. About 9.5 percent of that energy came from renewable sources: hydroelectric (dams), geothermal, solar, wind, and wood or other biomass. Indeed, wood and biomass accounted for about 52 percent of all renewable energy production, while hydroelectric power represented another 36 percent. Wind power represented about 5 percent of renewable energy and solar 1 percent.Energy Information Administration, Department of Energy, “Table 1.2: Primary Energy Production by Source, 1949–2009,” Annual Energy Review, accessed March 27, 2009, http://www.eia.doe.gov/emeu/aer/txt/ptb0102.html. The numbers were relatively small, but each of these markets was experiencing double-digit growth rates, offering significant opportunities to investors, entrepreneurs, and firms that wanted to contribute to cleaner energy and reduced fossil fuel dependence. In fact, climate change took center stage among environmental issues in the first decade of this century, with public awareness of climate change heightened by unusual weather patterns. Hurricane Katrina, which devastated New Orleans in 2005, was interpreted as a sign of worse storms to come. The Intergovernmental Panel on Climate Change (IPCC) released its Fourth Assessment Report in 2007. This report affirmed global climate change was largely anthropogenicCreated by the activity of human beings. The twenty-first century is being described as the time when people acknowledge the anthropogenic Earth; that is, Earth systems (carbon, nitrogen, and climate systems, for example) and ecological systems (wetlands, forests, freshwater lakes, and coastal zones) are shaped and defined by human influence. (caused by human activity) and indicated that change was occurring more rapidly than anticipated. Almost a doubling of the rate of sea level rise was recorded from 1993 to 2003 compared to earlier rates, and a steady increase in the ocean’s acidity was verified.Rajendra K. Pachauri, and Andy Reisinger, eds. (core writing team), Climate Change 2007: Synthesis Report (Geneva, Switzerland: Intergovernmental Panel on Climate Change, 2008), accessed November 30, 2010, http://www.ipcc.ch/publications_and_data/publications_ipcc_fourth_assessment_report _synthesis_report.htm. The ocean’s pH decreased about 0.04 pH units from 1984 to 2005. Acidity is measured on a logarithmic scale from 0 to 14, with a one pH unit increase meaning a tenfold increase in acidity. The 2006 Stern Review on the Economics of Climate Change, commissioned by the Treasury of the United Kingdom, attempted to put a cost on the price of business as usual in the face of climate change. It estimated climate change could incur expenses equivalent to 5 to 20 percent of the global gross domestic product (GDP) in the coming decades if nothing changed in our practices, whereas acting now to mitigate the impact of climate change would cost only about 1 percent of global GDP. As the report concluded, “Climate change is the greatest market failure the world has ever seen.”Sir Nicholas Stern, Stern Review on the Economics of Climate Change (London: HM Treasury, 2006), viii, accessed March 26, 2009, http://www.hm-treasury.gov.uk/sternreview_index.htm. Also in 2007, former vice president Al Gore’s documentary on climate change, An Inconvenient Truth, won an Oscar for best feature documentary, while Gore and the IPCC were jointly awarded the Nobel Peace Prize. Although debates over the science continued, the consensus of thousands of scientists worldwide that the atmospheric concentrations of CO2 were at least in part man-made firmly placed global climate and fossil fuel use on the agenda. National policies and the US military engagements related to securing and stabilizing oil imports and prices focused attention further on avoiding oil dependency. Indicating resource issues’ close link to social conflicts, in 2008 the National Intelligence Estimate report from the CIA and other agencies warned climate change could trigger massive upheaval, whether from natural disasters and droughts that destabilized governments or increased flows of climate refugees, both the result of and cause of competition over resources and civil unrest. ### Trailer for An Inconvenient Truth The 2006 film An Inconvenient Truth chronicles the perils of climate change and former US Vice President Al Gore’s work to alert people to the danger. The 2008 Olympic Games in Beijing, meanwhile, highlighted the increasing pollution from high-growth industrializing countries. That year China eclipsed the United States as the leading emitter of CO2, while Chinese officials had to take steps to prevent athletes and tourists from choking in Beijing’s notorious smog. To reduce the worst vehicle emissions in the days leading up to the games, cars with even license plate numbers could drive one day, odd the next, and factories were shut down.Paul Kelso, “Olympics: Pollution over Beijing? Don’t Worry, It’s Only Mist, Say Officials,” Guardian (London), August 6, 2008, accessed November 30, 2010, http://www.guardian.co.uk/sport/2008/aug/06/olympics2008.china; Talea Miller, “Beijing Pollution Poses Challenge to Olympic Athletes,” PBS NewsHour, May 16, 2008, accessed November 30, 2010, http://www.pbs.org/newshour/indepth_coverage/asia/china/2008/athletes.html. India also has struggled to curb pollution as its industrialization accelerates. The World Bank estimated India’s natural resources will be more strained than any other country’s by 2020.“India and Pollution: Up to Their Necks in It,” Economist, July 17, 2008, accessed November 30, 2010, http://www.economist.com/world/asia/displaystory.cfm?story_ id=11751397. To those living in a developed country, particularly in the United States where climate change continues to be debated, warming temperatures can seem somewhat abstract. The following links provide narratives and visual appreciation for how climate change actually influences many people around the world. ### Bangladesh Migration Forced by Sea-Level Rise http://www.guardian.co.uk/environment/video/2009/nov/30/bangladesh-climate-migration ### A More General Travelogue (Nepal to Bangladesh) of Effects of Glacial Retreat on People http://www.guardian.co.uk/environment/video/2009/dec/07/copenhagen-nepal-bangladesh ### Glacier Melt in China Affects People http://www.guardian.co.uk/environment/video/2008/jul/25/glacier.tian ### Global Warming Affects Inuit in Canada http://www.cbsnews.com/video/watch/?id=3181766n Broad scientific consensus on climate change and its origin, the increased concentration of greenhouse gases (GHGs) in the atmosphere, has motivated hundreds of US cities, from Chicago to Charlottesville, to pledge to follow the Kyoto Protocol to reduce emissions within their municipalities through a variety of mechanisms including setting green building standards. The Kyoto Protocol is an international agreement among countries formally initiated in 1997 whose goal is to reduce (GHGs). Figure 2.2 Bangladeshis Sandbagging Coastline This city movement is under way despite the eight-year oppositional position of President Bush’s administration and the Obama administration’s unsuccessful effort to promote a national carbon policy. States also took the lead on many other environmental issues, and according to the Pew Center on Global Climate Change, as of January 2009, twenty-nine states had mandatory renewable energy portfolio standards to encourage the growth of wind, solar, and other energy sources besides fossil fuels. This meant states set target dates at which some percentage (5 to 25 percent, for example) of the energy used within the state must come from renewable energy technology. Another six states had voluntary goals.Pew Center on Global Climate Change, “Renewable & Alternative Energy Portfolio Standards,” October 27, 2010, accessed November 30, 2010, http://www.pewclimate.org/what_s_being_done/in_the_states/rps.cfm. California’s 2006 Global Warming Solutions Act committed the state to reduce GHG emissions from stationary sources. In fall 2010, California voters affirmed the state’s comprehensive climate law designed to promote renewable energy, green-collar jobs, and lower emission vehicles, along with other advanced sustainability-focused technologies. Transportation is also a heavy contributor to CO2 emissions. Regulation of GHG emissions from vehicles may join a series of other regulations on mobile pollution sources. Since trading programs have succeeded in reducing nitrogen oxides and sulfur dioxide from stationary sources, vehicles have increased their relative contribution to acid rain and ground-level ozone, or smog. Each vehicle today may pollute less than its counterpart in 1970, but Americans have more cars and drive them farther, thus increasing total pollution from this sector. The US Environmental Protection Agency (EPA) acknowledges, “Transportation is also the fastest-growing source of GHGs in the U.S., accounting for 47 percent of the net increase in total U.S. emissions since 1990.”US Environmental Protection Agency, Office of Transportation and Air Quality, “Transportation and Climate: Basic Information,” last modified September 14, 2010, accessed November 30, 2010, http://www.epa.gov/OMS/climate/basicinfo.htm. Other countries have seen similar increases in vehicles and their associated pollution. Figure 2.3 Smog over Beijing, 2006 Although few countries regulated GHGs from vehicles as of 2009, many have focused on reducing other pollutants. The United States, the European Union, India, China, and other countries realized that particulate matter emissions from diesel fuel in particular could not be controlled at the tailpipe or locomotive exhaust vent without changing the whole supply chain, and without that change, about 85 percent of the largest cities in developing countries would continue to suffer poor air quality.United Nations Environment Programme, Partnership for Clean Fuels and Vehicles, “Background,” accessed November 30, 2010, http://www.unep.org/pcfv/about/bkground.asp. Thus US refineries have been mandated to produce diesel fuel at or below fifteen parts sulfur per million. This is being phased in for vehicles, trains, ships, and heavy equipment from 2006 to 2014. The lower sulfur content both reduces the sulfur dioxide formed during combustion and allows the use of catalytic converters and other control technology that would otherwise be rapidly corroded by the sulfur. For CO2 from these mobile sources, in 2009 President Obama asked the EPA to reconsider California’s request to regulate GHG emissions from vehicles, a request initially denied under the Bush administration despite a 2007 Supreme Court ruling that required the EPA to regulate GHGs under the Clean Air Act. Assuming California adopts stricter vehicle emissions standards, almost twenty other states will adopt those standards. Moreover, the American Recovery and Reinvestment Act of 2009 appropriated billions of dollars for green infrastructure, including high-speed rail. ### Interactive Timeline of California Petition to Regulate GHGs from Cars http://www.americanprogress.org/issues/2009/01/emissions_timeline.html The Kyoto Protocol itself, nonetheless, faced an uncertain fate under the Obama administration. Discussions for the successor to Kyoto were held in December 2009 in Copenhagen. In the interim between those two frameworks, over 180 nations plus nongovernmental organizations (NGOs)—many criticized for the carbon footprint of traveling in private jets—attended the UN Bali Climate Change Conference in December 2007. Figure 2.4 European Union Emissions Trading System (ETS) Carbon Prices, 2005–7 As climate change and its consequences have become increasingly accepted as real, more people and institutions are considering their “carbon footprints,” the levels of CO2 associated with a given activity. A number of voluntary programs, such as the Climate Registry, ISO 14000 for Environmental Management, and the Global Reporting Initiative, emerged to allow organizations and businesses to record and publicize their footprint and other environmental performance tracking. To assess and abet such efforts, in 2000 the US Green Building Council introduced a rating system called Leadership in Energy and Environmental Design (LEED)A nongovernmental green building design and construction certification system that encourages the design and construction of improved performance in buildings through attention to water use, energy savings, GHS emissions, indoor air quality, and material resource conservation. LEED standards offer measurable ways to improve design, construction, operating efficiencies, and maintenance.. Buildings earn points for energy efficiency, preserving green space, and so on; points then convert to a certification from basic to platinum. The 7 World Trade Center building, for instance, was gold certified upon its reconstruction in 2006.Taryn Holowka, “7 World Trade Center Earns LEED Gold,” US Green Building Council, March 27, 2006, accessed March 27, 2009, http://www.usgbc.org/News/USGBCNewsDetails.aspx?ID=2225. Other green building programs have appeared, while groups such as TerraPass and CarbonFund began selling carbon offsets for people to reduce the impact of their local pollution. Investors also have jumped in. Sustainable-investment funds allow people to buy stocks in companies screened for environmental practices and to press shareholder resolutions. For example, institutional investors representing state retirement funds have asked for evidence that management is fulfilling its fiduciary responsibility to protect the stock price against climate change impacts and other unexpected ecological and related political surprises. The Social Investment Forum’s 2007 Report on Socially Responsible Investing Trends in the United States noted that about 11 percent of investments under professional management in the United States—$2.7 trillion—adhered to one or more strategies of “socially responsible investment,” a category encompassing governance, ecological, health, and safety concerns.Social Investment Forum, 2007 Report on Socially Responsible Investing Trends in the United States (Washington, DC: Social Investment Forum Foundation, 2007), accessed March 27, 2009, http://www.socialinvest.org/resources/research.

Figure 2.5 Global Per Capita Energy Consumption, 2004

## Materials and Chemicals

In conjunction with threats to the globe’s ecosystems (a somewhat removed and therefore abstract notion for many), people became increasingly aware of threats to their personal health. This concern shifts attention from climate and energy issues at a more macro level to the material aspects of pollution and resource management.

Figure 2.6 Chemical Contamination

Knowledge about health threats from chemical exposure goes back in history. Lead and mercury were known human toxins for centuries, with the “mad hatter” syndrome caused by hat makers’ exposure to mercury, a neurotoxin. The scale and scope of chemicals’ impacts, combined with dramatically improved scientific analysis and monitoring, distinguish today’s challenges from those of the past. Bioaccumulation and persistence of chemicals, the interactive effect among chemicals once in the bloodstream, and the associated disruptions of normal development have continued to cause concern through 2010. Chemical off-gassing from materials used to build Federal Emergency Management Agency (FEMA) temporary housing trailers causing health problems for Katrina Hurricane victims, the ongoing health problems of early responders to the 9/11 terrorist attack in New York City, and health issues associated with bisphenol A (BPA) in hard plastic containers and food and beverage cans are some of the well-known issues of public concern raised in the last few years.The US Department of Health and Human Services offers suggestions to parents to avoid exposure to children. See US Department of Health and Human Services, “Bisphenol A (BPA) Information for Parents,” accessed November 30, 2010, http://www.hhs.gov/safety/bpa.

The national Centers for Disease Control and Prevention began periodic national health and exposure reports soon after the publication of Our Stolen Future, authored by Theo Colborn, Dianne Dumanoski, and John Peterson Myers.See the home page for the book: “Our Stolen Future,” accessed March 7, 2011, http://www.ourstolenfuture.org Considered by many as the 1990s sequel to Rachel Carson’s groundbreaking 1962 book Silent Spring, which informed and mobilized the public about pesticide impacts, Our Stolen Future linked toxins from industrial activity to widespread and growing human health problems including compromises in immune and reproductive system functions. In 2005, the federal government’s Third National Report on Human Exposure to Environmental Chemicals found American adults’ bodies contained noticeable levels of over one hundred toxins (our so-called body burdenAlso referred to as the chemical load, this includes the heavy metals, synthetic chemicals, and other toxins identified in samples of human blood and urine, accumulated over time from before birth; body burden reports are published by the US Centers for Disease Control and Prevention.), including the neurotoxin mercury taken up in our bodies through eating fish and absorbing air particulates (from fossil fuel combustion) and phthalates (synthetic materials used in production of personal care products, pharmaceuticals, plastics, and coatings such as varnishes and lacquers). Phthalates are associated with cancer outcomes and fetal development modifications.

BPA, an endocrine-disrupting chemical that can influence human development even at very low levels of exposure, has been associated with abnormal genital development in males, neurobehavioral problems such as attention deficit/hyperactivity disorder (ADHD), type 2 diabetes, and hormonally mediated cancers such as prostate and breast cancers.Frederick S. vom Saal, Benson T. Akingbemi, Scott M. Belcher, Linda S. Birnbaum, D. Andrew Crain, Marcus Eriksen, Francesca Farabollini, et al., “Chapel Hill Bisphenol A Expert Panel Consensus Statement: Integration of Mechanisms, Effects in Animals and Potential to Impact Human Health at Current Levels of Exposure,” Reproductive Toxicology 24, no. 2 (August/September 2007): 131–38, accessed November 30, 2010, http://www.ewg.org/files/BPAConsensus.pdf.

A recent update found three-fourths of Americans had triclosan in their urine, with wealthier Americans having higher levels.The report and updates are available from Centers for Disease Control and Prevention (CDC). See Centers for Disease Control and Prevention, “National Report on Human Exposure to Environmental Chemicals,” last modified October 12, 2010, accessed November 30, 2010, http://www.cdc.gov/exposurereport. This antibiotic is added to soaps, deodorants, toothpastes, and other products. In the first decade of the twenty-first century, pharmaceutical companies were coming under greater scrutiny as antibiotics and birth control hormones were found in city water supplies; the companies had to begin to assess their role in what has come to be called the PIE (pharmaceuticals in the environment) problem. Children, because of their higher consumption of food and water per body weight and their still-vulnerable and developing neurological, immune, and reproductive systems, are especially at risk.

### The Prevalence of Contamination

Virtually all of America’s fresh water is tainted with low concentrations of chemical contaminants, according to the new report of an ambitious nationwide study of streams and groundwater conducted by the U.S. Geological Survey.C. Lock, “Portrait of Pollution: Nation’s Freshwater Gets Checkup,” Science News, May 22, 2004, accessed March 7, 2011, http://findarticles.com/p/articles/mi_m1200/is_21_165/ai_n6110353.

Europe has led the world in its public policy response to reduce the health risks of chemicals. After many years of debate and discussion with labor, business, and government, the EU adopted the “precautionary principleA principle that asserts chemicals should be tested for toxicity and approved before use, rather than being deployed and then checked for toxicity afterward.” in 2007, requiring manufacturers to show chemicals were safe before they could be introduced on a wide scale.European Commission, “What Is REACH?,” last modified May 20, 2010, accessed November 30, 2010, http://ec.europa.eu/environment/chemicals/reach/reach_intro.htm. The REACH directive—Registration, Evaluation, Authorization, and Restriction of Chemicals—will be phased into full force by 2018. REACH requires manufacturers and importers to collect and submit information on chemicals’ hazards and practices for safe handling. It also requires the most dangerous chemicals to be replaced as safer alternatives are found.

The opposite system, which gathers toxicological information after chemicals have spread, prevails in the United States. Hence only after a spate of contaminated products imported from China sickened children and pets did Congress pass the US Consumer Product Safety Act amendments in 2008 to ban lead and six phthalates from children’s toys. However, another phthalate additive, BPA, was not banned. Often found in #7 plastics, including popular water bottles seen on college campuses around the country, BPA was linked to neurological and prostate problems by the National Toxicology Program.National Institute of Environmental Health Sciences, National Toxicology Program, Bisphenol A (BPA) (Research Triangle Park, NC: National Institutes of Health, US Department of Health and Human Services, 2010), accessed November 30, 2010, http://www.niehs.nih.gov/health/docs/bpa-factsheet.pdf. Although the US Food and Drug Administration (FDA), unlike its EU and Canadian counterparts, chose not to ban the chemical, many companies stopped selling products with BPA.

### Environmental Health Information

Environmental Health News provides environmental health information, global and updated daily.

Indeed, consumers have been increasingly wary of materials that inadvertently enter their bodies through the products they use, the air they breathe, and what they put into their bodies by diet. Sales of organic and local foods have been rising rapidly in numbers and prominence since the 1990s due to a greater focus on health. According to the Organic Trade Association, organic food sales climbed from $1 billion in 1990 to$20 billion in 2007.Organic Trade Association, “Industry Statistics and Projected Growth,” June 2010, accessed November 30, 2010, http://www.ota.com/organic/mt/business.html. Once found only in natural food stores, organic foods have been sold predominantly in conventional supermarkets since 2000.Carolyn Dimitri and Catherine Greene, Recent Growth Patterns in the U.S. Organic Foods Market, Agriculture Information Bulletin No. AIB-777 (Washington, DC: US Department of Agriculture, Economic Research Service, 2002), accessed December 1, 2010, http://www.ers.usda.gov/publications/aib777/aib777.pdf. Meanwhile, community-supported agriculture by 2007 encompassed nearly 13,000 farms as people grew more interested in sourcing from their local food shed.US Department of Agriculture, “Community Supported Agriculture,” last modified April 28, 2010, accessed November 30, 2010, http://www.nal.usda.gov/afsic/pubs/csa/csa.shtml. In addition to protection against food supply disruption due to fuel price volatility, terrorist attack, or severe weather (most foods are transported over 1,000 miles to their ultimate point of consumption, creating what many view as undesirable distribution system vulnerabilities), local food production ensures traceability (important for health protection), higher nutritional content, fewer or no chemical preservatives to extend shelf life, and better taste while providing local economic development and job creation.

Whether from energy production or materials processing, a major challenge across the board is where to put the waste. As visible and molecular waste accumulates, there are fewer places to dispose of it. Global carbon sinks, the natural systems (oceans and forests) that can absorb GHGs, show signs of stress. Oceans may have reached their peak absorption as they acidify and municipal waste washes onshore. Forests continue to shrink, unable to absorb additional CO2 emissions still being pumped into the atmosphere. The United Nations’ Food and Agriculture Organization reported that from 1900 to 2005, Africa lost about 3.1 percent of its forests; South America lost around 2.5 percent; and Central America, which had the highest regional rate of deforestation, lost nearly 6.2 percent of its forests. Individual countries have been hit particularly hard: Honduras lost 37 percent of its forests in those 15 years, and Togo lost a full 44 percent. However, the largest absolute loss of forests continues in Brazil, home of the Amazon rain forest. Brazil’s forests have been shrinking annually since 1990 by about three million hectares—an area about the size of Connecticut and Massachusetts combined.Food and Agriculture Organization of the United Nations, “Global Forest Resources Assessment 2005,” last modified November 10, 2005, accessed March 26, 2009, http://www.fao.org/forestry/32033/en.

### Video Clip

World Wildlife Fund Video on Deforestation

Figure 2.7 Protesting against Pollution

Solid waste, particularly plastics, has also come under increasing scrutiny because of its proliferation in and outside of landfills. Estimates put the number of plastic bags used annually in the early 2000s between five hundred billion and five trillion.John Roach, “Are Plastic Grocery Bags Sacking the Environment?,” National Geographic News, September 2, 2003, accessed November 30, 2010, http://news.nationalgeographic.com/news/2003/09/0902_030902 _plasticbags.html; “The List: Products in Peril,” Foreign Policy, April 2, 2007, accessed March 25, 2008, http://www.foreignpolicy.com/story/cms.php?story_id=3762. These bags, made from oil, are linked to clogged waterways and choked wildlife. Mumbai, India, forbade stores from giving out free plastic bags in 2000. Bangladesh, Ireland, South Africa, Rwanda, and China followed suit with outright bans or fees for the bags.“The List: Products in Peril,” Foreign Policy, April 2, 2007, accessed March 25, 2008, http://www.foreignpolicy.com/story/cms.php?story_id=3762; “China Bans Free Plastic Shopping Bags,” International Herald Tribune, January 9, 2008, accessed November 30, 2010, http://www.iht.com/articles/2008/01/09/asia/plastic.php. San Francisco became the first US city to ban plastic bags at large supermarkets and pharmacies in 2007.Charlie Goodyear, “S.F. First City to Ban Plastic Shopping Bags,” San Francisco Chronicle, March 28, 2007, accessed March 25, 2009, http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2007/03/28/MNGDROT5QN1.DTL. Los Angeles passed a similar ban in 2008 that takes effect in 2010 unless California adopts rules to charge patrons twenty-five cents per bag. Los Angeles had estimated that its citizens alone consumed about 2.3 billion plastic bags annually and recycled less than 5 percent of them.David Zahniser, “City Council Will Ban Plastic Bags If the State Doesn’t Act,” Los Angeles Times, July 23, 2008, accessed March 25, 2009, http://articles.latimes.com/2008/jul/23/local/me-plastic23.

### The Life Cycle and Impact of Business Activity on Global Scale

http://www.storyofstuff.com

Bottled water may now face a similar fate because of the tremendous increase in trash from plastic bottles and the resources consumed to create, fill, and ship those bottles.Charles Fishman, “Message in a Bottle,” Fast Company, July 1, 2007, accessed March 26, 2009, http://www.fastcompany.com/magazine/117/features-message- in-a-bottle.html. New York City, following San Francisco; Seattle; Fayetteville, Arkansas; and other cities, has curbed buying bottled water with city money.Jennifer Lee, “City Council Shuns Bottles in Favor of Water from Tap,” New York Times, June 17, 2008, accessed March 26, 2009, http://www.nytimes.com/2008/06/17/nyregion/17water.html. The inability of natural systems to absorb the flow of synthetic waste was dramatically communicated with reports and pictures of the Great Pacific Garbage Patch, also known as the North Pacific Gyre. Pacific Ocean currents create huge eddies where plastic waste is deposited and remains in floating islands of garbage.

### Video Clip

Greatgarbagepatch.org

### Key Takeaways

• The world is composed of energy and materials, and how we design business activity defines the ways we use energy and materials.
• There is growing concern that current patterns of use for energy and materials are not sustainable. Waste streams are the focus of much of this concern.

### Exercises

1. Propose an idea for a product that has sustainability concepts designed in from the outset. How does this change your thinking about resources you might use? How might it change processes of decision making within the firm and across supply chains?
2. What key elements characterize the standard model of business? What barriers can you list that would need to be overcome to move a mainstream business to a sustainability view?

## 2.2 Defining Sustainability Innovation

### Learning Objectives

1. Understand how sustainability innovation has been defined.
2. Begin to apply the basic ideas and concepts of sustainability design.

Recognition that the global economy is processing the world’s natural resources and generating waste streams at an unprecedented scale and scope calls for the redesign of commercial activity. Reconfiguring how we conduct business and implementing business practices that preserve the world’s natural resources for today’s communities and the economic, environmental, and social health and vitality of future generations only recently has become a priority. This notion lies at the heart of sustainability. Sustainability in the business sense is not about altruism and doing what is right for its own sake. Businesses with successful sustainability strategies are profitable because they integrate consideration of clean design and resource conservation throughout product life cycles and supply chains in ways that make economic sense. Sustainability innovation is about defining economic development as the creation of private and social wealth to ultimately eliminate harmful impacts on ecological systems, human health, and communities.

Awareness of the problem of pollution and resource limits has existed for decades but until now only in fragmented ways across informed academic and scientific subcommunities. Today it is becoming self-evident that our past patterns of energy and material use must be transformed. While some still question the seriousness of the challenges, governments and companies are responding. Government is imposing more environmental, health, and safety regulatory constraints on business. However, while regulation may be an important part of problem solving, it is not the answer. Fortunately, businesses are stepping up to the challenge. In fact, the inherent inefficiencies and blind spots that are built into the accepted business and growth models that have been debated and discussed for many years are beginning to be addressed by business. Entrepreneurial innovators are creating solutions that move us away from needing regulation. In addition, recently the critiques have moved from periphery to mainstream as it has become increasingly clear to the educated public that the economic practices that brought us to this point are not sufficient to carry us forward. Since governments alone cannot solve the problems, it will take the ingenuity of people across sectors to generate progress. Sustainability innovation offers a frame for thinking about how entrepreneurial individuals and firms can contribute.

The new models of business sustainability are emerging. They are based on current science, pressure from governments, and citizen demand and envision a world in which human economic development can continue to be sustained by natural systems while delivering improved living standards for more people. That is the goal; however, it takes concrete actions striving toward that ideal to make headway. Those entrepreneurs and ventures embodying the ideal of sustainability have found creative ways to achieve financial success by offering products that improve our natural environment and protect and preserve human health, equity, and community vitality. We will now explore this term, sustainability, and its significance in entrepreneurial thinking.

## General Definition

Sustainability innovationThe creative redesign of products and services that aligns business success with the viability of natural systems, human health, and thriving communities; can be applied to company strategy, supply-chain innovations, and design approaches that mobilize diverse collaborators to create breakthrough results. reflects the next generation of economic development thinking. It couples environmentalism’s protection of natural systems with the notion of business innovation while delivering essential goods and services that serve social goals of human health, equity, and environmental justice. It is the wave of innovation pushing society toward clean technology, the green economy, and clean commerce. It is the combined positive, pragmatic, and optimistic efforts of people around the world to refashion economic development into a process that addresses the fundamental challenges of poverty, environmental justice, and resource scarcity. At the organizational level, the term sustainability innovation applies to product/service and process design as well as company strategy.

Figure 2.8 The Movement toward Sustainability Innovation

Sustainability and sustainability innovation have been defined by different individuals representing diverse disciplines and institutions. Certain fundamentals lie at the concepts’ core, however, and we illuminate these fundamentals in the discussion that follows. Keep in mind that any given definition’s precision is less important than the vision and framework that guide actions in the direction of enduring healthy economic development. Later we will examine concepts and tools that are used to operationalize sustainability strategy and design. It is by combining existing definitions with an understanding of sustainability’s drivers and then studying how entrepreneurial innovators implement the concept that you gain the full appreciation for the change sustainability represents. Note that you will find the terms sustainability, sustainable business, and even sustainability innovation used loosely in the media and sometimes applied to activities that are only continued (“sustained”) as opposed to the meaning of sustainability we work with in this text. Our definition addresses the systemic endurance and smooth functioning of ecological systems and the preservation of carrying capacities, together with protection of human health, social justice, and vibrant communities. We are interested in entrepreneurial and innovative disruption that can accelerate progress along this path.

## Sustainability: Variations on a Theme

Paul E. Gray, a former president of the Massachusetts Institute of Technology (MIT), stated in 1989 that “furthering technological and economic development in a socially and environmentally responsible manner is not only feasible, it is the great challenge we face as engineers, as engineering institutions, and as a society.”Paul E. Gray, “The Paradox of Technological Development,” in Technology and Environment (Washington, DC: National Academy Press, 1989), 192–204. This was his expression of what it meant for MIT to pursue sustainability ideas.

### Sustainability Defined by Chemical Engineers

A sustainable product or process is one that constrains resource consumption and waste generation to an acceptable level, makes a positive contribution to the satisfaction of human needs, and provides enduring economic value to the business enterprise.Bhavik R. Bakshi and Joseph Fiksel, “The Quest for Sustainability: Challenges for Process Systems. Engineering,” AIChE Journal 49, no. 6 (2003): 1350.

### Sustainability Defined by The Natural Step

Pediatric cancer physician and researcher Karl-Henrik Robèrt, the founder of an educational foundation called The Natural Step that helps corporations and municipalities implement sustainability strategies, conveys sustainability this way: “Resource utilization should not deplete existing capital, that is, resources should not be used at a rate faster than the rate of replenishment, and waste generation should not exceed the carrying capacity of the surrounding ecosystem.”Karl-Heinrik Robert, The Natural Step: A Framework for Achieving Sustainability in Our Organizations (Cambridge, MA: Pegasus, 1997).

The Natural Step, a framework to guide decision making and an educational foundation with global reach based in Stockholm, Sweden, offers a scientific, consensus-based articulation of what it would mean for sustainability to be achieved by society and for humans to prosper and coexist compatibly with natural systems. Natural and man-made materials would not be extracted, distributed, and built up in the world at a rate exceeding the capacity of nature to absorb and regenerate those materials; habitat and ecological systems would be preserved; and actions that create poverty by undermining people’s capacity to meet fundamental human needs (for subsistence, protection, identity, or freedom) would not be pursued. These requisite system conditions acknowledge the physical realities of resource overuse and pollution as well as the inherent threat to social and political stability when human needs are systematically denied.

### Sustainability Defined in a Business Operations Journal

The search for sustainability can lead to innovation that yields cost savings, new designs, and competitive advantage. Like the quality gurus who called for zero defects, the early adopters of the sustainability perspective may seem extreme in calling for waste-free businesses in which the nonproduct outputs become inputs for other products or services. But sustainability’s zero-waste goal offers a critical, underlying insight: health, environmental, and community social issues offer opportunities for businesses.Andrea L. Larson, Elizabeth Olmsted Teisberg, and Richard R. Johnson, “Sustainable Business: Opportunity and Value Creation,” Interfaces: International Journal of the Institute for Operations Research and the Management Sciences 30, no. 3 (May/June 2000), 2.

Examining innovative leaders provides a window into the future through which we can see new possibilities for how goods and services can be delivered if sufficient human ingenuity is applied. The approach extends the premises of entrepreneurial innovation, a long-standing driver of social and economic change, to consider natural system viability and community health. Drawing on systems thinking, ecological and environmental health sciences, and the equitable availability of clean commerce economic development opportunities, sustainability innovation offers a fast-growing market space within which entrepreneurial leaders are offering solutions and paths forward to address some of society’s most critical challenges.

It is important to recognize sustainability’s cross-disciplinary approach. Sustainability in business is about designing strategies for value creation through innovation using an interdisciplinary lens. Specialization and grounding in established disciplines provide requisite know-how, but sustainability innovation requires the ability to bridge disciplines and to rise above the narrow bounds and myopia of specialized training in conventional economic models to envision new possibilities. Sustainability innovation occurs when entrepreneurs and ventures stretch toward a better future to offer distinctly new products, technologies, and ways of conducting business. The empirical evidence suggests that while entrepreneurs who succeed typically bring their uniquely specialized know-how to the table, they also have a systems view that welcomes and mixes diverse perspectives to create change.

Business has traveled a long distance from the adversarial pollution control days of the 1970s in the United States, when systemic ecological problems were first acknowledged. Companies were asked to bear the costs of environmental degradation yet often lacked the ability or know-how to realize any rewards for those investments. Decades ago, the goals were narrow: compliance and cost avoidance. Today the intersecting environmental, health, and social challenges are understood as more complex. Community prosperity requires a far broader view of economic development. It requires a sustainability mind-set. While the challenges are undeniably serious, as our examples will show, the entrepreneurial mind sees wide open opportunities.

A growing number of companies now recognize that improving performance and innovation across the full sustainability agenda—financial, ecological, environmental, and social health and prosperity—can grow revenues, improve profitability, and enhance their brands. Sustainability strategies and innovations also position businesses favorably in markets, as their slower-learning competitors fail to develop internal and supply-chain competencies to compete. We predict that within a relatively short period of time what is now considered sustainability innovation will become mainstream business operation.

### World Resources Institute’s Corporate Ecosystem Services Review

http://www.wri.org/project/ecosystem-services-review

Sidestepping the need for sustainability may prove difficult. Population growth rates and related higher levels of waste guarantee environmental concerns will grow in importance. The government and the public are increasingly concerned with the extent and severity of air, water, and soil contamination and the implications of natural resource consumption and pollution for food production, drinking water availability, and public health. As environmental and social problems increase, public health concerns are likely to drive new approaches to pollution prevention and new regulations encompassing previously unregulated activities. As concerns increase, so will the market power of sustainable business. The opportunities are there for the entrepreneurially minded. Sustainability innovation offers solutions.

The entrepreneurial leaders forging ahead with sustainability innovation understand the value of partnerships with supply-chain vendors and customers, nongovernmental organizations (NGOs), public policy agencies, and academia in pursuing product designs and strategies. Many of their innovations are designed to avoid the need for regulation by steadily reducing adverse ecological and health impacts, with the goal of eliminating negative impacts altogether. Significantly, environmental and associated health, community, and equity issues are integrated into core business strategy and thus into the operations of the firm and its supply chains.

Start-up firms and small to midsized companies have always been major movers of entrepreneurial innovation and will continue to lead in sustainability innovation. However, even large firms can offer innovative examples. Indeed, Stuart Hart in his 2005 book Capitalism at the Crossroads: The Unlimited Business Opportunities in Solving the World’s Most Difficult Problems argues that multinational corporations have the capacity and qualities to address the complicated problems of resource constraints, poverty, and growth.Stuart L. Hart, Capitalism at the Crossroads (Upper Saddle River, NJ: Wharton School Publishing, 2005). According to analysts of what is termed “bottom of the pyramid” markets where over two billion people live on one to two dollars a day, developing countries represent both a market for goods and the potential to introduce sustainable practices and products on a massive scale.

Figure 2.9 Growing Wealth but Growing Inequality

### Sustainable Business: Opportunity and Value Creation

• Sustainable business strategies are ones that achieve economic performance through environmentally and socially aware design and operating practices that move us toward a cleaner, healthier, more equitable (and hence more stable) world.
• Sustainable business entrepreneurs understand that sustainability opportunities represent a frontier for creativity, innovation, and the creation of value.

By the first decade of the twenty-first century, a growing number of business executives believed that sustainability should play a role in their work. PricewaterhouseCoopers found that in 2003, 70 percent of CEOs surveyed believed that environmental sustainability was important to overall profit. By 2005, that number had climbed to 87 percent.Karen Krebsbach, “The Green Revolution: Are Banks Sacrificing Profits for Activists’ Principles?” US Banker, December 1, 2005, accessed March 27, 2009, http://www.accessmylibrary.com/coms2/summary_0286-12108489_ITM. In a later PricewaterhouseCoopers survey of technology executives, 71 percent said they did not believe their company was particularly harmful to the environment, yet 61 percent said it was nonetheless important that they reduce their company’s environmental impact. The majority of executives also believed strong demand existed for “green” and cleaner products and that demand would only increase.PricewaterhouseCoopers, “Going Green: Sustainable Growth Strategies,” Technology Executive Connections 5 (February 2008), accessed March 27, 2009, http://www.pwc.com/images/techconnect/TEC5.pdf.

Such employers as well as employees have begun striving toward sustainability. Labor unions and environmentalists, once at odds, jointly created the Apollo Alliance to promote the transition to a clean energy environment under the slogan “Clean Energy, Good Jobs.” Van Jones, formerly with the Obama administration, led Green For All, an organization that proposed the new green economy tackle poverty and pollution at the same time through business collaboration in cities to provide clean energy jobs.

### Video Clip

Van Jones on Green for All

Meanwhile, numerous large and well-known companies, including DuPont, 3M, General Electric, Walmart, and FedEx, have taken steps to save money by using less energy and material or to increase market share by producing more environmental products. Walmart, for instance, stated that as of 2009 its “environmental goals are simple and straightforward: to be supplied 100 percent by renewable energy; to create zero waste; and to sell products that sustain our natural resources and the environment.”Walmart, “Sustainability,” accessed March 27, 2009, http://walmartstores.com/Sustainability. But transitioning from a wasteful economic system to one that conserves energy and materials and dramatically reduces hazardous waste, ultimately reversing the ecological degradation and social inequity often associated with economic growth, takes a major shift in the collective state of mind.

Assumptions that Earth systems, regional and local ecological systems, and even the human body can be sustained and can regenerate in the face of negative impacts from energy and material consumption have proven wrong. Linear processes of extracting or synthetically producing raw materials, converting them into products, using those products, and throwing them away to landfills and incinerators increasingly are viewed as antiquated, old-world designs that must be replaced by systems thinking and life-cycle analysis. These new models will explicitly consider poverty alleviation, equity, health, ecological restoration, and smart energy and materials management as integrated considerations. The precise outline of the new approach remains ambiguous, but the direction and trajectory are clear. While government policies may contribute guidelines and requirements for a more sustainable economic infrastructure, the business community is the most powerful driver of rapid innovation and change. The entrepreneurs are leading the way.

In conclusion, economic development trajectories both in the United States and worldwide are now recognized as incompatible with ecological systems’ viability and long-term human health and social stability. Wetlands, coastal zones, are rain forests are deteriorating, while toxins and air and water pollution harm human health and drive political unrest and social instability; witness the growing numbers of environmental refugees. Even large Earth systems, such as the atmosphere and nitrogen and carbon cycles, are endangered. The business models we created in the nineteenth and twentieth centuries that succeeded in delivering prosperity to ever greater numbers of people did not anticipate the exponential population explosion, technological capability to extract and process ever-greater volumes of materials, natural resource demand, growing constraints on resources, political unrest, fuel cost volatility, and limits of ecological systems and human bodies to assimilate industrial waste.

Scholars and students of business will look back on the early decades of the twenty-first century as a transition as the human community responded to scientific feedback from natural systems and took to heart the desire to extend true prosperity to greater numbers by redesigning business. To the extent that this effort will be deemed successful, much of the credit will go to the entrepreneurial efforts to experiment with new ideas and to drive the desired change. No single venture or individual can address the wide range of sustainability concerns. It is the combination of large and small efforts across sectors and industries around the world that will create an alternative future. That is how change happens—and entrepreneurs are at the cutting edge.

### Key Takeaways

• Sustainability innovation provides new ways to deliver goods and services that are explicitly designed to create a healthier, more equitable, and prosperous global community.
• The sustainability design criteria differ from conventional business approaches by their concurrent and integrated incorporation of economic performance goals, ecological system protection, human health promotion, and community vitality. A new model is emerging through the efforts of entrepreneurial leaders.

### Exercise

1. Identify an ecological, equity, health, or product safety problem you see that might be addressed through a sustainability innovation approach. What causes the problem? What kind of shift in mind-set may be required to generate possible solutions?

# Chapter 3 Framing Sustainability Innovation and Entrepreneurship

### Learning Objectives

1. Provide an overview of the basic stages of corporate engagement.
2. Explore the evolutionary character of private sector adaptation.

During the 1990s and the first decade of the twenty-first century, start-up ventures and large corporations adopted a variety of approaches to shape what we now call sustainability-based product and strategy designs. A sustainability approach acknowledges the interdependencies among healthy economic growth and healthy social and ecological systems. Sustainability innovation and entrepreneurshipThe cutting edge of business redesign that assesses business systems as a whole and attempts to eliminate pollution, waste streams, and inefficiency by refashioning products, processes, and supply chains. seeks to optimize performance across economic, social, and ecological business dimensions. Applied broadly across countries, this effort will evolve a design of commerce aligned and compatible with human and ecosystem health. A growing number of firms are applying creative practices demonstrating the compatibility of profit, community health, and viable natural systems. This discussion provides an introduction to some of the most important approaches used by firms to guide firms.Some topics discussed here have well-developed research literature and are taught as courses in engineering, chemistry, and executive business programs. A word of caution: terms do not have precise or universal meanings. Different academics and practitioners offer alternative views, and thus definitions may vary; this overview employs a consensus definition of a tool or concept as it is expressed by the author or authors primarily responsible for creating that tool or concept.

The spectrum of approaches can be viewed along a continuum toward the ideal of sustainability. Imagine a timeline. The Industrial Revolution has unfolded on the left side with time moving toward the right on a continuum. We are quickly learning how and why our industrial system, as currently designed, can undermine biosphere systems such as the atmosphere, water tables, fisheries, or soil fertility. With entrepreneurial actors leading the way, our response is to adapt our institutions and our mind-sets. Ultimately the evolution of new knowledge will create new rules for commerce, driving a redesign of our commercial systems to coevolve more compatibly with the natural world and human health requirements. Currently we are in a transition from the left side of the continuum to the right. On the far right of the continuum is the ideal state in which we achieve a design of commerce compatible with human prosperity and ecosystem health. This ideal state includes provision of goods and services to support a peaceful global community, one that is not undermined by violence and civil unrest due to income and resource disparities. Is this ideal state unrealistic? Having a human being walk on the moon was once thought impossible. Electricity was once unknown. Global treaties were considered impossible before they were achieved. Humans shape their future every day, and they can shape this future. In fact, the author’s decades of research show people are already shaping it. It’s a question of whether the reader wants to join in.

Looking at the timeline—or continuum—as a whole, the transition from the Industrial Revolution toward the ideal state can be characterized by imagining a “filter” of environmental and health protection imposed on manufacturing processes. This process is well under way around the world. The filter first appeared at the “end of the pipe” where waste pollution moved from a facility to the surrounding water, air, and soil. With the first round of US regulations in the 1970s (mirrored by public policies in many other countries in the intervening years), typical end-of-the-pipe solutions included scrubbers, filters, or on-site waste treatment and incineration. These are called pollution controlA method to prevent the release of emissions and other by-products into the environment after those wastes have been generated. Typical techniques include scrubbers and filters to trap pollutants. techniques, and regulations often specified the solution through fiat or “command and control” legislation.

Over time, as laws became more stringent, the conceptual filter for pollution control moved from filters on smokestacks outside a firm to operating and production processes inside. These in-the-pipe techniques constitute pollution preventionA method to reduce the generation of waste and other by-products in the first place so that they cannot accumulate in the environment. Typical techniques include dramatic improvements in the efficiency of production. measures in manufacturing and processing that minimize waste and tweak the production system to operate as efficiently as possible. Pollution prevention measures repeatedly have been shown in practice to reduce costs and risks, offering improvements in financial performance and even the quality and desirability of the final products.

In the third and final stage of social and ecological protection, the stage in which sustainability innovation thrives, the conceptual filter is incorporated into the minds of product designers, senior management, and employees. Thus the possibilities for ecological disruption and human health degradation can be removed at the early design stages by the application of human ingenuity. Fostered by a systems mind-set and informed by current science, this ingenuity enables an evolutionary adaptation of firms toward the ideal sustainability state. Seeing this design creativity at work—for example, producing clean renewable energy for electricity and benign, recyclable materials—provides a window to a future landscape in which the original Industrial Revolution is rapidly evolving to its next chapter.

Eco-efficiencyA conceptual framework that seeks to reduce the amount of material and energy needed to manufacture and use products over the product life cycle, thus minimizing waste and costs while boosting profits. describes many companies’ first efforts to reduce waste and use fewer energy and material inputs. Eco-efficiency can reduce materials and energy consumed over the product life cycle, thus minimizing waste and costs while boosting profits. Considering eco-efficiency beyond the level of the individual company leads to rethinking the industrial sector. Instead of individual firms maximizing profits, we see a web of interconnected corporations—an industrial ecosystem—through which a metabolism of materials and energy unfolds, analogous to the material and energy flows of the natural world. The tools for design for environment (DfE) and life-cycle analysis (LCA)The approach taken by firms to understand the full impact of their product throughout the production, sale, use, and disposal stages of a product’s life. from the field of industrial ecology provide information on the complete environmental impact of a product or process from material extraction to disposal. Other approaches to product design, such as concurrent engineeringA design process that involves manufacturing, operations, marketing, research, development, and other participants in collaborative conversations from the beginning of the design phase to optimize the product for sustainability., aid in placing the filter of environmental protection in a design process that invites full design participation from manufacturing, operations, and marketing representatives as well as research and development designers.

When powerful new business perspectives emerge, they often appear to be fads. Concentrating on quality, for example, seemed faddish as the movement emerged in the 1980s. Over time, however, total quality as a concept and total quality management (TQM) programs became standard practice. Now, over two decades after the quality “fad” was introduced to managers around the world, product quality assurance methods are part of the business fundamentals that good managers understand and pursue. Similarly, sustainability has been viewed as a fad. In fact, as its parameters are more carefully defined, it is increasingly understood as an emerging tenet of excellence.For a comprehensive discussion of sustainability as an emerging tenet of excellence, see Andrea Larson and Elizabeth Teisberg, eds., “Sustainable Business,” special issue, Interfaces: International Journal of the Institute for Operations Research and the Management Sciences 30, no. 3 (May/June 2000).

When we look at the emerging wave of sustainability innovation, we can view it as an adaptive process indicating that businesses are moving toward more intelligent interdependencies with natural systems. It is clear that companies are under growing pressure to offer cleaner and safer alternatives to existing products and services. This is in large part because the footprint, or cumulative impact, of business activity is becoming clearer. Pressures on companies to be transparent and factor in full costs, driven by a wide range of converging and increasingly urgent challenges from climate change and environmental health problems to regulation and resource competition, now accelerate change and drive innovation. Furthermore, growing demand for fresh water, food, and energy puts the need for innovative solutions front and center in business. In this chapter, we will look at the major shifts occurring and consider the role of paradigms and mind-sets. A presentation of core concepts, practical frameworks, and tools follows.

Table 3.1 Approximate Timing of Major Approaches/Frameworks

Framework Approximate Date of Emergence Perspective
Pollution control (reactive) 1970s Comply with regulations (clean up the pollution) using technologies specified by government.
Pollution prevention (proactive) 1980s Manage resources to minimize waste based on better operating practices (prevent pollution); consistent with existing total quality management efforts.
Eco-efficiency 1990s Maximize the efficiency of inputs, processing steps, waste disposal, and so forth, because it reduces costs and boosts profits.
Industrial ecology, green chemistry and engineering, design for environment, life-cycle analysis, concurrent engineering 1990s Incorporate ecological/health impact considerations into product design stage; extend this analysis to the full product life cycle.
Sustainability innovation 2000s Combine all the above in a systems thinking approach that drives entrepreneurial innovation.

### Key Takeaways

• Business practices have moved along a continuum, with an increasing attention to environmental, social, and health concerns.
• Corporate practice has evolved from rudimentary pollution control to product design changes that take into consideration the full life cycle of products including their energy and material inputs.
• As a consequence of new knowledge and evolutionary learning, sustainability issues are now in the forefront as companies experiment with ways to optimize performance across economic, social, and environmental factors.

### Exercises

1. Identify a business and describe what operational changes would be made if senior management applied life-cycle analysis sequentially to its operations and supply chain.
2. Select a product that you use. Identify as many inputs (energy, materials, and labor) as you can that enable that product to be available to you. Where and how might you apply these ideas to the production and delivery of the product?

### Learning Objectives

1. Explain how paradigms and innovation affect our perception of the possibilities for sustainable business.
2. Understand why new ideas, often introduced through innovative thinking and action, can meet with initial resistance.

The early decades of the twenty-first century will mark a transition period in which conventional economic models that assume infinite capacities of natural systems to provide resources and absorb waste no longer adequately reflect the reality of growth and its related environmental and health challenges. Providing material goods and creating prosperous communities for expanding populations in ways that are compatible with healthy communities and ecosystems are the core challenges of this century.

Not surprisingly, entrepreneurial innovators are stepping up to provide alternatives better aligned with the constraints of population growth, material demand, and limited resources. This activity is consistent with the role of society’s entrepreneurs. They are the societal subgroup that recognizes new needs and offers creative solutions in the marketplace. However, innovators and their new ways are often misunderstood and rejected, at least initially. Understanding the challenges facing the sustainability entrepreneurs who produce new products and technologies is enhanced by understanding how a paradigmA well-accepted thought pattern or theoretical framework that becomes integrated into our worldview such that it guides and can constrain the legitimacy of questions asked. is created and replaced.

Education, cultural messages (conveyed through family, media, and politics), and social context provide us with ideas about how the world works and shape our mind-sets. Formalized and sanctioned by academic fields and canonical textbooks, assumptions become set paradigms through which we understand the world, including our role in it and the possibilities for change. Despite new knowledge, the reality of daily living, and the results of scientific research generating empirical evidence that can challenge core assumptions, it is well known that individuals and societies resist change and hold fast to their known paradigms. Why? Because the unquestioned assumptions have functioned well for many in the population, inertia is powerful, and often we lack alternatives that will explain and bring order to what appears to be contradictory information about how new or unprecedented events are unfolding.

The fact that reality does not correspond to our assumptions can be ignored or denied for a long time if no alternative path is perceived. For years, pollution was acknowledged and accepted as the price of progress, the cost that must be paid to keep people employed and maintain economic growth. “Clean commerce” was an oxymoron. Furthermore, specialized disciplines in academia create narrow intellectual silos that become impediments to broader systems views. In business, functional silos emerge as companies grow. Communication between research and development and manufacturing breaks down, manufacturing experts and marketing staff are removed from each other’s work and even geographically separate, and sales departments rarely have the opportunity to provide feedback to designers. These realities present barriers to understanding the complex nature–human relationship shift in which we are now engaged.

It is only when the incongruity between reality and our perceived understanding of that same world presents a preponderance of data and experience to challenge accepted thought patterns that new explanations are permitted to surface, seriously discussed, and legitimized by the mainstream institutions (universities, corporations, and governments). Recently, climate change, toxin-containing household products, the collapse of ocean fisheries, the global asthma epidemic, and other challenges for which no simple answers seem possible have provided incentives for people to imagine and begin to build a different business model.

In fact, business consultants, architects, engineers, chemists, economists, and nonprofit activists have been grappling for many decades with limits to economic growth. Interdisciplinary science has become increasingly popular, and higher funding levels signal recognition that research and solutions need to bridge conventionally segregated and bound areas of thought (e.g., economics, biology, psychology, engineering, chemistry, and ecology). The new approaches to resource use, pollution, and environmental and equity concerns have opened new avenues for thought and action.

A body of ideas and approaches reflects movement toward inter- and even metadisciplinary understanding. Similarities across these approaches will be readily apparent. In fact, in combination, each of these seemingly disparate efforts to close the gap between what we have been taught about economic growth and what we have observed in the last few decades reveals common themes to guide entrepreneurial innovation and business strategy. In Chapter 3 "Framing Sustainability Innovation and Entrepreneurship", Chapter 3, Section 3 "Core Ideas and Metaconcepts", we will explore some metaconcepts.

### Key Takeaways

• Educational institutions, cultural values, and everyday practices create and sustain assumptions that become paradigms, which then influence what we consider possible.
• The 1990s and first decade of the twenty-first century witnessed a variety of difficult and growing environmental and social problems and, in response, the introduction of new concepts for business. These sustainability concepts may offer an approach more attuned to the problems businesses face now and will face in the future.

### Exercises

1. How do paradigms and entrepreneurial innovation interact?

## 3.3 Core Ideas and Metaconcepts

### Learning Objectives

1. Identify the roles of carrying capacity and equity in the four key metaconcepts of sustainability.
2. Compare and contrast the four key metaconcepts, including their assumptions, emphases, and implications.
3. Apply the metaconcepts to identify sustainable business practices.

An educated entrepreneur or business leader interested in sustainability innovation should understand two core ideas. The first is that sustainability innovation ultimately contributes to preservation and restoration of nature’s carrying capacity. Carrying capacityThe ability of the natural system to sustain demands placed upon it while still retaining the self-regenerative and self-renewing processes that preserve those systems indefinitely. refers to the ability of the natural system to sustain demands placed upon it while still retaining the self-regenerative processes that preserve the system’s viability indefinitely. Note that human bodies have carrying capacities, and thus we are included in this notion of natural carrying capacities. For example, similarly to groundwater supplies or coastal estuaries, children’s bodies can be burdened with pollutants only up to a point, beyond which the system collapses into dysfunction and disease.

The second core idea is equityA fair distribution of risks and resources among classes, ethnicities, current and future generations, and so forth along with an appreciation of personal and cultural distinctions., leading to our discussion of environmental justice as the second metaconcept category. Prosperity achieved by preserving and restoring natural system carrying capacities that structurally exclude many people from realizing the benefits of that prosperity is not sustainable, practically or morally. Sustainability scholars have suggested that a “fortress” future lies ahead if equity issues are not considered core to sustainability goals. The wealthy will need to defend their wealth from gated communities, while the poor live with illness, pollution, and resource scarcity.

Sustainability innovations guided by the following approaches aim to sustain biological carrying capacities and healthy human communities that strive toward equity. The ideal is that we tap into every person’s creativity and bring it to bear on how we learn to live on what scientists now call our “full Earth.”

Each of our four key metaconcepts—sustainable development, environmental justice, earth systems engineering and management, and sustainability science—addresses ideas of equity and carrying capacity in a slightly different way. Earth Systems Engineering and management and sustainability science focus on technology and carrying capacity, while sustainable development and environmental justice emphasize social structures and equity. Yet each metaconcept realizes equity and carrying capacity are linked; humans have both social and material aspirations that must be met within the finite resources of the environment.

## Sustainable Development

Sustainable developmentA socioeconomic development paradigm that achieves more widespread human prosperity while sustaining nature’s life-support systems. refers to a socioeconomic development paradigm that achieves more widespread human prosperity while sustaining nature’s life-support systems. Under sustainable development, the next generation’s choices are extended rather than attenuated; therefore, sustainable development addresses equity issues across generations to not impoverish those generations that follow. Introduced in the Brundtland Commission’s 1983 report, which focused attention on the interrelated and deteriorating environmental and social conditions worldwide, sustainable development would balance the carrying capacities of natural systems (environmental sustainability) with sociopolitical well-being. While debate continues on the challenges’ details and possible solutions, there is widespread scientific consensus that continued escalation in scale and scope of resource and energy consumption cannot be maintained without significant risk of ecological degradation accompanied by potentially severe economic and sociopolitical disruption. In 1992, the Economic Commission for Europe described societal transformation toward sustainable development moving through stages, from ignorance (problems are not widely known or understood) and lack of concern, to hope in technology-based fixes (“technology will solve our problems”), to eventual conversion of economic activities from their current separation from ecological and human health goals of society to new forms appropriately adapted to ecological laws and the promotion of community well-being. The goal of sustainable development, though perhaps impossible to reach, would be a smooth transition to a stable carrying capacity and leveling of population growth. Societies would evolve toward more compatible integration and coevolution of natural systems with industrial activity. Because corporations are among the most powerful institutions in the world today, they are viewed as instrumental in creating the transition from the current unsustainable growth trajectory to sustainable development.

## Environmental Justice

Environmental justice emerged as a mainstream concept in the 1980s. Broad population segments in the United States and elsewhere increasingly acknowledged that racial and ethnic minorities and the poor (groups that often overlap) suffered greater exposure to environmental hazards and environmental degradation than the general population. Following pressure from the Congressional Black Caucus and other groups, the US Environmental Protection Agency (EPA) incorporated environmental justice into its program goals in the early 1990s. The EPA defined environmental justice as “the fair treatment and meaningful involvement of all people regardless of race, color, national origin, or income with respect to the development, implementation, and enforcement of environmental laws, regulations, and policies.” The EPA also stated that environmental justice “will be achieved when everyone enjoys the same degree of protection from environmental and health hazards and equal access to the decision-making process to have a healthy environment in which to live, learn, and work.”US Environmental Protection Agency, “Compliance and Enforcement: Environmental Justice,” last updated November 24, 2010, accessed December 3, 2010, http://www.epa.gov/oecaerth/environmentaljustice. Other definitions of environmental justice similarly include an emphasis on stakeholder participation in decisions and an equitable distribution of environmental risks and benefits.

Environmental justice in the United States grew out of a civil rights framework that guarantees equal protection under the law, which globally translated into the framework of universal human rights. It crystallized as a movement in the years 1982–83, when hundreds of people were jailed for protesting the location of a hazardous waste dump in a predominantly black community in North Carolina.April Mosley, “Why Blacks Should Be Concerned about the Environment: An Interview with Dr. Robert Bullard,” November 1999, Environmental Justice Resource Center at Clark Atlanta University, accessed July 2, 2009, http://www.ejrc.cau.edu/nov99interv.htm. In 1991, the National People of Color Environmental Leadership Summit first convened and drafted the “Principles of Environmental Justice,” which were later circulated at the 1992 Rio Earth Summit.United Church of Christ, Toxic Wastes and Race at Twenty: 1987–2007 (Cleveland, OH: United Church of Christ, 2007), 2. The 2002 UN World Conference against Racism, Racial Discrimination, Xenophobia, and Related Intolerance also embraced environmental justice in its final report.United Nations, United Nations Report of the World Conference against Racism, Racial Discrimination, Xenophobia and Related Intolerance (Durban, South Africa: United Nations, 2001), accessed December 3, 2010, http://www.un.org/WCAR/aconf189_12.pdf.

Although the placement of hazardous waste dumps and heavily polluting industries in areas predominantly inhabited by minorities, such as incinerators in the Bronx in New York City and petrochemical plants along Louisiana’s Cancer Alley, remains the most glaring example of environmental injustice, the concept encompasses myriad problems. For instance, housing in which minorities and the poor are concentrated may have lead paint (now a known neurotoxin) and proximity to the diesel exhaust of freeways and shipping terminals.David Pace, “More Blacks Live with Pollution,” Associated Press, December 13, 2005, accessed December 1, 2010, http://www.precaution.org/lib/05/more_blacks_live_with_pollution.051213.htm; American Lung Association, “Comments to the Environmental Protection Agency re: Ocean Going Vessels,” September 28, 2009, accessed April 19, 2011, http://www.lungusa.org/get-involved/advocate/advocacy-documents/Comments-to-the-Environmental-Protection-Agency -re-Ocean-Going-Vessels.pdf. Migrant agricultural laborers are regularly exposed to higher concentrations of pesticides. As heavy industries relocate to areas where labor is cheaper, those regions and countries must shoulder more of the environmental and health burdens, even though most of their products are exported. For instance, demand for bananas and biodiesel in the Northern Hemisphere may accelerate deforestation in the tropics.

Climate change has also broadened the scope of environmental justice. Poor and indigenous people will suffer more from global warming: rising waters in the Pacific Ocean could eliminate island societies and inundate countries such as Bangladesh, cause warming in the Arctic, or cause droughts in Africa. Hurricane Katrina, which some scientists saw as a signal of the growing force of storms, was a dramatic reminder of how poor people have more limited access to assistance during “natural” disasters. In addition, those groups least able to avoid the consequences of pollution often enjoy less of the lifestyle that caused that pollution in the first place.

Spotting environmental injustice can sometimes be simple. However, to quantify environmental justice or its opposite, often called environmental racism, demographic variables frequently are correlated to health outcomes and environmental risk factors with an accepted degree of statistical significance. Rates of asthma, cancer, and absence from work and school are common health indicators. Information from the EPA’s Toxic Release Inventory or Air Quality Index can be combined with census data to suggest disproportionate exposure to pollution. For example, children attending schools close to major highways (often found in low-income neighborhoods) experience decreased lung health and capacity.

### Higher Exposure to Pollution

For 2007, host neighborhoods with commercial hazardous waste facilities are 56% people of color whereas non-host areas are 30% people of color. Thus, percentages of people of color as a whole are 1.9 times greater in host neighborhoods than in non-host neighborhoods.…Poverty rates in the host neighborhoods are 1.5 times greater than non-host areas (18% vs. 12%) and mean annual household incomes in host neighborhoods are 15% lower ($48,234 vs.$56, 912). Mean owner-occupied housing values are also disproportionately low in neighborhoods with hazardous waste facilities.United Church of Christ, Toxic Wastes and Race at Twenty: 1987–2007 (Cleveland, OH: United Church of Christ, 2007), 143.

### Video Clip

Fight for Environmental Justice in Chester, Pennsylvania

## Earth Systems Engineering and Management

With discussion of earth systems engineering (ESE), we transition from social and community concerns to human impacts on large-scale natural systems. Sometimes referred to as Earth Systems Engineering and management, ESE is a broad concept that builds from these basic premises:

1. People have altered the earth for millennia, often in unintended ways with enduring effects, such as the early deforestation of ancient Greece.
2. The scale of that alteration has increased dramatically with industrialization and the population growth of the twentieth century.
3. Our institutions, ethics, and other behaviors have yet to catch up to the power of our technology.
4. Since the world has become increasingly less natural and more—or entirely—an artifact of human activity, we should use technology to help us understand the impact of our alterations in the long and short terms. Instead of desisting from current practice, we should continue to use technology to intervene in the environment albeit in more conscious, sustainable ways. However, the interactions of human and natural systems are complex, so we must improve our ability to manage each by better understanding the science of how they operate and interact, building better tools to manage them, and creating better policies to guide us.National Academy of Engineering, Engineering and Environmental Challenges: Technical Symposium on Earth Systems Engineering (Washington, DC: National Academy Press, 2000), viii.

### Defining ESE

The often unintended consequences of our technologies reflect our incomplete understanding of existing data and the inherent complexities of natural and human systems. earth systems engineering is a holistic approach to overcoming these shortcomings. The goals of ESE are to understand the complex interactions among natural and human systems, to predict and monitor more accurately the impacts of engineered systems, and to optimize those systems to provide maximum benefits for people and for the planet. Many of the science, engineering, and ethical tools we will need to meet this enormous challenge have yet to be developed. National Academies of Science, Engineering and Environmental Challenges: Technical Symposium on Earth Systems Engineering (Washington, DC: National Academies Press, 2000), viii.

In 2000, Nobel laureate Paul Crutzen coined the term “anthropocene” to describe the intense impact of humanity upon the world. Anthropocene designates a new geological era with the advent of the Industrial Revolution. In this era, as opposed to the previous Holocene era, humans increasingly dominate the chemical and geologic processes of Earth, and they may continue to do so for tens of thousands of years as increased concentrations of GHGs linger in the atmosphere.

Professor Braden Allenby, a former vice president of AT&T who holds degrees in law, economics, and environmental science, argues we must embrace this anthropogenic (human-designed) world and make the most of it. An early and consistent proponent of ESE, he wrote in 2000, “The issue is not whether the earth will be engineered by the human species, it is whether humans will do so rationally, intelligently, and ethically.”Braden Allenby, “Earth Systems Engineering and Management,” IEEE Technology and Society Magazine 19, no. 4 (Winter 2000–2001): 10–24. Thus ESE differs from other sustainability concepts and frameworks that seek to reduce humanity’s impact on nature and to return nature to a more equal relationship with people. Allenby believes technology gives people options, and investing in new technologies to make human life sustainable will have a greater impact than trying to change people’s behaviors through laws or other social pressures.

### Brad Allenby Discusses Earth Systems Engineering

http://mitworld.mit.edu/video/531

ESE could be deployed at various scales. One of the more extreme is reengineering, which emerged in the 1970s and resurfaced after 2000 as efforts to curb greenhouse gas emissions floundered and people reconsidered ways to arrest or reverse climate change. Geoengineering would manipulate the global climate directly and massively, either by injecting particles such as sulfur dioxide into the atmosphere to block sunlight or by sowing oceans with iron to encourage the growth of algae that consume carbon dioxide (CO2). The potential for catastrophic consequences has often undermined geoengineering schemes, many of which are already technologically feasible and relatively cheap. On the scale of individual organisms, ESE could turn to genetic engineering, such as creating drought-resistant plants or trees that sequester more CO2.

### Reflection on ESE

David Keith, an environmental scientist at the University of Calgary, talks about the moral hazard of ESE at the 2007 Technology, Entertainment, and Design (TED) Conference.

Keith discusses the history of geoengineering since the 1950s and argues that more people must seriously discuss ESE because it would be cheap and easy for any one country to pursue unilaterally, for better or worse.

http://www.ted.com/talks/david_keith_s_surprising_ideas_on_climate_change.html

## Sustainability Science

Sustainability science was codified as a multidisciplinary academic field between 2000 and 2009 with the creation of a journal called Sustainability Science, a study section within the US National Academy of Sciences and the Forum on Science and Innovation for Sustainable Development, which links various sustainability efforts and individuals around the world. Sustainability science aims to bring scientific and technical knowledge to bear on problems of sustainability, including assessing the resilience of ecosystems, informing policy on poverty alleviation, and inventing technologies to sequester CO2 and purify drinking water. William C. Clark, associate editor of the Proceedings of the National Academy of Sciences, writes, “Like ‘agricultural science’ and ‘health science,’ sustainability science is a field defined by the problems it addresses rather than by the disciplines it employs. In particular, the field seeks to facilitate what the National Research Council has called a ‘transition toward sustainability,’ improving society’s capacity to use the earth in ways that simultaneously ‘meet the needs of a much larger but stabilizing human population…sustain the life support systems of the planet, and…substantially reduce hunger and poverty.’”William C. Clark, “Sustainability Science: A Room of Its Own,” Proceedings of the National Academy of Sciences 104, no. 6 (February 6, 2007): 1737–38.

Like ecological economics, sustainability science seeks to overcome the splintering of knowledge and perspectives by emphasizing a transdisciplinary, systems-level approach to sustainability. In contrast to ecological economics, sustainability science often brings together researchers from a broader base and focuses on devising practical solutions. Clark calls it the “use-inspired research” typified by Louis Pasteur.

Sustainability science arose largely in response to the increasing call for sustainable development in the late 1980s and early 1990s. The core question became how? The number of scholarly articles on sustainability science increased throughout the 1990s. In 1999, the National Research Council published Our Common Journey: A Transition Toward Sustainability. The report investigated how science could assist “the reconciliation of society’s development goals with the planet’s environmental limits over the long term.” It set three main goals for sustainability science research: “Develop a research framework that integrates global and local perspectives to shape a ‘place-based’ understanding of the interactions between environment and society.…Initiate focused research programs on a small set of understudied questions that are central to a deeper understanding of interactions between society and the environment.…Promote better utilization of existing tools and processes for linking knowledge to action in pursuit of a transition to sustainability.”National Research Council, Our Common Journey: A Transition toward Sustainability (Washington, DC: National Academy Press, 1999), 2, 10–11.

Shortly thereafter, an article in Science attempted to define the core questions of sustainability science, again focusing on themes of integrating research, policy, and practical action across a variety of geographic and temporal scales.Robert W. Kates, William C. Clark, Robert Corell, J. Michael Hall, Carlo C. Jaeger, Ian Lowe, James J. McCarthy, et al., “Sustainability Science,” Science 292, no. 5517 (April 27, 2000): 641–42.

At about the same time, groups such as the Alliance for Global Sustainability (AGS) formed. AGS is an academic collaboration among the Massachusetts Institute of Technology, the University of Tokyo, the Swiss Federal Institute of Technology, and Chalmers University of Technology in Sweden. The alliance seeks to inject scientific information into largely political debates on sustainability. Members of the alliance also created the journal Sustainability Science. Writing in the inaugural edition, Hiroshi Komiyama and Kazuhiko Takeuchi described sustainability science as broadly addressing three levels of analysis and their interactions: (1) global, primarily the natural environment and its life-support systems; (2) social, primarily comprising human institutions and collective activities; and (3) human, largely addressing questions of individual health, happiness, and prosperity (Figure 3.1 "Levels of Analysis: Global, Social, and Human").Hiroshi Komiyama and Kazuhiko Takeuchi, “Sustainability Science: Building a New Discipline,” Sustainability Science 1, no. 1 (October 2006): 1–6.

Figure 3.1 Levels of Analysis: Global, Social, and Human

### Key Takeaways

• The broad metaconcepts in sustainability emphasize equity and maintenance of the earth’s carrying capacity, despite an increased human population.
• Sustainability metaconcepts focus on balancing the needs of humans and their environment, present and future generations, and research and policy. These problems are complex, and the metaconcepts therefore tend to endorse an interdisciplinary, systems-level view.
• Equity considerations as design criteria offer opportunities for novel approaches to product and business competitiveness while preserving socially and politically stable communities.

### Exercises

1. Make a diagram comparing and contrasting the four metaconcepts, including their implications, assumptions, and past successes. Then present to others the framework you find most compelling and explain why. If you prefer, synthesize a fifth metaconcept to present.
2. Select an industry and briefly research how the four metaconcepts have changed its practices and may guide future changes.

## 3.4 Practical Frameworks and Tools

### Learning Objectives

1. Understand the core premises of each framework or tool.
2. Compare and contrast the frameworks and tools to evaluate the contributions of each to sustainability thinking.
3. Apply the frameworks and tools to improve existing products and services or to create new ones.

## The Natural Step

TNS is both a framework for understanding ecological principles and environmental problems and an international nonprofit education, consultation, and research institution based in Sweden. TNS was founded in 1989 by Swedish pediatric oncologist Dr. Karl-Henrik Robèrt. In his medical practice, Dr. Robèrt observed an increase of rare cancers in children who were too young to have their cells damaged through lifestyle choices. He began to explore human-caused pollution (environmental) causes—outcomes of industrial and commercial activity. Once engaged in the process and frustrated by the polarized public and scientific debates over pollution, Dr. Robèrt began enlisting leading Swedish scientists to identify irrefutable principles from which productive debate could follow. These principles became the basis for TNS framework now used by many businesses worldwide to guide strategy and product design.Andrea Larson and Wendy Warren, The Natural Step, UVA–G–0507 (Charlottesville: Darden Business Publishing, University of Virginia, 1997), 1–3.

The principles the scientists distinguished during the consensus-building process are three well-known and very basic physical laws. The first law of thermodynamics, also known as the law of conservation of energy, states that energy cannot be created or destroyed, only changed in form. Whether electrical, chemical, kinetic, heat, or light, the total energy remains constant. Similarly, the law of conservation of matter tells us that the total amount of matter is constant and cannot be created or destroyed.These two laws assume that matter and energy are not being converted into each other through nuclear processes, but when fission and fusion are taken into account, mass-energy becomes the new conserved quantity. Finally, by the second law of thermodynamics, we know that matter and energy tend to disperse. Greater entropy, or disorder, is the inevitable outcome. Think about the decomposition of discarded items. Over time, they lose their structure, order, and concentration; in other words, they lose their quality.

In our biosphere, these laws imply things do not appear or disappear; they only take on different forms. All energy and matter remain, either captured temporarily in products or dispersed into the air, water, and soil. The matter humans introduce into the biosphere from the earth’s crust (e.g., by mining and drilling) or from corporate research laboratories (synthetic compounds) eventually is released and dispersed into the larger natural systems, including the air we breathe, water we drink, and food we eat. Furthermore, humans do not literally “consume” products. We only consume or use up their quality, their purity, and their manufactured temporary structure. Thus there is no “away” when we throw things away.

However, if the law of entropy dictates that matter and energy tend toward disorder rather than toward complex materials and ecosystems, what keeps the earth’s systems running? An outside energy input is needed to create order. That energy is the sun. While the earth is essentially a closed system with respect to matter, it is an open system with respect to energy. Hence net increases in material quality on Earth ultimately derive from solar energy, present or ancient.Karl-Henrik Robèrt, Herman Daly, Paul Hawken, and John Holmberg, “A Compass for Sustainable Development,” Natural Step News 1 (Winter 1996): 4.

Green plant cells, as loci of photosynthesis, curb entropy by using sunlight to generate order. The cells produce more structure, quality, and order than they destroy through dissipation. Plants thereby regulate the biosphere by capturing carbon dioxide (CO2), producing oxygen for animal life, and creating food. Fossil fuels, meanwhile, are simply that: the end products of photosynthesis in fossil form.

### The Natural Step for Business

To summarize, while the Earth is a closed system with regard to matter, it is an open system with respect to energy. This is the reason why the system hasn’t already run down with all of its resources being converted to waste. The Earth receives light from the sun and emits heat into space. The difference between these two forms of energy creates the physical conditions for order in the biosphere—the thin surface layer in the path of the sun’s energy flow, in which all of the necessary ingredients for life as we know it are mingled.Brian Nattrass and Mary Altomare, The Natural Step for Business (Gabriola Island, BC: New Society Publishers, 1999), 35.

Cyclical systems lie at the heart of TNS framework. While the natural world operates in a continuously regenerative cyclical process—photosynthesis produces oxygen and absorbs CO2; plants are consumed, die, and decay, becoming food for microbial life; and the cycle continues—humankind has typically used resources in a linear fashion, producing waste streams both visible and molecular (invisible) that cannot all be absorbed and reassimilated by nature, at least not within time frames relevant for preservation of human health and extension of prosperity to billions more who demand a better life. The result is increasing accumulations of pollution and waste coupled with a declining stock of natural resources.Andrea Larson and Joel Reichert, IKEA and the Natural Step, UVA-G-0501 (Washington, DC: World Resources Institute and Darden Graduate School of Business Administration, 1998), 18. In the case of oil, global society must address both declining resources and control of existing resources by either unstable governments or regimes whose aims can oppose their own populations’ and other countries’ well-being.

## TNS System Conditions

With foundational scientific principles dictating a compelling logic that guides decision making, a framework of system conditions followed to form TNS system conditions:

1. The first system condition states that “substances from the earth’s crust must not systematically increase in the ecosphere.” This means that the rate of extraction of fossil fuels, metals, and other minerals must not exceed the pace of their slow redeposit and reintegration into the earth’s crust. The phrase “systematically increase” in the systems conditions deserves elaboration. The natural system complexity that has built and sustains the biosphere maintains systemic equilibrium within a certain range. We now recognize that humans contribute to CO2 atmospheric buildup, potentially tipping climate to a new equilibrium to which we must adapt.
2. The second system condition requires that “substances produced by society must not systematically increase in the ecosphere.” These substances, synthetic compounds created in laboratories, must be produced, used, and released at a rate that does not exceed the rate with which they can be broken down and integrated into natural cycles or safely incorporated in the earth’s crust (soil, water).
3. The third condition states that “the physical basis for productivity and diversity of nature must not be systematically diminished.” This requirement protects the productive capacity and diversity of the earth’s ecosystems as well as the green plant cells, the photosynthesizers on which the larger ecological systems depend.
4. Finally, the fourth system condition, a consideration of justice, calls for the “fair and efficient use of resources with respect to meeting human needs.”

Under TNS framework, these four system conditions act as a compass that can guide companies, governments, nonprofit organizations, and even individuals toward sustainability practices and innovation.Karl-Henrik Robèrt, Herman Daly, Paul Hawken, and John Holmberg, “A Compass for Sustainable Development,” Natural Step News 1 (Winter 1996): 4–5. Here, “sustainability” explicitly refers to a carrying capacity or ability of natural systems to continue the age-old regenerative processes that have maintained the requisite chemistry and systems balance to support life as we know it.

Figure 3.2 TNS System Conditions

TNS framework has been applied in many corporations and is seen by some as a logical extension of quality management and strategic systems thinking.Andrea Larson and Wendy Warren, The Natural Step, UVA–G–0507 (Charlottesville: Darden Business Publishing, University of Virginia, 1997), 2. It incorporates environmental and health protection into decision making by using scientific principles. TNS allows a company to understand the physical laws that drive environmental problems and defines the broad system conditions that form a “sustainable” society. These conditions provide a vehicle to assess progress, and from them companies can develop a strategy applicable to their products and services. Design teams can ask whether particular product designs, materials selection, and manufacturing processes meet each of the system conditions and can adjust in “natural steps”—that is, steps that are consistent with financially sound decision making in the direction of meeting the system conditions. TNS does not provide a detailed how-to regarding specific product design; however, with the knowledge and framework provided by TNS, companies can develop a more informed approach and strategic position and begin to take concrete steps customized to their unique circumstance with respect to natural resource use and waste streams.

## Industrial Ecology

Business activity currently generates waste and by-products. Unlike natural systems, modern human societies process resources in a linear fashion, creating waste faster than it can be reconstituted into reusable resources. According to the National Academy of Engineering, on average 94 percent of raw materials used in a product ends up as waste; only 6 percent ends up in the final product. Whereas pollution control and prevention focus on minimizing waste, industrial ecology allows for inevitable waste streams since they become useful inputs to other industrial and commercial processes. Continued provision of needed goods and services to growing populations in a finite biosphere becomes at least conceptually possible if all waste generated by business and consumer behavior is taken up by other industrial and commercial processes or safely returned to nature.

Figure 3.3 Waste Dominates Production

Consequently, the field of industrial ecology assumes the industrial system exists as a human-produced ecosystem with distinct material, energy, and information flows similar to any other ecosystem within the biosphere. It therefore must meet the same physical constraints as other ecosystems to survive. As a systems approach to understanding the interaction between industry and the natural world, industrial ecology looks beyond the linear cradle-to-grave viewpoint of design—you source materials, build the product, use the product, and throw it away—and imagines business as a series of energy and material flowsThe movement of the basic constituents of the physical world, and hence life and economic activity, through various systems. in which ideally the wastes of one process serve as the feedstock of another. Accordingly, nature’s processes and business activities are seen as interacting systems rather than separate components. They form an industrial web analogous to but separate from the natural web from which they may nonetheless draw inspiration.Hardin B. C. Tibbs, “Industrial Ecology: An Environmental Agenda for Industry,” Whole Earth Review 4, no. 16 (Winter 1992): 4–19; Deanna J. Richards, Braden Allenby, and Robert A. Frosch, “The Greening of Industrial Ecosystems: Overview and Perspective,” in The Greening of Industrial Ecosystems, ed. Deanna J. Richards and Braden Allenby (Washington, DC: National Academy Press, 1994), 3.

Clinton Andrews, a professor of environmental and urban planning, suggested a series of themes for industrial ecology based on natural metaphors: “Nutrients and wastes become raw materials for other processes, and the system runs almost entirely on solar energy. The analogy suggests that a sustainable industrial system would be one in which nearly complete recycling of materials is achieved.” Andrews described the present industrial systems as having “primitive metabolisms,” which will be “forced by environmental and social constraints to evolve more sophisticated metabolisms.…Inexhaustibility, recycling, and robustness are central themes in the industrial ecology agenda.”Clinton Andrews, Frans Berkhout, and Valerie Thomas, “The Industrial Ecology Agenda,” in Industrial Ecology and Global Change, ed. Robert Socolow, Clinton Andrews, Frans Berkhout, and Valerie Thomas (Cambridge: Cambridge University Press, 1994), 471–72. Theoretically, restructuring industry for compatibility with natural ecosystems’ self-regulation and self-renewal would reduce the current human activity that undermines natural systems and creates the growing environmental health problems we face.

In 1977, American geochemist Preston Cloud observed that “materials and energy are the interdependent feedstocks of economic systems, and thermodynamics is their moderator.”Suren Erkman, “Industrial Ecology: An Historical View,” Journal of Cleaner Production 5, no. 1–2 (1997): 1–10. Cloud’s point about thermodynamics anticipates TNS, and he was perhaps the first person to use the term “industrial ecosystem.”Preston Cloud, “Entropy, Materials and Posterity,” Geologische Rundschau 66, no. 3 (1977): 678–96, quoted and cited in John Ehrenfeld and Nicholas Gertler, “Industrial Ecology in Practice: The Evolution of Interdependence at Kalundborg,” Journal of Industrial Ecology 1, no. 1 (Winter 1997): 67–79. Despite earlier analogies between the human economy and natural systems, this correspondence did not gain widespread currency until 1989 when business executive Robert Frosch and Nicholas Gallopoulos first coined the term “industrial ecology”Robert A. Frosch and Nicholas E. Gallopoulos, “Strategies for Manufacturing,” Scientific American 261, no. 3 (September 1989): 144–52. and described it in Scientific American as follows:

In nature an ecological system operates through a web of connections in which organisms live and consume each other and each other’s waste. The system has evolved so that the characteristic of communities of living organisms seems to be that nothing that contains available energy or useful material will be lost. There will evolve some organism that will manage to make its living by dealing with any waste product that provides available energy or usable material. Ecologists talk of a food web: an interconnection of uses of both organisms and their wastes. In the industrial context we may think of this as being use of products and waste products. The system structure of a natural ecology and the structure of an industrial system, or an economic system, are extremely similar.Robert A. Frosch, “Industrial Ecology: A Philosophical Introduction,” Proceedings of the National Academy of Sciences, USA, vol. 89 (February 1992): 800–803.

Professor Robert U. Ayres clarified process flows within the natural and industrial systems by naming them the “biological metabolism” and the “industrial metabolism.”Ayres coined the term “industrial metabolism” at a conference at the United Nations University in 1987. The proceedings of this conference were published in Robert U. Ayres and Udo Ernst Simonis, eds., Industrial Metabolism (Tokyo: United Nations University Press, 1994). The feedstocks of these systems are known as “biological nutrients” and “industrial nutrients,” respectively, when they act in a closed cycle (which is always the case in nature, and rarely the case in industry).See Robert U. Ayres, “Industrial Metabolism: Theory and Practice,” in The Greening of Industrial Ecosystems, ed. Deanna J. Richards and Braden Allenby (Washington, DC: National Academy Press, 1994), 25; Robert U. Ayres and Udo Ernst Simonis, eds., Industrial Metabolism (Tokyo: United Nations University Press, 1994). In an ideal industrial ecosystem, there would be, as Hardin Tibbs wrote, “no such thing as ‘waste’ in the sense of something that cannot be absorbed constructively somewhere else in the system.” This suggests that “the key to creating industrial ecosystems is to reconceptualize wastes as products.”Hardin B. C. Tibbs, “Industrial Ecology: An Environmental Agenda for Industry,” Whole Earth Review 4, no. 16 (Winter 1992): 4–19.

Others have pointed out that “materials and material products (unlike pure services) are not really consumed. The only thing consumed is their ‘utility.’”Robert U. Ayres and Allen V. Kneese, “Externalities: Economics and Thermodynamics,” in Economy and Ecology: Towards Sustainable Development, ed. Franco Archibugi and Peter Nijkamp (Dordrecht, Netherlands: Kluwer Academic Publishers, 1989), 90. This concept has led to selling the utilization of products rather than the products themselves, thus creating a closed-loop product cycle in which manufacturers maintain ownership of the product. For example, a company could lease the service of floor coverings rather than sell carpeting. The responsibility for creating a system of product reuse, reconditioning, and other forms of product life extension, or waste disposal, then falls on the owner of the product—the manufacturer—not the user.Walter R. Stahel, “The Utilization-Focused Service Economy: Resource Efficiency and Product-Life Extension,” in The Greening of Industrial Ecosystems, ed. Deanna J. Richards and Braden Allenby (Washington, DC: National Academy Press, 1994), 183. This product life cycle can be described as being “from cradle back to cradle,” rather than from cradle to grave, which is of primary importance in establishing a well-functioning industrial ecosystem.Walter R. Stahel, “The Utilization-Focused Service Economy: Resource Efficiency and Product-Life Extension,” in The Greening of Industrial Ecosystems, ed. Deanna J. Richards and Braden Allenby (Washington, DC: National Academy Press, 1994), 183. The cradle-to-cradle life cycle became so important to some practitioners that it emerged as an independent concern.

The challenges to establishing a sophisticated industrial ecosystem are many, including identifying appropriate input opportunities for waste products amid ownership, geographic, jurisdictional, informational, operational, regulatory, and economic hurdles. Although industrial ecology could theoretically link industries around the globe, it has also been used at a local scale to mitigate some of these challenges. Several eco-industrial parks are currently in development (Kallundborg, Denmark, is the well-known historical example) where industries are intentionally sited together based on their waste products and input material requirements. If the interdependent system components at the site are functioning properly, the emissions from the industrial park are zero or almost zero. Problems arise when companies change processes, move facilities, or go out of business. This disrupts the ordered and tightly coupled chain of interdependency, much as when a species disappears from a natural ecosystem. Industrial ecology thus provides a broad framework and suggests practical solutions.

## Natural Capitalism

Natural capitalism is a broad social and economic framework that attempts to integrate insights from eco-efficiency, nature’s services, biomimicry, and other realms to create a plan for a sustainable, more equitable, and productive world. Paul Hawken, author of The Ecology of Commerce, and Amory Lovins and L. Hunter Lovins, cofounders of the Rocky Mountain Institute for resource analysis and coauthors with Ernest von Weizsäcker of Factor Four: Doubling Wealth, Halving Resource Use, were independently looking for an overall framework to implement the environmental business gains they had studied and advocated. After learning of each other’s projects, they decided in 1994 to collaborate on Natural Capitalism:

Some very simple changes to the way we run our businesses, built on advanced techniques for making resources more productive, can yield startling benefits both for today’s shareholders and for future generations. This approach is called natural capitalism because it’s what capitalism might become if its largest category of capital—the “natural capital” of ecosystem services—were properly valued. The journey to natural capitalism involves four major shifts in business practices, all vitally interlinked:

• Dramatically increase the productivity of natural resources.…
• Shift to biologically inspired production models.…
• Move to a solution-based business model.…
• Reinvest in natural capital.…Amory Lovins, L. Hunter Lovins, and Paul Hawken, “A Road Map for Natural Capitalism,” Harvard Business Review 77, no. 3 (May–June 1999): 146–48.

### The Big Picture of Interdependence

In all respects, Natural Capitalism is about integration and restoration, a systems view of our society and its relationships to the environment. Paul Hawken, Amory Lovins, and L. Hunter Lovins, Natural Capitalism: Creating the Next Industrial Revolution (Boston: Little, Brown, 1999), xii–xiii.

Natural capitalism emphasizes a broad and integrated approach to sustainable human activity. Although economic, environmental, and social goals had been conventionally seen in conflict, natural capitalism argues, “The best solutions are based not on tradeoffs or ‘balance’ between these objectives but on design integration achieving all of them together.”Paul Hawken, Amory Lovins, and L. Hunter Lovins, Natural Capitalism: Creating the Next Industrial Revolution (Boston: Little, Brown, 1999), xi. Hence, by considering all facets of the problem in advance, business can yield dramatic, multiple improvements and will drive environmental progress. For perhaps the simplest example, using more sunlight and less artificial light in buildings lowers energy costs, reduces pollution, and improves workers’ outlook and satisfaction, and hence their productivity and retention rates.

Like similar broad frameworks for sustainability, natural capitalism perceives a variety of current structures, rather than lack of knowledge or opportunity for profit, as obstacles to progress: perverse incentives from government tax policy hamper change, the division of labor and capital investments among different groups does not reward efficiency for the entire system but only the cheapest choice for each individual, companies do not know how to value natural capital properly, and so on.

### Moving Away from Fossil Fuels

Amory Lovins talks about weaning the US economy off oil, 2005 Technology, Entertainment, and Design (TED) Conference.

Lovins argues that interlocking government incentives, rewards, market forces, and other system-level considerations can easily create the conditions to reduce US oil use.

http://www.ted.com/talks/lang/eng/amory_lovins_on_winning_the_oil_endgame.html

Natural capitalism also criticizes eco-efficiency as too narrow: “Eco-efficiency, an increasingly popular concept used by business to describe incremental improvements in materials use and environmental impact, is only one small part of a richer and more complex web of ideas and solutions.…More efficient production by itself could become not the servant but the enemy of a durable economy.”Paul Hawken, Amory Lovins, and L. Hunter Lovins, Natural Capitalism: Creating the Next Industrial Revolution (Boston: Little, Brown, 1999), xi–xii.

Natural capitalism does, however, see eco-efficiency as one important component of curbing environmental degradation. Adapting the best-available technology and designing entire systems, rather than just pieces, to function efficiently from the outset saves money quickly. That money can be invested in other changes. Indeed, natural capitalism’s case studies argue major gains in productivity by reconceiving entire systems are often cheaper than minor gains from incremental improvements.

Figure 3.4 Value of Forests

Natural capitalism’s three other principles emphasize eliminating waste entirely and uniting environmental and economic gains. For instance, mimicking natural production systems means waste from one process equals food for another in a closed loopA cycle in which products are either recycled and placed back into the manufacturing stream or broken down into safely compostable materials rather than discarded in landfills, incinerated, or otherwise left as waste in the environment.. Shifting from providing goods to providing services holds manufacturers accountable for their products and allows them to benefit from their design innovations while eliminating the waste inherent in planned obsolescence. Finally, companies can reinvest in natural capital to replenish, sustain, and expand the services and goods ecosystems provide. Beyond mimicry, letting nature do the work in the first place means that benign, efficient processes, such as using wetlands to process sewage, can replace artificial and often more dangerous and energy-intensive practices.

For example, a study of forests around the Mediterranean suggested that preserving forests may provide greater economic value than consuming those forests for timber and grazing land. Forests contribute immensely to clean waterways by limiting erosion and filtering pollutants. They can also sequester CO2, provide habitats for other valuable plants and animals, and encourage recreation and tourism. Investing in forests could therefore return dividends in various ways.

## Ecological Economics

Ecological economics as a field of study was formalized in 1989 with the foundation of the International Society for Ecological Economics (ISEE) and the first publication of the journal Ecological Economics. The move toward ecological economics had roots in the classical economics, natural sciences, and sociology of the mid-nineteenth century but gained significant momentum in the 1970sJuan Martinez-Alier with Klaus Schlüpmann, Ecological Economics: Energy, Environment and Society (Oxford: Basil Blackwell, 1987). as the strain between human activity (economics) and natural systems (ecology) intensified but no discipline or even group of disciplines examined the interaction of those two systems specifically. Robert Costanza commented on the problem and the need for a new approach: “Environmental and resource economics, as it is currently practiced, covers only the application of neoclassical economics to environmental and resource problems. Ecology, as it is currently practiced, sometimes deals with human impacts on ecosystems, but the more common tendency is to stick to ‘natural’ systems.…[Ecological economics] is intended to be a new approach to both ecology and economics that recognizes the need to make economics more cognizant of ecological impacts and dependencies; the need to make ecology more sensitive to economic forces, incentives, and constraints.”Robert Costanza, “What Is Ecological Economics?,” Ecological Economics 1 (1989): 1.

The 2 × 2 diagram in Figure 3.5 "The Interaction of Economics and Ecology" depicts how ecological economics embraces a wide array of disciplines and interactions among them. For instance, conventional economics examines only transactions within economic sectors, while conventional ecology examines only transactions within ecological sectors. Other specialties arose to examine inputs from ecosystems to the economy (resource economics) or from the economic system to the environment (environmental economics and impact analyses). Ecological economics encompasses all possible flows among economies and ecosystems.

Figure 3.5 The Interaction of Economics and Ecology

Ecological economics examines how economies influence ecologies and vice versa. It sees economic activity as occurring only within the confines of Earth’s processes for maintaining life and equilibrium and ecology as overwhelmingly influenced by humans, even if they are but one species among many. In short, the global economy is a subset of Earth systems, not a distinct, unfettered entity. Earth’s processes and resultant equilibrium are threatened by massive material extraction from and waste disposal into the environment, while material inequality among societies and people threatens long-term prosperity and social stability. Hence the constitution of the ISEE propounds the “advancement of our understanding of the relationships among ecological, social, and economic systems and the application of this understanding to the mutual well-being of nature and people, especially that of the most vulnerable including future generations.”International Society for Ecological Economics, “Constitution: Article II. Purpose,” accessed December 1, 2010, http://www.ecoeco.org/content/about/constitution. The field continues to emphasize broadly and rigorously investigating interdependent systems and their material and energy flows.

Indeed, ecological economics began as a transdisciplinary venture. That variety in academic disciplines is reflected in the field’s seminal figures: Robert Costanza earned a master’s degree in urban and regional planning and a doctorate in systems ecology, Paul Ehrlich was a lepidopterist, Herman Daly was a World Bank economist, and Richard Norgaard an academic one. Diversity and breadth were enshrined in the ISEE constitution because “in an interconnected evolving world, reductionist science has pushed out the envelope of knowledge in many different directions, but it has left us bereft of ideas as to how to formulate and solve problems that stem from the interactions between humans and the natural world.”International Society for Ecological Economics, “Constitution: Article II. Purpose,” accessed December 1, 2010, http://www.ecoeco.org/content/about/constitution. Hence ecological economics has studied an array of issues, frequently including equitable economic development in poorer countries and questions of sustainable scale within closed systems.

### Ecological Economics for Policy

Robert Costanza, Joshua Farley, and Jon Erickson discuss policy tools derived from ecological economic principles.

http://mitworld.mit.edu/video/531

Nonetheless, there has been some discussion of whether ecological economics should remain an eclectic category or become a defined specialty with concomitant methodologies.Richard B. Norgaard, “Ecological Economics: A Short Description,” Forum on Religion and Ecology, Yale University, 2000, accessed June 25, 2009, http://fore.research.yale.edu/disciplines/economics/index.html. Ecological economics tends to use different models than mainstream economics and has a normative inclination toward sustainability and justice over individual preference or maximizing return on investments.Mick Common and Sigrid Stagl, Ecological Economics: An Introduction (Cambridge: Cambridge University Press, 2005), 10; Paul Ehrlich, “The Limits to Substitution: Meta-Resource Depletion and a New Economic-Ecological Paradigm,” Ecological Economics 1 (1989): 11. Moreover, while mainstream economics continues not to require an environmental education for a degree, some doctoral programs now grant a separate degree in ecological economics, while others offer it as a field for specialization. The location of ecological economics courses within university economics departments, however, suggests that contrary to the founding aspirations of the field, ecological economics has become the purview of economists more than ecologists in the United States.

### Consider the Ants

Consider this: all the ants on the planet, taken together, have a biomass greater than that of humans. Ants have been incredibly industrious for millions of years. Yet their productiveness nourishes plants, animals, and soil. Human industry has been in full swing for little over a century, yet it has brought about a decline in almost every ecosystem on the planet. Nature doesn’t have a design problem. People do.William McDonough and Michael Braungart, Cradle to Cradle: Remaking the Way We Make Things (New York: North Pont Press, 2002), 16.

In this approach, ecology, economy, and equity occupy equally important vertices of a triangle of human activity, and waste is eliminated as a concept in advance, as all products should be designed to become harmless feedstocks or “nutrients” for other biological or industrial processes. These closed loops acknowledge matter is finite on Earth, Earth is ultimately humanity’s only home, and the only new energy comes from the sun. Cradle-to-cradle thus shares and elaborates some of the basic understandings of TNS and industrial ecology albeit with an emphasis on product design and life cycle.

McDonough is an architect who was inspired by elegant solutions to resource scarcity that he observed in Japan and Jordan. In the United States, he was frustrated by the dearth of options for improving indoor air quality in buildings in the 1980s. He also was frustrated with eco-efficiency’s “failure of imagination,” although eco-efficiency was a trendsetting business approach at the time. Eco-efficiency stressed doing “less bad” but still accepted the proposition that industry would harm the environment; hence, eco-efficiency would, at best, merely delay the worst consequences or, at worst, accelerate them. Furthermore, it implied economic activity was intrinsically negative. McDonough specified his personal frustration: “I was tired of working hard to be less bad. I wanted to be involved in making buildings, even products, with completely positive intentions.”William McDonough and Michael Braungart, Cradle to Cradle: Remaking the Way We Make Things (New York: North Point Press, 2002), 10.

Braungart, meanwhile, was a German chemist active in the Green Party and with Greenpeace: “I soon realized that protest wasn’t enough. We needed to develop a process for change.”William McDonough and Michael Braungart, Cradle to Cradle: Remaking the Way We Make Things (New York: North Point Press, 2002), 11. He created the Environmental Protection Encouragement Agency (EPEA) in Hamburg, Germany, to promote change but found few chemists had any concern for environmental design, while industrialists and environmentalists mutually demonized each other.

After Braungart and McDonough met in 1991, they drafted cradle-to-cradle principles and founded MBDC in 1994 to help enact them. One of their early successes was redesigning the manufacture of carpets for Swiss Rohner Textil AG. The use of recycled plastics in manufacturing carpet was rejected, as the plastic itself is hazardous; humans inhale or ingest plastics as they are abraded and otherwise degraded. Hence McDonough and Braungart designed a product safe enough to eat. They used natural fibers and a process that made effluent from the factory cleaner than the incoming water. This redesign exemplified McDonough and Braungart’s idea of “eco-effectiveness,” in which “the key is not to make human industries and systems smaller, as efficiency advocates propound, but to design them to get bigger and better in a way that replenishes, restores, and nourishes the rest of the world” and that returns humans to a positive “dynamic interdependence” with rather than dominance over nature.William McDonough and Michael Braungart, Cradle to Cradle: Remaking the Way We Make Things (New York: North Point Press, 2002), 78, 80.

Figure 3.6 Products Cycle through the Biosphere and Technosphere

McDonough and Braungart’s efforts proved that cradle-to-cradle design was possible, concretely illustrating concepts important to cradle-to-cradle design while affirming the prior decades of conceptual work. The first concept of eco-effectiveness or ecological intelligence to be realized in cradle-to-cradle was the sense of nature and industry as metabolic systems, fed by “biological nutrients” in the “biosphere” and “technical nutrients” in the “technosphere,” or industry. “With the right design, all of the products and materials of industry will feed these two metabolisms, providing nourishment for something new,” thereby eliminating waste.William McDonough and Michael Braungart, Cradle to Cradle: Remaking the Way We Make Things (New York: North Point Press, 2002), 104.

McDonough and Braungart operationalized and popularized the concept of “waste equals food,” and by that phrase they mean that the waste of one system or process must be the “food” or feedstock of another. They were drawing on the industrial ecology writing of Robert Ayres, Hardin Tibbs, and others, since in a closed loop the waste is a nutrient (and an asset) rather than a problem for disposal. Hence waste equals food.Paul Hawken, Amory Lovins, and L. Hunter Lovins, Natural Capitalism: Creating the Next Industrial Revolution (Boston: Little, Brown, 1999), 12. Also see Paul Hawken and William McDonough, “Seven Steps to Doing Good Business,” Inc., November 1993, 81; William McDonough Architects, The Hannover Principles: Design for Sustainability (Charlottesville, VA: William McDonough Architects, 1992), 7. A core goal of sustainable design is to eliminate the concept of waste so that all products nourish a metabolism. Although lowering resource consumption has its own returns to the system, the waste-equals-food notion allows the possibility for nontoxic “waste” to be produced without guilt as long as the waste feeds another product or process.

To explain further the implications of designing into the two metabolisms, McDonough and Braungart and Justus Englefried of the EPEA developed the Intelligent Product System, which is a typology of three fundamental products that guides design to meet the waste-equals-food test. The product types are consumables, products of service, and unsalables.Paul Hawken, Amory Lovins, and L. Hunter Lovins, Natural Capitalism: Creating the Next Industrial Revolution (Boston: Little, Brown, 1999), 67; William McDonough, “A Boat for Thoreau: A Discourse on Ecology, Ethics, and the Making of Things,” in The Business of Consumption: Environmental Ethics and the Global Economy, ed. Laura Westra and Patricia H. Werhane (Lanham, MD: Rowman and Littlefield, 1998), 297–317.

A “consumable” is a product that is intended to be literally consumed, such as food, or designed to safely return to the biological (or organic) metabolism where it becomes a nutrient for other living things.Paul Hawken and William McDonough, “Seven Steps to Doing Good Business,” Inc., November 1993, 81. McDonough added that “the things we design to go into the organic metabolism should not contain mutagens, carcinogens, heavy metals, persistent toxins, bio-accumulative substances or endocrine disrupters.”William McDonough, “A Boat for Thoreau: A Discourse on Ecology, Ethics, and the Making of Things,” in The Business of Consumption: Environmental Ethics and the Global Economy, ed. Laura Westra and Patricia H. Werhane (Lanham, MD: Rowman and Littlefield, 1998), 297–317. For an explanation of endocrine disrupters, see Theo Colburn, Dianne Dumanoski, and John Peterson Myers, Our Stolen Future (New York: Dutton, 1996).

A “product of service,” on the other hand, provides a service, as suggested by Walter Stahel and Max Börlin, among others.Walter R. Stahel, “The Utilization-Focused Service Economy: Resource Efficiency and Product-Life Extension,” in The Greening of Industrial Ecosystems, ed. Deanna J. Richards and Braden Allenby (Washington, DC: National Academy Press, 1994), 183; Robert U. Ayres and Allen V. Kneese, “Externalities: Economics and Thermodynamics,” in Economy and Ecology: Towards Sustainable Development, ed. Franco Archibugi and Peter Nijkamp (Dordrecht, Netherlands: Kluwer Academic Publishers, 1989), 90. Examples of service products include television sets (which provide the service of news and entertainment), washing machines (which provide clean clothes), computers, automobiles, and so on. These products would be leased, not sold, to a customer, and when the customer no longer required the service of the product or wanted to upgrade the service, the item would be returned to the producer to serve as a nutrient to the industrial metabolism. This system of design and policy provides an incentive for the producer to use design for environment (DfE) and concurrent engineering to design for refurbishing, disassembly, remanufacture, and so forth. Braungart suggests that “waste supermarkets” could provide centralized locations for customer “de-shopping,” where used service products are returned and sorted for reclamation by the producer.Paul Hawken and William McDonough, “Seven Steps to Doing Good Business,” Inc., November 1993, 81; Michael Braungart, “Product Life-Cycle Management to Replace Waste Management,” Industrial Ecology and Global Change, ed. Robert Socolow, Clinton Andrews, Frans Berkhout, and Valerie Thomas (Cambridge: Cambridge University Press, 1994), 335–37.

An “unsalable,” also known as an “unmarketable,” is a product that does not feed metabolism in either the technosphere or the biosphere and thus should not be made. Unsalables include products that incorporate dangerous (radioactive, toxic, carcinogenic, etc.) materials or that combine both biological and technical nutrients in such a way that they cannot be separated. These latter combinations are “monstrous hybrids” from the cradle-to-cradle perspective or “products plus”—something we want plus a toxin we do not. Recycling, as Ayres explained, has become more difficult due to increasingly complex materials forming increasingly complex products. His example was the once-profitable wool recycling industry, which has now virtually disappeared because most new clothes are blends of fibers from both the natural and industrial metabolisms that cannot be separated and reprocessed economically.Robert U. Ayres, “Industrial Metabolism: Theory and Practice,” in The Greening of Industrial Ecosystems, ed. Deanna J. Richards and Braden Allenby (Washington, DC: National Academy Press, 1994), 34–35.

In a sustainable economy, unsalables would not be manufactured. During the transition, unsalables, as a matter of business and public policy, would always belong to the original manufacturer. To guarantee that unsalables are not dumped or otherwise discharged into the environment in irretrievable locations, “waste parking lots” operated perhaps by a public utility would be established so that these products can be stored safely. The original manufacturers of the unsalables would be charged rent for the storage until such time when processes were developed to detoxify their products. All toxic chemicals would contain chemical markers that identify the chemical’s owner, and the owner would be responsible for retrieving, mitigating, or cleaning up its toxins should they be discovered in lakes, wells, soil, birds, or people.Paul Hawken and William McDonough, “Seven Steps to Doing Good Business,” Inc., November 1993, 81; Michael Braungart, “Product Life-Cycle Management to Replace Waste Management,” Industrial Ecology and Global Change, ed. Robert Socolow, Clinton Andrews, Frans Berkhout, and Valerie Thomas (Cambridge: Cambridge University Press, 1994), 335–37.

The second principle of ecological intelligence, “use current solar income,” is derived from the second law of thermodynamics. Though the earth is a closed system with respect to matter, it is an open system with respect to energy, thanks to the sun. This situation implies that a sustainable, steady-state economy is possible on Earth as long as the sun continues to shine.Robert U. Ayres and Allen V. Kneese, “Externalities: Economics and Thermodynamics,” in Economy and Ecology: Towards Sustainable Development, ed. Franco Archibugi and Peter Nijkamp (Dordrecht, Netherlands: Kluwer Academic Publishers, 1989), 105. Using current solar income requires that Earth capital not be depleted—generally mined and burned—as a way to release energy. Thus all energy must be either solar or from solar-derived sources such as wind power, photovoltaic cells, geothermal, tidal power, and biomass fuels.Geothermal power, although perhaps more plentiful than other sources, ultimately derives from heat within Earth’s mantle and is thus not technically solar derived. Fossilized animals and plants, namely oil and coal, while technically solar sources, fail the current solar income test, and their use violates the imperative to preserve healthy natural system functioning since burning fossil fuels alters climate systems and produces acid rain among other adverse impacts.

The third principle of ecological intelligence is “respect diversity.” Biodiversity, the characteristic that sustains the natural metabolism, must be encouraged through conscious design. Diversity in nature increases overall ecosystem resilience to exogenous shocks. Clinton Andrews, Frans Berkhout, and Valerie Thomas suggest applying this characteristic to the industrial metabolism to develop a similar robustness.Clinton Andrews, Frans Berkhout, and Valerie Thomas, “The Industrial Ecology Agenda,” in Industrial Ecology and Global Change, ed. Robert Socolow, Clinton Andrews, Frans Berkhout, and Valerie Thomas (Cambridge: Cambridge University Press, 1994), 472–75. (See Andrews’s guiding metaphors for industrial ecology earlier in this section.) Respecting diversity, however, has a broader interpretation than just biological diversity. In its broadest sense, “respect diversity” means “one size does not fit all.” Every location has different material flows, energy flows, culture, and character.William McDonough, “A Boat for Thoreau: A Discourse on Ecology, Ethics, and the Making of Things,” in The Business of Consumption: Environmental Ethics and the Global Economy, ed. Laura Westra and Patricia H. Werhane (Lanham, MD: Rowman and Littlefield, 1998), 297–317. Therefore, this principle attempts to take into account the uniqueness of place by celebrating differences rather than promoting uniformity and monocultures.

In addition to the requirement of ecological intelligence, an additional criterion similar to the fourth system condition of TNS asks of the design, “Is it just?” Justice from a design perspective can be tricky to define or quantify and instead lends itself to qualitative reflection. However, the sustainable design framework forces an intergenerational perspective of justice through its design principles and product typology. As William McDonough explains, products designed to fit neither the biological nor industrial metabolism inflict “remote tyranny” on future generations as they will be left with the challenges of depleted Earth capital and wastes that are completely useless and often dangerous.William McDonough, “A Boat for Thoreau: A Discourse on Ecology, Ethics, and the Making of Things,” in The Business of Consumption: Environmental Ethics and the Global Economy, ed. Laura Westra and Patricia H. Werhane (Lanham, MD: Rowman and Littlefield, 1998), 297–317.

Finally, cradle-to-cradle eco-effectiveness “sees commerce as the engine of change” rather than the inherent enemy of the environment and “honors its ability to function quickly and productively.”William McDonough and Michael Braungart, Cradle to Cradle: Remaking the Way We Make Things (New York: North Point Press, 2002), 150. Companies should make money, but they must also protect local cultural and environmental diversity, promote justice, and in McDonough’s world, be fun.

## Nature’s Services

Nature’s services emerged in the late 1990s as a practical framework to put a monetary value on the services that ecosystems provide to humans to better weigh the trade-offs involved with preserving an ecosystem or converting it to a different use. The nature’s services outlook posits two things. First, “the goods and services flowing from natural ecosystems are greatly undervalued by society…[and] the benefits of those ecosystems are not traded in formal markets and do not send price signals.”Gretchen Daily, ed., Nature’s Services: Societal Dependence on Natural Ecosystems (Washington, DC: Island Press, 1997), 2. Second, we are rapidly reaching a point of no return, where we will have despoiled or destroyed so many ecosystems that the earth can no longer sustain the burgeoning human population. Nature’s systems are too complex for humans to understand entirely, let alone replace if the systems fail. Indeed, Stanford biology professor Gretchen Daily was inspired to edit the book Nature’s Services, published in 1997, after “a small group of us [scientists] gathered to lament the near total lack of public appreciation of societal dependence upon natural ecosystems.”Gretchen Daily, ed., Nature’s Services: Societal Dependence on Natural Ecosystems (Washington, DC: Island Press, 1997), xv. Daily expanded on these concepts in the 2002 book The New Economy of Nature.

### Ecosystem Survival Is Human Survival

Unless their true social and economic value is recognized in terms we all can understand, we run the grave risk of sacrificing the long-term survival of these natural systems to our short-term economic interests.Gretchen Daily, ed., Nature’s Services: Societal Dependence on Natural Ecosystems (Washington, DC: Island Press, 1997), xx.

Nature’s services consist primarily of “ecosystem goods” and “ecosystem services.” Natural systems have developed synergistic and tightly intertwined structures and processes within which species thrive, wastes are converted to useful inputs, and the entire system sustains itself, sustaining human life and activity as a subset. For instance, ecosystems services include the carbon and nitrogen cycles, pollination of crops, or the safe decomposition of wastes, all of which can involve species from bacteria to trees to bees. Healthy ecosystems also provide “ecosystem goods, such as seafood, forage, timber, biomass fuels, natural fibers, and many pharmaceuticals, industrial products, and their precursors.”Gretchen Daily, ed., Nature’s Services: Societal Dependence on Natural Ecosystems (Washington, DC: Island Press, 1997), 3. In short, ecosystems provide raw materials for the human economy or provide the conditions that allow humans to have economy in the first place.

Although these natural goods and services can be valued “biocentrically” (i.e., for their intrinsic worth) or “anthropocentrically” (i.e., for their value to humans), the nature’s services framework focuses on the latter because its audience needs a way to incorporate ecosystems into conventional, cost-benefit calculations for human projects. For instance, if a field is “just there,” the conventional calculation of the cost of converting it to a parking lot will focus much more on the price of asphalt and contractors than on the value lost when the field can no longer filter water, support plants and wildlife, grow food, or provide aesthetic pleasure. A nature’s services outlook instead captures the value of the functioning field so that it can be directly compared to the value of a parking lot.

Anthropocentric valuation schemes can take numerous forms. They can consider how ecosystems contribute to broad goals of sustainability, fairness, and efficiency or more direct economic activity. For instance, a farmer could calculate the avoided cost of applying pesticides whenever a sound ecosystem or biological method instead controls pests. A state forestry agency could calculate the direct value of consuming ecosystem products, such as the value of trees cut and ultimately sold as lumber, or it could calculate the indirect value of using the same forest for recreation and tourism, perhaps by calculating travel costs and other fees people are willing to bear to use that forest.

Estimating the value of nature can be difficult, especially because we are not used to thinking about buying and selling its services, such as clean air and clean water, or we see them as so basic that we want them to be free to all. Moreover, most people do not even know the services nature provides or how those services interact. Nonetheless, in addition to the aforementioned methods, economists and others trying to use nature’s services often survey people’s willingness to pay for nature, such as using their willingness to protect an endangered animal as a proxy for their attitude toward that animal’s ecosystem as a whole. One spectrum of approaches to valuation is illustrated in Figure 3.7 "Ways to Value Nature’s Services", where use value reflects present anthropocentric value and nonuse value encompasses biocentric value as well as anthropocentric value for future generations.

Figure 3.7 Ways to Value Nature’s Services

In addition to the uncertainty of ascertaining values for everything an ecosystem can do, nature’s services face the issues of whether some people’s needs should be valued more than others’ and of how present choices will constrain future options. Nature’s services practitioners also must be able to calculate changes in value from incremental damage, not just the total value of an ecosystem. For example, clear-cutting one hundred acres of rain forest to plant palm trees is one problem; eradicating the entire Amazon rain forest is quite another. Destroying the first hundred acres might have a very different cost than destroying the last hundred. Hence the nature’s services approach attempts to characterize with ever greater resolution ecosystems, their goods and services, and the systems interdependenceRelationships between large-scale processes, such as the carbon cycle or human economy, in which changes in one process affect other processes and no process can exist without the others. to include the results in economic calculations. Finally, once those values are quantified, their corresponding ecosystems need to be protected as would any other asset. Systems for monitoring and safeguarding nature’s services must emerge concurrently with estimates of their worth.

Robert Costanza and collaborating scientists and economists wrote one of the first papers on the financial value of ecosystems, “The Value of Ecosystem Services: Putting the Issues in Perspective,” published in Ecological Economics in 1998.Robert Costanza, Ralph d’Arge, Rudolf de Groot, Stephen Farber, Monica Grasso, Bruce Hannon, Karin Limburg, et al., “The Value of Ecosystem Services: Putting the Issues in Perspective,” Ecological Economics 25, no. 1 (April 1998): 67–72, doi:10.1016/S0921-8009(98)00019-6. It and the review article “The Nature and Value of Ecosystem Services” by Kate Brauman, Gretchen Daily, T. Ka’eo Duarte, and Harold Mooney are worth reading for an accessible discussion of ecosystem services.Kate A. Brauman, Gretchen C. Daily, T. Ka’eo Duarte, and Harold A. Mooney, “The Nature and Value of Ecosystem Services: An Overview Highlighting Hydrologic Services,” Annual Review of Environment and Resources 32, no. 6 (2007): 1–32, doi:10.1146/annurev.energy.32.031306.102758.

## Biomimicry

Biomimicry, expounded by Janine Benyus in a book of the same name, is “the conscious emulation of life’s genius” to solve human problems in design, industry, and elsewhere.Janine M. Benyus, Biomimicry: Innovation Inspired by Nature (New York: William Morrow, 1997), 2. Biomimicry also spawned a consultancy and nonprofit organization, both based in Montana. The Biomimicry Guild helps companies apply biomimicry’s principles, while the Biomimicry Institute aspires to educate a broad audience and spread those principles. Biomimicry’s core assumption is that four billion years of natural selection and evolution have yielded sophisticated, sustainable, diverse, and efficient answers to problems such as energy use and sustainable population growth. Humans now have the technology to understand many of nature’s solutions and to apply similar ideas in our societies from the level of materials, such as mimicking spider silk or deriving pharmaceuticals from plants, to the level of ecosystems and the biosphere, such as improving our agriculture by learning from prairies and forests or reducing our greenhouse gas emissions by shifting toward solar energy.

### Biomimicry

Janine Benyus talks about biomimicry at the 2005 TED conference.

http://www.ted.com/talks/janine_benyus_shares_nature_s_designs.html

Biomimicry does not, however, merely exploit nature’s design secrets in conventional industry, whether to make Velcro or genetically engineered corn. Instead, biomimicry requires us to assume a sustainable place within nature by recognizing ourselves as inextricably part of it. Biomimicry focuses “not on what we can extract from the natural world, but on what we can learn from it.”Janine M. Benyus, prologue to Biomimicry: Innovation Inspired by Nature (New York: William Morrow, 1997). This emphasis leads to three precepts: nature is a model for sustainable designs and processes, nature is the measure for successful solutions, and nature is our mentor. It also lends urgency to protecting ecosystems and cataloguing their species and interdependencies so that we may continue to be inspired, aided, and instructed by nature’s ingenuity. In these respects, biomimicry most resembles industrial ecology and nature’s services but clearly shares traits with other frameworks and concepts.

### Nature as the Ultimate Model

In short, living things have done everything we want to do, without guzzling fossil fuel, polluting the planet, or mortgaging their future. What better models could there be?…This time, we come not to learn about nature so that we might circumvent or control her, but to learn from nature, so that we might fit in, at last and for good, on the Earth from which we sprang.Janine M. Benyus, Biomimicry: Innovation Inspired by Nature (New York: William Morrow, 1997), 2, 9.

Nature’s ingenuity, meanwhile, displays recurrent “laws, strategies, and principles”:

Nature

• runs on sunlight.
• uses only the energy it needs.
• fits form to function.
• recycles everything.
• rewards cooperation.
• banks on diversity.
• demands local expertise.
• curbs excesses from within.
• taps the power of limits.Janine M. Benyus, Biomimicry: Innovation Inspired by Nature (New York: William Morrow, 1997), 7.

Benyus was frustrated that her academic training in forestry, in contrast, focused on analyzing discrete pieces, which initially prevented her and others from seeing principles that emerge from analyzing entire systems. Similarly, solutions to problems of waste and energy need to operate with the big picture in mind. Benyus explicitly allied biomimicry with industrial ecology and elucidated ten principles of an economy that mimicked nature:Janine M. Benyus, Biomimicry: Innovation Inspired by Nature (New York: William Morrow, 1997), 252–277. Italicized items in the list are Benyus’s wording.

1. Use waste as a resource. Whether at the scale of integrated business parks or the global economy, “all waste is food, and everybody winds up reincarnated inside somebody else. The only thing the community imports in any appreciable amount is energy in the form of sunlight, and the only thing it exports is the by-product of its energy use, heat.”Janine M. Benyus, Biomimicry: Innovation Inspired by Nature (New York: William Morrow, 1997), 255.
2. Diversify and cooperate to fully use the habitat. Symbiosis and specialization within niches assure nothing is wasted and provide benefits to other species or parts of the ecosystem just as it does to other companies or parts of industry when businesses collaborate to facilitate efficiency, remanufacturing, and other changes.
3. Gather and use energy efficiently. Use fossil fuels more efficiently and invest them in producing what truly matters in the long run while shifting to solar and other renewable resources.
4. Optimize rather than maximize. Focus on quality over quantity.
5. Use materials sparingly. Dematerialize products and reduce packaging; reconceptualize business as providing services instead of selling goods.
6. Don’t foul the nests. Reduce toxins and decentralize production of goods and energy.
7. Don’t draw down resources. Shift to renewable feedstocks but use them at a low enough rate that they can regenerate. Invest in ecological capital.
8. Remain in balance with the biosphere. Limit emissions of greenhouse gases, chlorofluorocarbons, and other pollutants that severely disrupt natural cycles.
9. Run on information. Create feedback loops to improve processes and reward environmental behavior.
10. Shop locally. Using local resources constrains regional populations to sizes that can be supported, reduces transportation needs, and lets people see the impact of their consumption on the environment and suppliers.

While biomimicry’s concepts can be used at different scales, they have already been directly applied to improve many conventional products. Butterflies alone have provided much help. For example, Lotusan paint uses lessons from the surface structure of butterfly wings to shed dirt and stay cleaner, obviating the need for detergents, while Qualcomm examined how butterfly wings scatter light to develop its low-energy and highly reflective Mirasol display for mobile phones and other electronics. These and other products have been catalogued by the Biomimicry Institute at AskNature.org.

## Green Chemistry

Green chemistry, now a recognized field of research and design activity, grew from the awareness that conventional ways to synthesize chemicals consumed large amounts of energy and materials and generated hazardous waste, while the final products themselves were often toxic to humans and other life and persisted in the environment. Hence green chemistry seeks to produce safer chemicals in more efficient and benign ways as well as to neutralize existing contaminants. Such green chemicals typically emulate the nontoxic components and reactions of nature.

### 1,300 Liters of Solvent for 1 Kilogram of Viagra

http://www.ted.com/talks/david_keith_s_surprising_ideas_on_climate_change.html

Green chemistry emerged as a field after the US Environmental Protection Agency (EPA) began the program “Alternative Synthetic Pathways for Pollution Prevention” in response to the 1990 Pollution Prevention Act. In 1993 the program, renamed “Green Chemistry,” established the Presidential Green Chemistry Challenge Award to encourage and recognize research that replaces dangerous chemicals and manufacturing processes with safer alternatives. Recent winners of the award have created ways to make cosmetics and personal products without solvents and an efficient way to convert plant sugars into biofuels.US Environmental Protection Agency, “Presidential Green Chemistry Challenge: Award Winners,” last updated July 28, 2010, accessed December 3, 2010, http://www.epa.gov/greenchemistry/pubs/pgcc/past.html. In 1997, the nonprofit Green Chemistry Institute was established and would later become part of the American Chemistry Society. The following year, the Organization for European Economic Development (OECD) created the Sustainable Chemistry Initiative Steering Group, and Paul Anastas and John Warner’s book Green Chemistry: Theory and Practice established twelve principles for green chemistry.Paul T. Anastas and John C. Warner, Green Chemistry: Theory and Practice (Oxford: Oxford University Press, 1998). The principles are quoted on the EPA website, US Environmental Protection Agency, “Green Chemistry: Twelve Principles of Green Chemistry,” last updated April 22, 2010, accessed December 1, 2010, http://www.epa.gov/greenchemistry/pubs/principles.html. Recognized as leaders in the green chemistry field, Anastas and Warner have continued to advance the ideas through innovation, education, and policy, with Warner helping to create the Warner Babcock Institute to support this mission. Paul Anastas, meanwhile, was confirmed as head of the EPA’s Office of Research and Development in 2010. Their green chemistry principles are reflected in a hierarchy of goals set by the Green Chemistry program:

1. Green Chemistry: Source Reduction/Prevention of Chemical Hazards

• Design chemical products to be less hazardous to human health and the environment*
• Use feedstocks and reagents that are less hazardous to human health and the environment*
• Design syntheses and other processes to be less energy and materials intensive (high atom economy, low feed factor)
• Use feedstocks derived from annually renewable resources or from abundant waste
• Design chemical products for increased, more facile reuse or recycling
2. Reuse or Recycle Chemicals
3. Treat Chemicals to Render Them Less Hazardous
4. Dispose of Chemicals Properly

*Chemicals that are less hazardous to human health and the environment are:

• Less toxic to organisms and ecosystems
• Not persistent or bioaccumulative in organisms or the environment
• Inherently safer with respect to handling and useUS Environmental Protection Agency, “Introduction to the Concept of Green Chemistry: Sustainable Chemistry Hierarchy,” last updated April 22, 2010, accessed December 1, 2010, http://www.epa.gov/greenchemistry/pubs/about_gc.html.

Figure 3.8 Goals for Production of Green Chemicals

James Clark, a chemist who leads the Green Chemistry Centre of Excellence at the University of York, England, has summarized the goals of green chemistry in an octagon. This octagon likewise stresses efficiency, renewable feedstocks, and human and environmental health.

Green chemistry also refers to a journal devoted to the topic (Green Chemistry), and one of its associate editors, Terry Collins, has identified steps to expand green chemistry. First, incorporate environmental considerations and sustainability ethics into the training of all chemists and their decisions in the laboratory. Second, be honest about the terms green or sustainable and the evidence for the harm chemicals cause. For instance, a cleaner, more efficient way to produce a certain product may be progress, but if the product itself remains highly toxic and persistent in the environment, it is not exactly green. Consequently, “since many chemical sustainability goals such as those associated with solar energy conversion call for ambitious, highly creative research approaches, short-term and myopic thinking must be avoided. Government, universities, and industry must learn to value and support research programs that do not rapidly produce publications, but instead present reasonable promise of promoting sustainability.”Terry Collins, “Toward Sustainable Chemistry,” Science 291, no. 5501 (2001): 48–49.

• Employee productivity gains: AT&T estimated that increased productivity due to telework was worth $100 million a year. Eighty percent of employees surveyed said the change had improved their productivity. • Improved employee quality of life and morale: Eliminating the stress and wasted time of commuting contributed to productivity. • Employee retention and related cost savings: AT&T employees turned down other job offers in part because of the telecommuting options they enjoyed. • Appropriate management metrics: AT&T accelerated a transition from time-at-desk management to management by results and, more broadly, learned how to effectively manage knowledge workers in a rapidly changing, increasingly knowledge-based economy (seen as a competitive advantage). • Security: After the 9/11 attacks on the World Trade Center and the Pentagon, a more dispersed workforce was viewed as a way to increase institutional resiliency and limit the impact of an attack (or for that matter any disaster, natural or otherwise). As the AT&T example shows, when systems thinking guides strategy and action, the collision between business and natural systems can become a frontier of opportunity. Systems thinking can encourage and institutionalize the natural ability of companies to evolve, not through small adaptations but through creative leaps. ## Shaw Industries Shaw Industries underwent a profound strategic reorientation and redesigned its products—carpets—not in the traditional linear make-use-waste model but in a sustainability-inspired circular strategy. Shaw now takes back products at the end of their useful life, disassembles them, and remanufactures them as new carpets. This is a radical rethinking of the value of a product using systems terms. In 2003, Shaw’s EcoWorx product won the US Green Chemistry Institute’s Green Chemistry Award for Designing Safer Products. The company combined application of green chemistry principles with a cradle-to-cradle design approach to create new environmentally benign carpet tile.Shaw Industries worked with William McDonough and Michael Braungart, an architect and chemist who conceived the cradle-to-cradle design approach that considers the ultimate end of products from the very beginning of their design in order to reduce waste and toxicity. The product met the rising demand for sustainable products, helping define a new market space that emerged in the late 1990s and 2000s as buyers became more cognizant of health hazards associated with building materials and furnishings. EcoWorx also educated the marketplace on the desirability of sustainable products as qualitatively, economically, and environmentally superior substitutes, in this case for a product that had been in place for thirty years.See Jeffrey W. Segard, Steven Bradfield, Jeffrey J. White, and Mathew J. Realff, “EcoWorx, Green Engineering Principles in Practice,” Environmental Science and Technology 37, no. 23 (2003): 5269–77. Carpeting is big business. In 2004, the global market for carpeting was about$26 billion, and it was expected to grow to $73 billion in 2007. Carpeting and rugs sectors expect a combined growth rate of 17 percent that year. Shaw Industries of Dalton, Georgia, was the world’s largest carpet manufacturer in 2004. Its carpet brand names include Cabin Crafts, Queen, Designweave, Philadelphia, and ShawMark. The company sells residential products to distributors and retailers and offers commercial products directly to customers through Shaw Contract Flooring. The company also sells laminate, ceramic tile, and hardwood flooring. In 2003, Shaw recorded$4.7 billion in sales.

Now acknowledged as an innovator in sustainable product design and business strategy, by early 2005, Shaw had completed a successful transformation to an environmentally benign carpet tile system design. Customers self-selected EcoWorx over tiles containing polyvinyl chloride (PVC), driving the new technology to over 80 percent of Shaw’s total carpet tile production. In retrospect, selecting carpet tiles as a key part of its sustainability strategy looks like a smart decision. In 2005, carpet tile was the fastest growing product category in the commercial carpet market.

In hindsight, Shaw’s decision seems the only way forward in the highly competitive floor covering business. However, in 1999, Shaw Industries Vice President Steve Bradfield described the carpet industry as “a marketing landscape that looked increasingly like a quagmire of greenwash.” Waste issues were putting pressure on the industry to clean up its act. Carpet took up considerable space in municipal landfills, took a long time to decompose, and was notoriously difficult to recycle. Moreover, carpet was coming under increasing scrutiny for its association with health problems.

In the late 1990s, companies vied to project the best image of environmental responsibility. However, Shaw Industries moved beyond marketing hype to a strategy that eliminated hazardous materials and recovered and reused carpet in a closed materials cycle. Shaw had to differentiate itself and create new capabilities and even new markets. EcoWorx, designed with cradle-to-cradle logic, required more innovation than simply the product. To implement its strategy, the company had to think in systems and design products not in the linear make-use-waste model but in cycles. For Shaw, this meant it must collect, disassemble, and reuse the old carpet tile material in new products. Moreover, the materials used in its products needed to be environmentally superior to anything used before.

Shaw was not the first company to think of this approach. In 1994, Ray Anderson of Interface Flooring Systems set the bar high for the industry by declaring sustainability as a corporate (and industry) goal.Ray Anderson, Mid Course Correction: Toward a Sustainable Enterprise: The Interface Model (Atlanta, GA: Peregrinzilla, 1998). While smaller in scale than Shaw Industries, Interface succeeded in changing the terms of the debate. For Shaw, the biggest player in the field, to not only rise to the challenge but to champion the way forward was not something one could necessarily predict.

Shaw’s EcoWorx, the replacement system for the PVC-nylon incumbent system, drove double-digit growth for carpet tile after its introduction in 1999. The system made it possible to recycle both the nylon face and the backing components into next-generation face and backing materials for future EcoWorx carpet tile. Shaw used its own EcoSolution Q nylon 6 branded fiber that would be recycled as a technical nutrient through a recovery agreement with Honeywell’s Arnprior depolymerization facility in Canada. The nylon experienced no loss of performance or quality reduction and cost the same or less.

Seeking every way possible to reduce materials use, remove hazardous inputs, and maintain or improve product performance, Shaw made the following changes:

• Replacement of PVC and phthalate plasticizer with an inert and nonhazardous mix of polymers ensuring material safety throughout the system. (PVC-contaminated nylon facing cannot be used for noncarpet applications of recycled materials.)
• Elimination of antimony trioxide flame retardant associated with harm to aquatic organisms.
• Dramatic reduction of waste during the processing phases by immediate recovery and use of the technical nutrients. (The production waste goal is zero.)
• A life-cycle inventory and mass flow analysis that captures systems impacts and material efficiencies compared with PVC backing.
• Efficiencies (energy and material reductions) in production, packaging, and distribution—40 percent lighter weight of EcoWorx tiles over PVC-backed tiles yields transport and handling (installation and removal/demolition) cost savings.
• Use of a minimum number of raw materials, none of which lose value, as all can be continuously disassembled and remanufactured.
• Use of a closed-loop, integrated plant-wide cooling water system providing chilled water for the extrusion process as well as the heating and cooling system.
• Provision of a toll-free phone number on every EcoWorx tile for the buyer to contact Shaw for removal of the material for recycling.

Models assessing comparative costs of the conventional versus the new system indicated the recycled components would be less costly to process than virgin materials. Essentially, EcoWorx tile remains a raw material indefinitely.

Moreover, as is typical of companies actively applying a systems-oriented innovation to product lines, Shaw has found other opportunities for cost reduction and new revenue. For example, Shaw projects $2.5 million in overall savings per year from a Dalton, Georgia, steam energy plant designed collaboratively with Siemens Building Technologies. Manufacturing waste by-products are converted into gas that fuels a boiler to produce fifty thousand pounds of steam per hour that will be used on-site for manufacturing. The facility lowers corporate plant emissions, eliminates postmanufacturing carpet waste, and provides the Dalton manufacturing site with a fixed-cost reliable energy source, which is no small benefit in a time of high and fluctuating energy prices. Once the power of systems thinking becomes clear, returning to a compartmentalized or linear view becomes an irrational abandonment of essential knowledge. Systems thinking illuminates how the world actually works and how actions far beyond what we can see influence our decisions and choices. It frees us to imagine alternative future products and services and create positive outcomes for more stakeholders. For Shaw, the benefits of thinking in systems were clear. The takeaway is that breaking out of the traditional linear approach to products and designing from a systems perspective can lead to differentiation, new competitive advantage, and tangible results. ## Coastwide Labs Systems thinking encourages systems solutions for your customers. Once you see the broader systems context and tightly coupled interdependencies, you have the opportunity to simultaneously solve multiple customer problems and provide a comprehensive “answer” for which they could not even form the right question. Coastwide Laboratories, when it was a stand-alone company before being acquired by Express and then Staples, sold systems solutions to its customers. Coastwide’s approach was developed over several years and culminated in a complete strategic transformation in 2006. The change separated the firm from its competitors and enabled it to shape a regional market to its advantage. Rewards included customer retention, increased sales to existing customers, new customers, dominant market share in a seven-state region, and brand visibility. By selling systems solutions, Coastwide Labs reduced regulatory burdens for itself and its customers, reduced costs for both, and removed human health and environmental threats across the supply chain. The company tracked an array of trends and systems that influenced its market and customers. The resulting perspective put senior management in the driver’s seat to benefit from and shape those trends in ways that also meet customers’ latent needs. Context is important. For decades, Coastwide’s product formulations, typical for the industry, were consistent with expectations for old-style janitorial products. The company made or bought cleaners, disinfectants, floor finishes and sealers, and degreasers and provided a full line of sanitary maintenance equipment and supplies. Performing the cleaning function was the primary requirement; other health and ecosystem impact considerations did not emerge until years later. Serving the US Pacific Northwest region, Coastwide competed in a growing market in the 1990s, driven by expanding high-tech firms that emerged or grew rapidly in the 1980s and 1990s (e.g., Microsoft, Intel, Amgen, and Boeing). By the 1990s, the growth of overall demand for cleaning products had tapered off and the products were essentially commodities. This meant that growth, improved sales, and profitability depended on either increasing market share or offering value-added services. The commercial and industrial cleaning products industry remained fragmented in 2000 with many small companies with less than$5 million in revenue competing as producers, distributors, or both.

However, this sleepy, traditional industry was about to wake up. In August 2002, Coastwide—by then a commercial and industrial cleaning product formulator and distributor—introduced the Sustainable Earth line of products. This experimental line was designed for performance efficacy, easy use, and low to zero toxicity. By 2006, the line had grown to dominate the company’s strategy, positioning Coastwide as the largest provider of safe and “clean” cleaning products, janitorial supplies, and related services in the region. The market extended from southern Canada to central California and west to Idaho.

The Sustainable Earth line enabled Coastwide to lower its customers’ costs for maintenance by offering system solutions. Higher dilution rates for chemicals, dispensing units that eliminate overuse, improved safety for the end user, and less employee lost-work time because of health problems associated with chemical exposure were reported. Higher dilutions also reduced the packaging waste stream, thereby reducing customer waste disposal fees. TriMet, the Portland, Oregon, metropolitan area’s municipal bus and light rail system, reduced its number of cleaning products from twenty-two to four by switching to Sustainable Earth products. Initial cleaning chemical cost savings to the municipality amounted to 70 percent, not including training cost savings associated with the inventory simplification. In 2006, the Sustainable Earth line performed as well or better than the category leaders while realizing a gross margin over 40 percent higher than on its conventional cleaners.

Perhaps most telling, Coastwide’s overall corporate strategy changed in 2006 to implement a corporate transformation to what the company terms “sustainability” products. All cleaning product lines were replaced with sustainably designed formulations and designs. It is important to keep in mind that health benefits and improved water quality in the region’s cities were not the reasons to design this strategy; they characterized opportunities for innovation that drove lower costs for buyers and higher revenues for Coastwide. Through carefully crafted positioning, this company has become a major player creating and shaping the market to its advantage.

Coastwide’s strategic roots were in its early systems approach to meet customers’ full-service needs, long before environmental and sustainability vocabulary entered the business mainstream. The corporate vision evolved from simply selling cleaning products to offering unique, nonhazardous cleaning formulations at the lowest “total cost” to the buyer. Eventually, Coastwide addressed its customers’ comprehensive maintenance and cleaning needs—in other words, their system’s needs—which only later included sustainability features.

The cleaning product markets are more complicated than one might suspect. Several factors shaped industry selling strategies. Customers needed multiple cleaning products and equipment for different applications. However, buyers had more than cleaning needs. Fast-growing and large electronics manufacturers with clean rooms had to protect their production processes from contaminants or suffer major financial losses from downtime, as much as a million dollars a day. In addition, a barrage of intensifying local, state, and federal regulatory requirements demanded safe handling, storage, and disposal of all toxic and hazardous materials. These legal mandates imposed additional costs such as protective clothing, training, and hazardous waste disposal fees. Adding complexity, historic buying patterns fragmented purchase decisions. One facility maintenance manager ordered a set of products from one supplier; a second ordered different products from another supplier. As a result, companies with geographically dispersed sites made nonoptimal choices from both a price and a systems sense. As in many compartmentalized companies, jobs were divided with people working against each other, sometimes under the same roof. Maintenance bought the products; the environment, health, and safety group was responsible for knowing what was in the products as well as for workers’ safety and health; and manufacturing had to ensure pristine production.

Furthermore, all buyers contended with wastewater disposal regulations that forbade contaminated water from leaving the premises and entering the water supply system, but the requirements were different depending on the local or state regulations. Typically, minimal or no training was given maintenance staff members who actually used the hazardous cleaning chemicals. High janitorial employee turnover and low literacy rates made it expensive to hire and train employees. A 150 to 200 percent annual turnover rate was typical with this employee group, imposing its own unique costs and health risks to the employer. The low status of the maintenance and janitorial function didn’t help. The job was delegated in the organization to the staff that did the cleaning work, or one supervisory level above. In other words, despite many small areas needing the customer’s attention as a complex set of interrelated factors (a system), responsibility was either nonexistent or fragmented across different departments that traditionally had no incentive to communicate.

More history magnifies the systems thinking in action. In the late 1990s, buyers wanted stockless systems with just-in-time delivery and single source purchasing to avoid dealing with seven or eight companies for ninety cleaning items. Coastwide had designed its first system-solution contract in the late 1980s when it contracted with Tektronix, a test, measurement, and monitoring computer equipment producer, then the largest Oregon employer and a high-tech company with a dozen operating locations. Coastwide offered to supply all Tektronix maintenance needs, including training personnel to use cleaning products safely. Getting Tektronix’s business required knowing the company’s different facilities, various manufacturing operations requirements, and maintenance standards. It also meant that Coastwide presented an analysis showing Tektronix the economics of why it made sense to outsource the company’s system needs. Coastwide had to understand the buyer’s internal use and purchasing systems, including its costs and chemical vulnerabilities.

Roger McFadden, Coastwide’s chemist and senior product development person—the internal entrepreneur, or intrapreneur—took on the additional job of keeping a list of chemicals the buyer wanted kept out of its facilities due to clean room contamination risks. McFadden saw this change as an opportunity to look at a variety of suspect chemicals on various health, safety, and environmental lists. The lists were growing for the customer and regulatory agencies. Eventually Coastwide was asked to handle the complete health and safety functions for this customer and eventually for others because it could do so at a lower cost with customized analyses presented to each buyer, and with a systems perspective that optimized efficiencies across linked system parts with tagged areas for continuous improvement. Important interrelated issues for Roger McFadden included product contamination, regulations, customers’ workers’ compensation and injury liability, and chemical compound toxicity thresholds and cancer rates.

To compete with foresight Coastwide also had to stay current on and continuously adapt its solutions services to larger and increasingly more relevant trends. McFadden served on the Governor’s Community Sustainability Taskforce for Oregon and in the process gained more information about the science of toxicity, state regulatory intentions, and changing governmental agency purchasing practices. This led to expanded sales to the state and city governments and to Nike, Hewlett-Packard, and Intel. Coastwide’s involvement with broader community issues translated into flows of information to senior management that helped the firm position itself and learn despite constantly moving terrain.

McFadden’s first step was to rethink the cleaning product formulations. The products had to work as well as not pose a risk or threat. The second step was to expand the product line so that customers would source a range of products solely from Coastwide, a step that provided customers with insurance that all cleaning products met uniform “clean” and low- or zero-toxicity specifications. Coastwide extended its “cleaner cleaners” criteria to auxiliary products. For example, PVC-containing buckets were rejected in favor of those made from safely reusable polyethylene. Used buckets were picked up by Coastwide’s distribution arm, with the containers color coded to ensure no other containers (for which the company would not know the materials inside) would inadvertently be brought back.

Understanding the interconnections across systems continued to bring Coastwide financial and competitive benefits. By 2005 the major trade organization for the industrial cleaning industry, the International Sanitary Supply Association (ISSA), began highlighting members’ green cleaning products and programs. Grant Watkinson, president of Coastwide, was featured on the organization’s website. The American Association of Architects’ US Green Building Council developed its Leadership in Energy and Environmental Design (LEED) program that set voluntary national standards for high-performance sustainable buildings. LEED assigned points that could be earned by organizations requesting certification if they integrated system-designed cleaning practices. Since many major corporations and organizations gain productivity and reputation advantages for having their buildings certified by LEED, Coastwide was positioned with more knowledge and media visibility as this market driver accelerated a transition to lower toxicity and more benign materials.

In addition, Coastwide was in a far better position than its competition when Executive Order 13148, Greening the Government Through Leadership in Environmental Management, appeared. This order set strict requirements for all federal agencies to “reduce [their] use of selected toxic chemicals, hazardous substances, and pollutants…at [their] facilities by 50 percent by December 31, 2006.”National Environmental Policy Act, “Executive Order 13148,” accessed March 7, 2011, http://ceq.hss.doe.gov/nepa/regs/eos/eo13148.html.

By 2006 most of the major institutional cleaning-products companies across the country had “green” product offerings of some sort, but Coastwide already was well ahead of them. Building service contractor and property manager customers told Coastwide they were awarded new business because of the “green” package Coastwide offers. Some buyers use the Sustainable Earth line as part of their marketing program to differentiate and enhance the value of their services. The city of San Francisco specified Coastwide’s line even though the company did not have sales representatives in that market (sales are through distributors). Inquiries from the US Midwest, South, and East Coast increased in 2006, and Roger McFadden and the firm’s corporate director of sustainability were frequently invited to speak in various US and Canadian cities outside Coastwide’s market area. In sum, by making sure it understood the dynamics of the relevant systems for its success and its customers’ benefit, Coastwide created a successful strategy because, in the current competitive environment, it was just good business.

Results for Coastwide included the following:

• The industry average net operating income was 2 percent; Coastwide averaged double or triple that level.
• Sales in 2005 increased by 8 percent, driven by market share increases in segments where the most Sustainable Earth products were sold; operating profits rose by an even larger percentage.
• The number of new customers rose over 35 percent in 2005, largely attributable to Sustainable Earth product lines.

Coastwide’s solution for buyers went further than any other firm’s to blend problem solving around a company’s unique needs with changing regulatory system requirements and emerging human health and ecosystem trends. Coastwide, through McFadden’s entrepreneurial innovation, saw an opportunity in the complex corporate, regulatory, and ecological systems and in its customers’ need for a sustainable response. By understanding the systems in which you operate, higher level solutions can emerge that will give you competitive advantage. By 2010 McFadden had become Stapless’ senior scientist, advising the $27 billion office products company on its sustainability strategy. In each instance of these instances, entrepreneurial (or intrapreneurial) leaders made decisions from a systems perspective. The individuals came to this understanding in different ways, but this way of seeing their companies’ interdependencies with both living and nonliving systems allowed them to introduce innovative ways of doing business, create new product designs and operating structures, and generate new revenues. Systems analysis is an effective problem-solving tool in dynamic, complex circumstances where economic opportunities are not easily apparent. A systems perspective accommodates the constant changes that characterize the competitive terrain. To recap, we provide the following tactics to help you think in systems terms: • Design products in “circles,” not lines. • Optimize across multiple systems. • Sell systems solutions. This kind of broader systems-oriented strategy will be increasingly important for claiming market share in the new sustainability market space. Increasingly, senior management, and eventually everyone within firms and their supply chains, will understand that the future lies on a path toward benign products (no harm to existing natural systems) or products that—at the end of use—are returned so that their component parts can be used to make equal or better quality new products.The point is not the goal but the continuous effort. Systems thinking applied to entrepreneurial innovation is not merely a tool or theory—it is increasingly a mind-set, a survival skill, and key to strategic advantage. ### Key Takeaways • A systems approach to business is a reminder that companies operate in complex sets of interlocking living and nonliving systems, including markets and supply chains as well as natural systems. • Systems thinking can open up new opportunities for product and process redesign and lead to innovative business models. • Individuals with a creative bent can lead sustainability innovation changes inside small or large firms. ### Exercise 1. In teams, identify a commonly used product. Try to name all the component parts and material inputs involved in bringing the product to market. List the ways in which producing that item likely depended on, drew from, and impacted natural systems over the product’s life. ## 4.3 Molecular Thinking ### Learning Objectives 1. Explore systems thinking at the molecular level. 2. Focus on materials innovation. 3. Provide examples of green chemistry applications. In this discussion, we encourage you to think on the micro level, as though you were a molecule. We tend to focus on what is visible to the human eye, forgetting that important human product design work takes place at scales invisible to human beings. Molecular thinking, as a metaphorical subset of systems thinking, provides a useful perspective by focusing attention on invisible material components and contaminants. In the first decade of the twenty-first century there has been heavy emphasis on clean energy in the media. Yet our world is composed of energy and materials. When we do examine materials we tend to focus on visible waste streams, such as the problems of municipal waste, forgetting that some of the most urgent environmental health problems are caused by microscopic, and perhaps nanoscale, compounds. These compounds contain persistent contaminants that remain invisible in the air, soil, and water and subsequently accumulate inside our bodies through ingestion of food and water. Thinking like a molecule can reveal efficiency and innovation opportunities that address hazardous materials exposure problems; the principles of green chemistryChemical design, manufacture, and use guided by principles that reduce or eliminate the use or generation of hazardous substances and waste. give you the tools to act on such opportunities. The companies discussed in this section provide examples of successful sustainability innovation efforts at the molecular level. Green chemistry, an emerging area in science, is based on a set of twelve design principles.Paul T. Anastas and John C. Warner, Green Chemistry: Theory and Practice (Oxford: Oxford University Press, 1998). Application of the principles can significantly reduce or even eliminate generation of hazardous substances in the design, manufacture, and application of chemical products. Green chemistry offers many business benefits. Its guiding principles drive design of new products and processes around health and environmental criteria and can help firms capture top (revenue) and bottom line (profitability) gains within the company and throughout value chains. As public demand and regulatory drivers for “clean” products and processes grow, molecular thinking enables entrepreneurs inside large and small companies to differentiate their businesses and gain competitive advantage over others who are less attuned to the changing market demands. In the ideal environment, green chemistry products are derived from renewable feedstocks, and toxicity is deliberately prevented at the molecular level. Green chemistry also provides the means of shifting from a petrochemical-based economy based on oil feedstocks (from which virtually all plastics are derived) to a bio-based economy. This has profound consequences for a wide range of issues, including environmental health, worker safety, national security, and the agriculture sector. While no one scientific approach can supply all the answers, green chemistry plays a foundational role in enabling companies to realize concrete benefits from greener design. What does it mean to pursue sustainability innovation at the molecular level? When chemicals and chemical processes are selected and designed to eliminate waste, minimize energy use, and degrade safely upon disposal, the result is a set of processes streamlined for maximum efficiency. In addition, hazards to those who handle the chemicals, along with the chemicals’ inherent costs, are designed out of both products and processes. With the growing pressure on firms to take responsibility for the adverse impacts of business operations throughout their supply chain and the demand for greater transparency by corporations, forward-thinking organizations—whether start-ups or established firms—increasingly must assess products and process steps for inherent hazard and toxicity. ### 12 Principles of Green Chemistry 1. Prevent waste, rather than treat it after it is formed. 2. Maximize the incorporation of all process materials into the final product. 3. Use and generate substances of little or no toxicity. 4. Preserve efficacy of function while reducing toxicity. 5. Eliminate or minimize use of or toxicity of auxiliary substances (e.g., solvents). 6. Recognize and minimize energy requirements; shoot for room temperature. 7. Use renewable raw material feedstock, if economically and technically possible. 8. Avoid unnecessary derivatization (e.g., blocking group, protection/deprotection). 9. Consider catalytic reagents superior to stoichiometric reagents. 10. Design end product to innocuously degrade, not persist. 11. Develop analytical methodologies that facilitate real-time monitoring and control. 12. Choose substances/forms that minimize potential for accidents, releases, and fires.Paul T. Anastas and John C. Warner, Green Chemistry: Theory and Practice (Oxford: Oxford University Press, 1998), 30. Molecular thinking, applied through the use of the green chemistry principles, guides you to examine the nature of material inputs to your products. Once again, a life-cycle approach is required to consider, from the outset, the ultimate fate of your waste outputs and products. This analysis can occur concurrently with delivering a high-quality product to the buyer. Thus thinking like a molecule asks business managers and executives to examine not only a product’s immediate functionality but its entire molecular cycle from raw material, through manufacture and processing, to end of life and disposal. Smart decision makers will ask, Where do we get our feedstocks? Are they renewable or limited? Are they vulnerable to price and supply fluctuations? Are they vulnerable to emerging environmental health regulations? Are they inherently benign or does the management of risk incur costs in handling, processing, and disposal? Managers and sustainability entrepreneurs also must ask whether chemicals in their products accumulate in human tissue or biodegrade harmlessly. Where do the molecular materials go when thrown away? Do they remain stable in landfills, or do they break down to pollute local water supplies? Does their combination create new and more potent toxins when incinerated? If so, can air emissions be carried by wind currents and influence the healthy functioning of people and natural systems far from the source? Until very recently these questions were not business concerns. Increasingly, however, circumstances demand that we think small (at the molecular and even nano levels) to think big (providing safe products for two to four billion aspiring middle-class citizens around the world). As we devise more effective monitoring devices that are better able to detect and analyze the negative health impacts of certain persistent chemical compounds, corporate tracking of product ingredients at the molecular level becomes imperative. Monitoring chemical materials to date has been driven primarily by increased regulation, product boycotts, and market campaigns by health-oriented nonprofit organizations. But instead of a reactive defense against these growing forces, forward-thinking entrepreneurial companies and individuals see new areas of business opportunity and growth represented by the updated science and shifting market conditions. Green chemistry design principles are being applied by a range of leading companies across sectors including chemical giants Dow, DuPont, and Rohm and Haas and consumer product producers such as SC Johnson, Shaw Industries, and Merck & Co. Small and midsized businesses such as Ecover, Seventh Generation, Method, AgraQuest, and Metabolix also play a leading innovative role. (See the Presidential Green Chemistry Challenge Award winners for a detailed list of these businesses.)US Environmental Protection Agency, “Presidential Green Chemistry Challenge: Award Winners,” last updated July 28, 2010, accessed December 3, 2010, http://www.epa.gov/greenchemistry/pubs/pgcc/past.html. Currently green chemistry–inspired design and innovation has made inroads into a range of applications, including the following:  Adhesives Pesticides Cleaning products Pharmaceuticals Fine chemicals Plastics Fuels and renewable energy technologies Pulp and paper Nanotechnologies Textile manufacturing Paints and coatings Water purification Included in green chemistry is the idea of the atom economyA practice that emphasizes the most efficient use of every input molecule in the final product., which would have manufacturers use as fully as possible every input molecule in the final output product. The pharmaceutical industry, an early adopter of green chemistry efficiency principles in manufacturing processes, uses a metric called E-factorAn efficiency measurement for chemicals production expressed as a ratio of inputs to outputs in any given product. E-factor measurement tells you how many units of weight of output one gets per unit of weight of input and provides a process efficiency metric that reports inherent costs associated with waste, energy, and other resources’ inputs rates of use. to measure the ratio of inputs to outputs in any given product.The definition of E-factor is evolving at this writing. Currently pharmaceutical companies engaged in green chemistry are debating whether to include input factors such as energy, water, and other nontraditional inputs. In essence, an E-factor measurement tells you how many units of weight of output one gets per unit of weight of input. This figure gives managers a sense of process efficiency and the inherent costs associated with waste, energy, and other resources’ rates of use. By applying green chemistry principles to pharmaceutical production processes, companies have been able to dramatically lower their E-factor—and significantly raise profits. Merck & Co., for example, uncovered a highly innovative and efficient catalytic synthesis for sitagliptin, the active ingredient in Januvia, the company’s new treatment for type 2 diabetes. This revolutionary synthesis generated 220 pounds less waste for each pound of sitagliptin manufactured and increased the overall yield by nearly 50 percent. Over the lifetime of Januvia, Merck expects to eliminate the formation of at least 330 million pounds of waste, including nearly 110 million pounds of aqueous waste.US Environmental Protection Agency, “Presidential GC Challenge: Past Awards: 2006 Greener Synthetic Pathways Award,” last updated June 21, 2010, accessed December 2, 2010, http://www.epa.gov/greenchemistry/pubs/pgcc/winners/gspa06.html. ## Pfizer In 2002, pharmaceutical firm Pfizer won the US Presidential Green Chemistry Challenge Award for Alternative Synthetic Pathways for its innovation of the manufacturing process for sertraline hydrochloride (HCl). Sertraline HCl is the active ingredient in Zoloft, which is the most prescribed agent of its kind used to treat depression. In 2004, global sales of Zoloft were$3.4 billion. Pharmaceutical wisdom holds that companies compete on the nature of the drug primarily and on process secondarily, with “maximum yield” as the main objective. Green chemistry adds a new dimension to this calculus: Pfizer and other pharmaceutical companies are discovering that by thinking like a molecule and applying green chemistry process innovations, they see their atom economy exponentially improve.

In the case of Pfizer, the company saw that it could significantly cut input costs. The new commercial process offered dramatic pollution prevention benefits, reduced energy and water use, and improved safety and materials handling. As a consequence, Pfizer significantly improved worker and environmental safety while doubling product yield. This was achieved by analyzing each chemical step. The key improvement in the sertraline synthesis was reducing a three-step sequence in the original process to a single step.Stephen K. Ritter, “Green Challenge,” Chemical & Engineering News, 80, no. 26 (2009): 30. Overall, the process changes reduced the solvent requirement from 60,000 gallons to 6,000 gallons per ton of sertraline. On an annual basis, the changes eliminated 440 metric tons of titanium dioxide-methylamine hydrochloride salt waste, 150 metric tons of 35 percent hydrochloric acid waste, and 100 metric tons of 50 percent sodium hydroxide waste. With hazardous waste disposal growing more costly, this represented real savings now and avoided possible future costs.

By redesigning the chemical process to be more efficient and produce fewer harmful and expensive waste products, the process of producing sertraline generated both economic and environmental/health benefits for Pfizer. Typically, 20 percent of the wholesale price is manufacturing costs, of which approximately 20 percent is the cost of the tablet or capsule with the remaining percentage representing all other materials, energy, water, and processing costs. Using green chemistry can reduce both of these input costs significantly. As patents expire and pharmaceutical products are challenged by cheaper generics, maintaining the most efficient, cost-effective manufacturing process will be the key to maintaining competitiveness.

As mentioned earlier, E-factor analysis offers the means for streamlining materials processing and capturing cost savings. An efficiency assessment tool for the pharmaceutical industry, E-factor is defined as the ratio of total kilograms of all input materials (raw materials, solvents, and processing chemicals) used per kilogram of active product ingredient (API) produced. A pivotal 1994 study indicated that as standard practice in the pharmaceutical industry, for every kilogram of API produced, between twenty-five and one hundred kilograms or more of waste was generated—a ratio still found in the industry. By the end of the decade, E-factors were being used more frequently to evaluate products. Firms were identifying drivers of high E-factor values and taking action to improve efficiency. Multiplying the E-factor by the estimated kilograms of API produced by the industry overall suggested that, for the year 2003, as much as 500 million to 2.5 billion kilograms of waste could be the by-product of pharmaceutical industry API manufacture. This waste represented a double penalty: the costs associated with purchasing chemicals that are ultimately diverted from API yield and the costs associated with disposing of this waste (ranging from one to five dollars per kilogram depending on the hazard). Very little information is released by competitors in this industry, but a published 2004 GlaxoSmithKline life-cycle assessment of its API manufacturing processes revealed approximately 75 to 80 percent of the waste produced was solvent (liquid) and 20 to 25 percent solids, of which a considerable proportion of both was likely hazardous under state and federal laws.

For years, the pharmaceutical industry stated it did not produce the significant product volumes needed to be concerned about toxicity and waste, particularly relative to commodity chemical producers. However, government and citizen concern about product safety and high levels of medications in wastewater combined with the growing cost of hazardous waste disposal is changing that picture relatively quickly. With favorable competitive conditions eroding, companies have been eager to find ways to cut costs, eliminate risk, innovate, and improve their image.

After implementing the green chemistry award-winning process as standard in sertraline HCl manufacture, Pfizer’s experience indicated that green chemistry–guided process changes reduced E-factor ratios to ten to twenty kilograms. The potential to dramatically reduce E-factors through green chemistry could be significant. Other pharmaceutical companies that won Presidential Green Chemistry Challenge Awards between 1999 and 2010—Lilly, Roche, Bristol-Meyers Squibb, and Merck—reported improvements of this magnitude after the application of green chemistry principles. Additionally, Pfizer was awarded the prestigious UK environmental Crystal Faraday Award for innovation in the redesign of the manufacturing process of sildenafil citrate (the active ingredient in the product Viagra).

Not surprisingly, thinking like a molecule applied through use of green chemistry’s twelve principles fits easily with existing corporate Six Sigma quality programs whose principles consider waste a process defect. “Right the first time” was an industry quality initiative backed strongly by the US Food and Drug Administration. Pfizer’s Dr. Berkeley (“Buzz”) Cue (retired but still actively advancing green chemistry in the industry), credited with introducing green chemistry ideas to the pharmaceutical industry, views these initiatives as a lens that allows the companies to look at processes and yield objectives in a more comprehensive way (a systems view), with quality programs dovetailing easily with the approach and even enhancing it.

Dr. Cue, looking back on his history with green chemistry and Pfizer, said, “The question is what has Pfizer learned through understanding Green Chemistry principles that not only advantages them in the short term, but positions them for future innovation and trends?”Phone interview with Berkeley Cue, retired Pfizer executive, July 16, 2003. This is an important question for entrepreneurs in small firms and large firms alike. If you think like a molecule, overlooked opportunities and differentiation possibilities present themselves. Are you calculating the ratio of inputs to outputs? Has your company captured obvious efficiency cost savings, increased product yield, and redesigned more customer and life-cycle effective molecules? Are you missing opportunities to reduce or eliminate regulatory oversight by replacing inherently hazardous and toxic inputs with benign materials? Regulatory compliance for hazardous chemical waste represents a significant budget item and cost burden. Those dollars would be more usefully spent elsewhere.

Green chemistry has generated breakthrough innovations in the agriculture sector as well. Growers face a suite of rising challenges connected with using traditional chemical pesticides. A primary concern is that pests are becoming increasingly resistant to conventional chemical pesticides. In some cases, pesticides must be applied two to five times to accomplish what a single application did in the 1970s. Moreover, pests can reproduce and mutate quickly enough to develop resistance to a pesticide within one growing season. Increased rates of pesticide usage deplete soil and contaminate water supplies, and these negative side effects and costs (so-called externalities) are shifted onto individuals while society bears the cost.

## AgraQuest

AgraQuest is an innovative small company based in Davis, California. The company was founded by entrepreneur Pam Marrone, a PhD biochemist with a vision of commercially harnessing the power of naturally occurring plant defense systems. Marrone had left Monsanto, where she had originally been engaged to do this work, when that company shifted its strategic focus to genetically modified plants. Marrone looked for venture capital and ultimately launched AgraQuest, a privately held company, which in 2005 employed seventy-two people and expected sales of approximately $10 million. AgraQuest strategically differentiated itself by offering products that provided the service of effective pest management while solving user problems of pest resistance, environmental impact, and worker health and safety. AgraQuest provides an exemplary case study of green chemistry technology developed and brought to market at a competitive cost. The company is also is a prime example of how a business markets a disruptive technology and grapples with the issues that face a challenge to the status quo. ### About AgraQuest Powering today’s agricultural revolution for cleaner, safer food through effective biopesticides and innovative technologies for sustainable, highly productive farming and a better environment. As a leader in innovative biological and low-chemical pest management solutions, AgraQuest is at the forefront of the new agriculture revolution and a shift in how food is grown. AgraQuest focuses on discovering, developing, manufacturing and marketing highly effective biopesticides and low-chem pest and disease control and yield enhancing products for sustainable agriculture, the home and garden, and food safety markets. Through its Agrochemical and BioInnovations Divisions, AgraQuest provides its customers and partners with tools to create value-enhancing solutions.Andrea Larson and Karen O’Brien, from field interviews; untitled/unpublished manuscript, 2006. Winner of the Presidential Green Chemistry Challenge Small Business Award in 2003 for its innovative enzymatic biotechnology process used to generate its products, AgraQuest employed a proprietary technology to screen naturally occurring microorganisms to identify those that may have novel and effective pest management characteristics.US Environmental Protection Agency, “Green Chemistry: Award Winners,” accessed July 28, 2010, http://www.epa.gov/gcc/pubs/pgcc/past.html. AgraQuest scientists traveled around the world searching out promising-looking microbes for analysis. AgraQuest scientists gathered microbe samples from around the world, identifying those that fight the diseases and pests that destroy crops. Once located, these microorganisms were screened, cultivated, and optimized in AgraQuest’s facilities and then sent in powder or liquid form to growers. In field trials and in commercial use, AgraQuest’s microbial pesticides have been shown to attack crop diseases and pests and then completely biodegrade, leaving no residue behind. Ironically, AgraQuest’s first product was developed from a microbe found in the company’s backyard—a nearby peach orchard. Once the microbe was identified, company biochemists analyzed and characterized the compound structures produced by selected microorganisms to ensure there were no toxins, confirm that the product biodegraded innocuously, and identify product candidates for development and commercialization. The company, led by entrepreneur Marrone, has screened over twenty-three thousand microorganisms and identified more than twenty product candidates that display high levels of activity against insects, nematodes, and plant pathogens. These products include Serenade, Sonata, and Rhapsody biological fungicides; Virtuoso biological insecticide; and Arabesque biofumigant. The market opportunities for microbial-based pesticides are extensive. Furthermore, the booming$4 billion organic food industry generates rising demand for organic-certified pest management tools. As growers strive to increase yields to meet this expanding market, they require more effective, organic means of fighting crop threats. AgraQuest’s fungicide Serenade is organic certified to serve this expanding market, and other products are in the pipeline.

The US Environmental Protection Agency (EPA) has streamlined the registration process for “reduced-risk” bio-based pesticides such as AgraQuest’s to help move them to market faster. The Biopesticides and Pollution Prevention Division oversees regulation of all biopesticides and has accelerated its testing and registration processes. The average time from submission to registration is now twelve to fourteen months rather than five to seven years.

Moreover, since the products biodegrade and are inherently nontoxic to humans, they are exempt from testing for “tolerances”—that is, the threshold exposure to a toxic substance to which workers can legally be exposed. This means that workers are required to wait a minimum of four hours after use before entering the fields, whereas other conventional pesticides require a seventy-two-hour wait. The reduction of restricted entry intervals registers as time and money saved to growers. Therefore, AgraQuest products can act as “crop savers”—used immediately prior to harvest in the event of bad weather. To growers of certain products, such as wine grapes, this can mean the difference between success and failure for a season.

AgraQuest deployed exemplary green chemistry and sustainability innovation strategies. The opportunity presented by the problems associated with conventional chemical pesticides was relatively easy to perceive, but designing a viable alternative took real ingenuity and a dramatic diversion from well-worn industry norms. Thinking like a molecule in this context enabled the firm to challenge the existing industry pattern of applying toxins and instead examine how natural systems create safe pesticides. Marrone and her team have been able to invent entirely new biodegradable and benign products—and capitalize on rising market demand for the unique array of applications inherent in this type of product.

As the science linking cause and effect grows more sophisticated, public concern about the human health and environmental effects of pesticides is increasing.Rick A. Relyeaa, “The Impact of Insecticides and Herbicides on the Biodiversity and Productivity of Aquatic Communities,” Ecological Applications 15, no. 2 (2005): 618–27; Xiaomei Ma, Patricia A. Buffler, Robert B. Gunier, Gary Dahl, Martyn T. Smith, Kyndaron Reinier, and Peggy Reynolds, “Critical Windows of Exposure to Household Pesticides and Risk of Childhood Leukemia,” Environmental Health Perspectives 110, no. 9 (2002): 955–60; Anne R. Greenlee, Tammy M. Ellis, and Richard L. Berg, “Low-Dose Agrochemicals and Lawn-Care Pesticides Induce Developmental Toxicity in Murine Preimplantation Embryos,” Environmental Health Perspectives 112, no. 6 (2004): 703–9. Related to this is an international movement to phase out specific widely used pesticides such as DDT and methyl bromide. Moreover, a growing number of countries impose trade barriers on food imports due to residual pesticides on the products.

In this suite of challenges facing the food production industry, AgraQuest found opportunity. The logic behind AgraQuest’s product line is simple: rather than rely solely on petrochemical-derived approaches to eradicating pests, AgraQuest products use microbes to fight microbes. Over millennia, microbes have evolved complex defense systems that we are only now beginning to understand. AgraQuest designs products that replicate and focus these natural defense systems on target pests. When used in combination with conventional pesticides, AgraQuest products are part of a highly effective pest management system that has the added benefit of lowering the overall chemical load released into natural systems. Because they are inherently benign, AgraQuest products biodegrade innocuously, avoiding the threats to human health and ecosystems—not to mention associated costs—that growers using traditional pesticides incur.

## NatureWorks

In a final example, NatureWorks, Cargill’s entrepreneurial biotechnology venture, designed plastics made from biomass, a renewable input. The genius of NatureWorks’ biotechnology is that it uses a wide range of plant-based feedstocks and is not limited to corn, thus avoiding competition with food production. NatureWorks’ innovative breakthroughs addressed the central environmental problem of conventional plastic. Derived from oil, conventional plastic, a nonrenewable resource associated with a long list of environmental, price, and national security concerns, has become a major health and waste disposal problem. By building a product around bio-based inputs, NatureWorks designed an alternative product that is competitive in both performance and price—one that circumvents the pollution and other concerns of oil-based plastics. As a result of its successful strategy, NatureWorks has shifted the market in its favor.

NatureWorks LLC received the 2002 Presidential Green Chemistry Challenge Award for its development of the first synthetic polymer class to be produced from renewable resources, specifically from corn grown in the American Midwest. At the Green Chemistry and Engineering conference and awards ceremony in Washington, DC, attended by the president of the US National Academy of Sciences, the White House science advisor, and other dignitaries from the National Academies and the American Chemical Society, the award recognized the company’s major biochemistry innovation, achieved in large part under the guidance and inspiration of former NatureWorks technology vice president Patrick Gruber.

Gruber was an early champion of sustainability innovation. As an entrepreneur inside a large firm, he led the effort that resulted in NatureWorks’ bio-based plastic. Together with a team of chemical engineers, biotechnology experts, and marketing strategists, Gruber spearheaded the effort to marry agricultural products giant Cargill with chemical company Dow to create the spin-off company originally known as Cargill Dow and renamed NatureWorks in January 2005. Gruber was the visionary who saw the potential for a bio-based plastic and the possibilities for a new enzymatic green chemistry process to manufacture it. He helped drive that process until it was cost-effective enough to produce products competitive with conventional products on the market.

NatureWorks’ plastic, whose scientific name is polylactic acid (PLA), has the potential to revolutionize the plastics and agricultural industries by offering biomass-based biopolymers as a substitute for conventional petroleum-based plastics. NatureWorks resins were named and trademarked NatureWorks PLA for the polylactic acid that comprises the base plant sugars. In addition to replacing petroleum as the material feedstock, PLA resins have the added benefit of being compostable (safely biodegraded) or even infinitely recyclable, which means they can be reprocessed again and again. This provides a distinct environmental advantage, since recycling—or “down-cycling”—postconsumer or postindustrial conventional plastics into lower quality products only slows material flow to landfills; it does not prevent waste. Moreover, manufacturing plastic from corn field residues results in 30 to 50 percent fewer greenhouse gases when measured from “field to pellet.” Additional life-cycle environmental and health benefits have been identified by a thorough life-cycle analysis. In addition, PLA resins, virgin and postconsumer, can be processed into a variety of end uses.

In 2005, NatureWorks CEO Kathleen Bader and Patrick Gruber were wrestling with a number of questions. NatureWorks’ challenges were operational and strategic: how to take the successful product to high-volume production and how to market the unique resin in a mature plastics market. NatureWorks employed 230 people distributed almost equally among headquarters (labs and management offices), the plant, and international locations. As a joint venture, the enterprise had consumed close to $750 million dollars in capital and was not yet profitable, but it held the promise of tremendous growth that could transform a wide range of markets worldwide. In 2005, NatureWorks was still the only company in the world capable of producing large-scale corn-based resins that exhibited standard performance traits, such as durability, flexibility, resistance to chemicals, and strength—all at a competitive market price. The plastics industry is the fourth largest manufacturing segment in the United States behind motor vehicles, electronics, and petroleum refining. Both the oil and chemical industries are mature and rely on commodities sold on thin margins. The combined efforts of a large-scale chemical company in Dow and an agricultural processor giant in Cargill suggested Cargill Dow—now NatureWorks—might be well suited for the mammoth task of challenging oil feedstocks. However, a question inside the business in 2005 was whether the company could grow beyond the market share that usually limited “environmental” products, considered somewhere between 2 and 5 percent of the market. Was PLA an “environmental product,” or was it the result of strategy that anticipated profound market shifts? NatureWorks brought its new product to market in the late 1990s and early 2000s at a time of shifting market dynamics and converging health, environmental, national security, and energy independence concerns. These market drivers gave NatureWorks a profound edge. Oil supplies and instability concerns loomed large in 2005 and have not subsided. Volatile oil prices and political instability in oil-producing countries argued for decreasing dependence on foreign oil to the extent possible. The volatility of petroleum prices between 1995 and 2005 wreaked havoc on the plastics industry. From 1998 to 2001, natural gas prices (which typically tracked oil prices) doubled, then quintupled, then returned to 1998 levels. The year 2003 was again a roller coaster of unpredictable fluctuations, causing a Huntsman Chemical Corp. official to lament, “The problem facing the polymers and petrochemicals industry in the U.S. is unprecedented. Rome is burning.”Reference for Business, “SIC 2821: Plastic Materials and Resins,” accessed January 10, 2011, http://www.referenceforbusiness.com/industries/Chemicals-Allied/Plastic-Materials-Resins.html. In contrast PLA, made from a renewable resource, offered performance, price, environmental compatibility, high visibility, and therefore significant value to certain buyers for whom this configuration of product characteristics is important. Consumers are growing increasingly concerned about chemicals in products. This provides market space for companies who supply “clean materials.” NatureWorks’ strategists knew, for example, that certain plastics were under increasing public scrutiny. Health concerns, especially those of women and children, have put plastics under suspicion in the United States and abroad. The European Union and Japan have instituted bans and regulatory frameworks on some commonly used plastics and related chemicals. Plastic softeners such as phthalates, among the most commonly used additives, have been labeled in studies as potential carcinogens and endocrine disruptors. Several common flame retardants in plastic can cause developmental disorders in laboratory mice. Studies have found plastics and related chemicals in mothers’ breast milk and babies’ umbilical cord blood samples.Sara Goodman, “Tests Find More Than 200 Chemicals in Newborn Umbilical Cord Blood,” Scientific American, December 2, 2009, accessed January 10, 2011, http://www.scientificamerican.com/article.cfm?id=newborn-babies-chemicals -exposure-bpa; Éric Dewailly Dallaire, Gina Muckle, and Pierre Ayotte, “Time Trends of Persistent Organic Pollutants and Heavy Metals in Umbilical Cord Blood of Inuit Infants Born in Nunavik (Québec, Canada) between 1994 and 2001,” Environmental Health Perspectives 36, no. 13 (2003):1660–64. Consumer concern about chemicals and health opens new markets for “clean” materials designed from a sustainability innovation perspective. In addition, international regulations are accelerating growth in the market. In 1999, the European Union banned the use of phthalates in children’s toys and teething rings and in 2003 banned some phthalates for use in cosmetics. States such as California have taken steps to warn consumers of the suspected risk of some phthalates. The European Union, California, and Maine banned the production or sale of products using certain polybrominated diphenyl ethers (PDBEs) as flame retardants. In 2006, the European Union was in the final phases of legislative directives to require registration and testing of nearly ten thousand chemicals of concern. The act, called Registration, Evaluation, Authorization, and Restriction of Chemicals (REACH), became law in 2007 and regulates the manufacture, import, marketing, and use of chemicals. All imports into Europe need to meet REACH information requirements for toxicity and health impacts. Companies are required to demonstrate that a substance does not adversely affect human health, and chemical property and safe use information must be communicated up and down supply chains to protect workers, consumers, and the environment. All of these drivers contributed to the molecular thinking that generated NatureWorks’ corn-based plastics. The volatility of oil prices, growing consumer concerns about plastics and health, waste disposal issues, and changing international regulations are among the systemic issues creating a new competitive arena in which bio-based products based on green chemistry design principles can be successfully introduced. Given higher levels of consumer awareness in Europe and Japan, NatureWorks’ plastic initially received more attention in the international market than in the United States. In 2004, IPER, an Italian food market, sold “natural food in natural packaging” (made with PLA) and attributed a 4 percent increase in deli sales to the green packaging.Carol Radice, “Packaging Prowess,” Grocery Headquarters, August 2, 2010, accessed January 10, 2011, http://www.groceryheadquarters.com/articles/2010-08-02/Packaging-prowess. NatureWorks established a strategic partnership with Amprica SpA in Castelbelforte, Italy, a major European manufacturer of thermoformed packaging for the bakery and convenience food markets. Amprica was moving ahead with plans to replace the plastics it used, including polyethelene terephthalate (PET), polyvinyl chloride (PVC), and polystyrene with the PLA polymer. In response to the national phaseout and ultimate ban of petroleum-based shopping bags and disposable tableware in Taiwan, Wei-Mon Industry (WMI) signed an exclusive agreement with NatureWorks to promote and distribute packaging articles made with PLA.NatureWorks LLC, “First Launch by Local Companies of Environmentally Friendly Paper & Pulp Products with NatureWorks PLA,” June 9, 2006, accessed January 7, 2011, http://www.natureworksllc.com/news-and-events/press-releases/2006/6-9-06-wei-mon-extrusion-coated-paper-launch.aspx. In other markets, Giorgio Armani released men’s dress suits made completely of PLA fiber and Sony sold PLA Discman and Walkman products in Japan. Due to growing concerns about the health impacts of some flame-retardant additives, NEC Corp. of Tokyo combined PLA with a natural fiber called kenaf to make an ecologically and biologically neutral flame-resistant bioplastic.“NEC Develops Flame-Resistant Bio-Plastic,” GreenBiz, January 26, 2004, accessed December 2, 2010, http://www/greenbiz.com/news/news_third.cfm?NewsID= 26360. The US market has been slower to embrace PLA, but Walmart’s purchasing decisions may change that. In fact, NatureWorks’ product solves several of Walmart’s problems. Walmart has battled corporate image problems on several fronts—in its treatment of employees, as a contributor to “big box” sprawl, and in its practice of outsourcing, among others. Sourcing NatureWorks’ bio-based, American-grown, corn-based plastic not only fits into Walmart’s larger corporate “sustainability” effort but addresses US dependence on foreign oil and supports the American farmer. The spectrum of entrepreneurial activities in the sustainable materials arena is wide. While some entrepreneurs are early entrants who are fundamentally reconfiguring product systems, others take more incremental steps toward adopting cleaner, innovative materials and processes. However, incremental changes can be radical when taken cumulatively, as long as one constantly looks ahead toward the larger goal. Many companies, within the chemical industry and outside, now understand that cost reductions and product/process improvements are available through green chemistry and other environmental efficiency policies. Documented cost savings in materials input, waste streams, and energy use are readily available. In recognition of the efficiency gains to be realized, as well as risk reduction and regulatory advantages, most firms acknowledge the benefits that result from developing a strategy with these goals in mind. In addition, companies know they can help avoid the adverse effects of ignoring theses issues, such as boycotts and stockholders’ resolutions that generate negative publicity. However, the efficiency improvement and risk reduction sides of environmental concerns and sustainability are only the leading edge of the opportunities possible. Sustainability strategies and innovative practices go beyond incremental improvement to existing products. This future-oriented business strategy—geared toward new processes, products, technologies, and markets—offers profound prospects for competitive advantage over rival firms. As the molecular links among the things we make and macrolevel issues such as health, energy independence, and climate change become more widely understood, companies that think strategically about the chemical nature of their products and processes will emerge as leaders. A “think like a molecule” approach to designing materials, products, and processes gives entrepreneurs and product designers an advantage. By combining this mode of operating with systems thinking and the other sustainability approaches discussed in Chapter 4 "Entrepreneurship and Sustainability Innovation Analysis", Chapter 4, Section 4 "Weak Ties", you will have a strategy that will enable you not to merely survive but to lead in the twenty-first century. ### Key Takeaways • Invisible design considerations—for example, the design of molecular materials—must be factored into consideration of sustainability design. • Green chemistry offers principles to guide chemical design and production. • Thinking like a molecule opens new avenues for progress toward safer product innovation. ### Exercise 1. Contact your local government and ask about chemical compounds from industrial and commercial activity that end up in the water and air. What are the government’s major concerns? What are the sources of problematic chemicals? What is being done to reduce their release? Go to http://blog.epa.gov/blog/2010/12/17/tri or http://www.epa.gov/tri to read about the Toxic Release Inventory. Search the inventory for evidence of hazardous chemicals used in your area. ## 4.4 Weak Ties ### Learning Objectives 1. Understand the notion of weak ties. 2. Know how and why weak ties contribute to innovation. Firms that carve out positions on the cutting edge of sustainable business share a common feature. They reach out to attract new information from nontraditional sources. Developing the capacity to seek, absorb, and shape changing competitive conditions with respect to human activity and natural systems through weak tieMark Granovetter, “The Strength of Weak Ties,” American Journal of Sociology 78, no. 6 (1973): 1360–80. cultivation holds a key to successful innovation. This is not surprising. Business success depends on continuous revitalization of strategic capabilities. Good strategy creates the future in which a company will succeed. Not all individuals or companies can embrace change, however. In the past, revitalization of existing firms meant analysis of standard factors: competitors, market size and growth, product attributes, past consumer behavior, pricing strategies, and marketing programs. We suggest that limiting yourself to conventional analysis constrains strategic options. To compete in the sustainability arena, companies must go beyond what has worked in the past and seek perspectives outside the historically assumed subset. We argue that incorporating rigorous sustainability analysis into your market positioning is likely to yield opportunities that can be keys to future success. What does this mean when it comes to environmental topics, opportunities in green chemistry applications, implementing sustainability principles in operations, and the myriad other environmental and health imperatives that fall under the term sustainability? It means developing what are called, in the academic literature on networks, weak tiesRelationships outside your traditional network of ties that bring in novel information and perspectives that contribute to new ways of thinking. with unconventional partners who provide you with increasingly essential strategic information. This does not mean that “the answer” will be easily found. It does mean that the net must be thrown wider to access information relevant to strategic success. Sustainability innovation and entrepreneurship involves traveling across new ground. Imagine you will be accompanying the early nineteenth-century explorers Lewis and Clarke to explore the unfamiliar territory of the American West. You will be the first European Americans to chart a course from the eastern seaboard to the Pacific Ocean. The year is 1803, and there are very few maps of the American interior. The ones that exist are sketchy at best. How would you prepare for such a journey? You might talk to your friends and acquaintances to learn what they know about the terrain you’ll be covering. To get the information necessary to survive this foray into the unknown, however, you would probably go outside your immediate circle to talk with trappers, Native Americans, French traders, natural scientists, and other voyagers—people from diverse walks of life. You would need to build new relationships, or weak ties, to access a wide range of people who will provide you with the necessary information to move forward. These ties are called “weak” not because they lack substance or will disappoint you but because they lie outside the traditional network of relationships on which you or the company depends. Contrasting weak ties with “strong ties” highlights their unique characteristics. Strong ties, as a category of network relations, have immediate currency and often long-standing rich histories with extensive mutual exchange. An example in an established company would be an existing relationship with a funder or supplier; for a start-up, it may be someone with whom the company has a history of successful collaboration. Typically, strong ties are to people and organizations you see often and to which you frequently turn for input. In the case of large firms, important strong ties may be those formed between heads of independent business units within the same organization. Alternatively, they might be ties to reliable suppliers or even to the board of directors and the people with whom that group associates. Research indicates, however, that the longer the duration of strong ties between two entities, the more similar the entities’ perspectives are. People from the same circles tend to share the same pools of information. Under normal circumstances this is fine; we augment and reinforce each other’s understanding of how the known world works. However, it is likely that information from strong ties will add only minimal value to the information you already possess. When we want to take action in an arena outside the familiar terrain, information from strong ties often proves insufficient. We would argue, moreover, that relying solely on strong ties can actually deprive you of information, thereby insulating you from potentially important emergent data and trends. In contrast, weak ties bring new or previously marginal information to the forefront. They enable you to reach outside the normal boundaries of “relevant” strategic information. Weak ties trigger innovative thinking because they bring in fresh ideas—viewpoints likely to diverge from yours or from senior management’s—and data otherwise overlooked or dismissed because they have not been a priority historically. Sometimes the most fruitful weak ties are to individuals or organizations previously considered to be your adversaries. Not surprisingly, the most innovative ideas for success may well come from those quarters most critical of how business has traditionally been done. To successfully traverse the relatively unfamiliar territory of entrepreneurship and sustainability, you need to seek information from weak ties to access emergent perspectives and new scientific data that make what used to be peripheral issues—as many ecological and environmental health issues have been—now salient to strategic success. Perspectives gained from weak ties enable discerning companies to differentiate themselves and gain relative to their competitors. They can be formed with a range of individuals and organizations—including academics, consultants, nonprofit research institutes, government research organizations, and nongovernmental organizations (NGOs). The latter community is often business’s harshest critic on environmental issues. It is for this reason that business is increasingly forming weak ties to NGOs to engage them in thinking strategically about solutions. Toward this end, it is important to understand that the NGO community is not homogeneous. There is a spectrum of groups active on environmental and sustainability issues. They range from those that view business as antithetical to social and ecological concerns to those that seek partnership and joint solutions. Certainly any weak tie relationship requires due diligence and partnerships must be considered carefully, but there is a wealth of untapped expertise and stakeholder value that is potentially available to you. The accounts that follow illustrate effective use of weak ties to help craft sustainability strategies. Home Depot’s president Arthur Blank found new perspectives through weak ties by seeking input from NGOs critical of the company’s old-growth forest purchasing practices prior to 1999. That year Home Depot, the largest home improvement retailer in the United States, was also the largest lumber retailer in the world, selling between 5 and 10 percent of the global market. The company recorded$38 billion in sales and over 200,000 employees in 930 stores. It also had been repeatedly voted “Most Admired Specialty Retailer.”

Faced with negative publicity and store boycotts by activist groups, however, the company’s openness to learning about alternative sourcing opportunities led to invitations to NGO representatives to meet with Home Depot’s senior management. Those new contacts—and the information flows they facilitated—helped put Home Depot on a track and timetable for dramatically reducing and ultimately ending old-growth forest wood purchasing and store sales. Stated Arthur Blank at the time, “Our pledge to our customers, associates and stockholders is that Home Depot will stop selling wood products from environmentally sensitive areas. Home Depot embraces its responsibility as a global leader to help protect endangered forests. By the end of 2002, we will eliminate from our stores wood from endangered areas—including certain lauan, redwood and cedar products—and give preference to ‘certified’ wood.”CBC News, “Home Depot Going Green,” November 10, 2000, accessed January 7, 2011, http://www.cbc.ca/money/story/1999/08/27/homedepot990827.html.

Certified wood is defined as lumber tracked from the forest, through manufacturing and distribution, to the customer to assure that harvesting the wood takes into account a balance of social, economic, and environmental factors. Home Depot’s ultimate goal was to sell only products made from certified lumber, but initially only about 1 percent of timber available was certified. How was Home Depot’s demand—let alone the industry’s—going to be met? The answer was that Home Depot’s decision moved markets. Vendors were asked to dramatically increase their supplies of certified lumber, driving demand back through the supply chain to lumber companies that expanded their activity in sustainably managed forestry.

Evidence that companies are seeking new perspectives grows each year as firms expand their range of conversations about improved practices to citizens groups, environmental scientists, and even international experts from other countries and industries. These groups are outsiders—examples of weak ties—because historically they have not been sought for strategically relevant information. However, this pattern has increasingly been shared by companies for which market scanning processes were previously limited to competitor and narrowly conceived industry trend data.

As the larger picture of economic activity’s impact on nature’s life support systems and the quality of life becomes more important to business, these ties now serve as conduits for knowledge on how and where the company might improve its overall strategy and performance. The known link of deforestation to climate change and species extinction combine with the implication of raw material processing methods in ecological and human health threats and known mutations to require—for fiduciary reasons—that companies buying and selling lumber pay attention to these issues. Firms that actively seek new perspectives that may have a bearing on their business success going forward will have a distinct advantage over those whose efforts are minimal, poorly designed, or viewed as marketing “greenwash.” Gaining true strategic leverage requires leadership. Home Depot was fortunate to have a leader with the broad intellect capable of seeing and implementing a wise path for the firm.

### Statement from Home Depot on Wood Purchasing

We pledged to give preference to wood that has come from forests managed in a responsible way and to eliminate wood purchases from endangered regions of the world. Today there is limited scientific consensus on “endangered regions” of forestry. We have broadened our focus to understand the impact of our wood purchases in all regions and embrace the many social and economic issues that must be considered in recognizing “endangered regions” of forests. To fulfill the pledge, it was necessary to trace the origin of each and every wood product on our shelves. After years of research, we now know item by item—from lumber to broom handles, doors to molding and paneling to plywood—where our wood products are harvested.Home Depot, “Wood Purchasing,” accessed March 16, 2011, http://corporate.homedepot.com/wps/portal/Wood_Purchasing.

General Electric, Dell, and IKEA each pursued different types of weak ties. General Electric (GE) publicly announced the integration of environmental issues into product research and development (R&D) strategy and pursued weak ties to help develop strategy both by systematically contacting outside experts and by convening a series of gatherings of national experts and senior GE executives. In the process, GE unearthed previously unappreciated areas of technical innovation of great current and potential value to the company and launched a new corporate R&D strategy called “Ecomagination.” Dell worked with some of its harshest NGO critics to understand the emerging perspectives on managing electronic waste. The NGO links were Dell’s weak ties. This process of engagement not only helped Dell manage a public relations problem but—much to the company’s surprise—created a profitable new secondary service business that differentiated Dell as an industry leader in managing electronic waste. In another example, IKEA searched for assistance in its effort to reorient strategy after being embarrassed by a product that failed to meet European environmental regulatory requirements. IKEA’s weak tie to NGO consultant The Natural Step not only helped IKEA solve immediate product issues but helped fundamentally reorient company strategy on materials. IKEA’s openness to new information played a role in differentiating the company and augmented its existing reputation for design and low cost. The following sections include accounts of these company’s activities with lessons to be learned about profitably pursuing weak ties.

## GE

In June 2005, GE CEO Jeff Immelt announced GE’s new sustainability strategy, “Ecomagination,” at a press event with Jonathan Lash, executive director of the environmental nonprofit organization World Resources Institute. Ecomagination, said Immelt, aims to “focus our unique energy, technology, manufacturing, and infrastructure capabilities to develop tomorrow’s solutions such as solar energy, hybrid locomotives, fuel cells, lower-emission aircraft engines, lighter and stronger materials, efficient lighting, and water purification technology.”Joel Makower, “‘Ecomagination’: Inside GE’s Power Play,” GreenBiz, May 10, 2005, accessed December 3, 2010, http://www.greenbiz.com/news/columns_ third.cfm?NewsID=28061.

Specifically, GE announced it would more than double its research investment in cleaner technologies, from $700 million in 2004 to$1.5 billion by 2010. GE also pledged to improve its own environmental performance by “reducing its greenhouse gas emissions 1% by 2012 and the intensity of its greenhouse gas emissions 30% by 2008, both compared to 2004 (based on the company’s projected growth, GE says its emissions would have otherwise risen 40% by 2012 without further action).”Joel Makower, “‘Ecomagination’: Inside GE’s Power Play,” GreenBiz, May 10, 2005, accessed December 3, 2010, http://www.greenbiz.com/news/columns_ third.cfm?NewsID=28061.

GE’s 2005 strategy was driven to a large degree by the cultivation of weak ties. Characteristic of many large firms active in eco-efficiency, GE had long viewed itself as a leader in environmental productivity improvements because it built energy-efficient airplane engines and other smaller systems and appliances that dramatically reduced resource and electricity use. However, these were design improvements that lacked the broader sweep of a systems view. To bring in new thinking and develop a new competitive stance, GE’s senior management aggressively sought perspectives from atypical sources.Thanks to Jon Freedman at GE Water, formerly with GE corporate marketing and a leader in the Ecomagination policy development process, for information about GE’s activity.

The Ecomagination story begins in 2003 and 2004 when three-year strategic plans drawn up by GE’s business unit CEOs were presented to corporate CEO Jeff Immelt. These indicated market opportunities in green-friendly products across all the units. Core customers were asking for products designed to address escalating resource scarcity and pollution pressures. Clean water and clean energy featured prominently. At the same time, Immelt had received periodic inquiries publicly (in the form of shareholder petitions) and privately as to how GE would respond in an increasingly resource-constrained world. What was GE’s position on environmental issues? Did it have a position?

A project to research the questions and trends was assigned and scoped out. GE assembled a team to interview thought leaders and experts outside the company in a variety of sectors. Academic experts in many fields, futurists, other business leaders, and leading NGOs were systematically interviewed as part of the information gathering that ultimately informed top management.

Through this process, topics were identified as relevant to GE’s markets and offerings. In 2004, GE hosted by-invitation-only meetings of top GE decision makers and a subset of outside experts to look at trends in water and energy concerns five to ten years out. Major customers, the dozen top executives at GE including the CEO, and a select group of outside expert advisors were present at the meetings from beginning to end, an attendance record unusual in the corporate world. In total, over one hundred experts inside and outside GE were consulted, forty leading companies studied, and multiple internal GE seminars and brainstorming sessions convened to discuss megatrends influencing GE’s future businesses.

As a result of this process, GE found that it was already seeing $10 billion annual revenues from existing green technologies and services. The relative value of this activity was unexpected. Rather than being something foreign or new, GE was already seeing high returns from existing green technology innovations. This perspective, when combined with the outside expert feedback on likely trends, confirmed for GE management that their efforts should be redoubled to generate revenues of at least$20 billion by 2010, with application of more aggressive targets thereafter.

Clean Edge, a research and advisory firm, estimated in 2006 that global markets for three of GE’s identified technologies—wind power, solar photovoltaics, and fuel cells—would grow to more than $100 billion within 10 years, from some$16 billion in 2006. This figure did not include clean-water technologies, in which GE has also invested heavily. A previous study predicted that the market for world water treatment technologies will reach $35 billion by 2007.Joel Makower, “‘Ecomagination’: Inside GE’s Power Play,” GreenBiz, May 10, 2005, accessed December 3, 2010, http://www.greenbiz.com/news/columns_ third.cfm?NewsID=28061. Weak ties influenced GE’s strategy formation in a number of ways. First, the ties helped GE design metrics to measure the current and potential values of some of its “green” technologies. One of GE’s weak ties was to GreenOrder, a New York–based consultancy specializing in sustainable business. According to GreenOrder, GE identified 17 products representing about$10 billion in annual sales as part of the Ecomagination platform on which it planned to build. In doing so, the company undertook intensive processes to identify and qualify current Ecomagination products, analyzing the environmental attributes of GE products relative to benchmarks such as competitors’ best products, the installed base of products, regulatory standards, and historical performance. For each Ecomagination product, GE created an extensive “scorecard” quantifying the product’s environmental attributes, impacts, and benefits relative to comparable products.Joel Makower, “‘Ecomagination’: Inside GE’s Power Play,” GreenBiz, May 10, 2005, accessed December 3, 2010, http://www.greenbiz.com/news/columns_ third.cfm?NewsID=28061. Doing this analysis was one of the key roles played by GreenOrder.

As a result of these metrics, GE’s corporate Global Research Center doubled its R&D spending on Ecomagination products and associated services. Business units are required to focus on enhanced internal environmental performance and new product offerings. By October 2005, a senior vice president and officer of the corporation was appointed who reported directly to the CEO and took responsibility for the quantitative tracking of business units’ progress to both “walk the talk” internally and drive new product ideas.

The firm’s strategy change was driven by a historically unprecedented search for new information that used many weak ties to gain emerging perspectives and new science data. This process gave senior management a broader view of global resource trends and allowed the company to gauge how it could best leverage its assets and capabilities to both profit from and contribute to solutions.

In contrast to many firms that are low-key about their environmental activities (to avoid criticism of falling short of the ideal), Jeff Immelt put GE out on a limb. The company, already criticized for environmental transgressions such as that in the Hudson River,In 2002 the EPA decided to dredge 2.65 million cubic yards of sediment—enough dirt to fill an area the size of ten football fields to a height of 145 feet—which is expected to cost GE about 460 million. The dredging is aimed at removing polychlorinated biphenyls (PCBs) dumped into the river from GE plants in Hudson Falls, New York, and Fort Edward, New York, from 1947 to 1977, before PCB use was banned. Deborah Brunswick, “EPA: Hudson River Dredging Delayed,” CNNMoney, July 26, 2008, accessed December 3, 2010, http://money.cnn.com/2006/07/28/news/companies/hudson_river. will be held to a higher, self-defined standard. There is reasoned debate, moreover, on the “greenness” of some of the technologies that GE is putting forward (nuclear power, “clean” coal, etc.). No company with a brand as well known as GE’s can afford to not deliver. Time will tell how successful GE’s strategy will be, but suffice it to say that a company such as GE does not make such a significant and public move without a thoroughly reasoned strategy. The GE example shows the formative role that weak ties can play in a company’s strategic transformation. ## Dell Next, we look at Dell. The article read, “Las Vegas, Nevada, January 9, 2002, environmentalists dressed in prison uniforms circled a collection of dusty computers outside the Consumer Electronics Show…to protest Dell Computer’s use of inmates to recycle computers. ‘I lost my job. I robbed a store. Went to jail. I got my job back,’ chanted five mock prisoners wearing ‘Dell Recycling Team’ signs and linked by chains. While Dell’s executives gathered at the huge electronics convention, the ‘high-tech chain gang,’ members of the Silicon Valley Toxics Coalition, attracted a small crowd outside.”Janelle Carter, “Senate Rejects Felon Vote Bid,” Associated Press, February 15, 2002, accessed December 10, 2011, http://www.sjcite.info/prison.html. Dell executives were understandably embarrassed by this incident. The assumption inside the company was that the company was doing what it reasonably could do about product recycling—a thorn in the paw of the industry lion. However, this public relations fiasco drew attention to an issue that no one in the industry was adequately addressing: electronic waste is a burgeoning problem that, if not dealt with, would come back to all players in the industry. Disposal of electronic products represents one of the fastest growing industrial waste streams. Roughly one thousand hazardous materials used in manufacturing personal computers alone pose problems of human exposure to heavy metals, drinking water contamination, and air quality problems. With the rapid retirement of old models, a staggering volume of computers and other electronic equipment now migrates around the world. Only a small fraction goes to reuse programs. The majority are shipped to landfills and incinerators, or sent as waste to foreign countries. In response to the public health threats from hazardous materials in electronics waste streams, the European Union, Japan, China, and states within the United States are regulating electronic waste. One such regulation in the European Union is the Restrictions on Hazardous Substances in Electrical and Electronic Equipment.NetRegs, “Restriction Of Hazardous Substances in Electrical and Electronic Equipment (RoHS),” last updated October 15, 2010, accessed December 3, 2010, http://www.netregs.gov.uk/netregs/63025.aspx. “Product take-back” laws—and the threat of more such regulations in the future—are stimulating companies to experiment with a variety of means to take back and reuse products. (See the sidebar in this section.) Whether you agree or disagree with these actions, they are one of many drivers of sustainability strategies today: Producers will be responsible for taking back and recycling electrical and electronic equipment. This will provide incentives to design electrical and electronic equipment in an environmentally more efficient way, which takes waste management aspects fully into account. Consumers will be able to return their equipment free of charge. In order to prevent the generation of hazardous waste, the proposal for a Directive on the restriction of the use of certain hazardous substances requires the substitution of various heavy metals and brominated flame retardants in new electrical and electronic equipment from 1 January 2008 onwards.Proposal for a Directive of the European Parliament and of the Council on Waste Electrical and Electronic Equipment and on the restriction of the use of certain hazardous substances in electrical and electronic equipment. European Commission, “Recast of the WEEE and RoHS Directives proposed,” COM (2000), accessed March 16, 2011, http://ec.europa.eu/environment/waste/weee_index.htm. Dell is one of the largest personal computer manufacturers in the world. It is an information technology supplier and partner and sells a comprehensive portfolio of products and services directly to customers worldwide. Dell dealt with a US government contractor, UNICOR, which employed prison inmates to recycle outdated computers. The justification was cost; since recycling products was assumed to be a net cost to the company, efforts were made to cut associated expenses. In February 2002, the Basel Action Network released an alarming report about end-of-life electronics exported and dumped in Asia. The report, “Exporting Harm: The High-Tech Trashing of Asia,” focused a significant amount of media and NGO attention on what computer manufacturers were doing to offer customers options for responsible electronics disposal. Later that year, the Computer Take-Back Coalition launched its “Toxic Dude” website, targeting Dell for not doing enough on computer recycling and reuse. Socially responsible investors (SRIs) and a variety of NGOs, including the aforementioned Silicon Valley Toxics Coalition and the Texas Campaign for the Environment, increased pressure on Dell to do more about electronic waste issues. Following the prison-garbed protest, Dell began engaging in frequent conversations with these and other NGOs. These were Dell’s weak ties—new sources of information outside the company. Dell found that having conversations with these groups helped the company create a more strategically astute direction for its product end-of-life programs. Dell, a relatively young company that had grown rapidly, had not previously formed relationships with health and environmental NGOs. Through these conversations, Dell fundamentally reconfigured its recycling and reuse services for customers. As a leader in supply-chain management, productivity, and efficiency, the company designed an “asset recovery” program for end-of-life products—a program that would maximize quality and minimize costs for its recycling programs. Much to Dell’s surprise, the program not only minimized cost but generated value while also enhancing Dell’s brand and reputation as a responsible corporate citizen. Early in 2003, Dell restructured its recycling program to make it easier for users and more proactive for the company. The “Dell Recycling” program was simplified and made more visible to customers. The company launched a national recycling tour consisting of one-day no-cost computer recycling events in cities across the country, with the objective of raising consumer awareness of computer recycling issues and solutions. When Dell first offered printers among its array of products, the company included free recycling of old printers. Ongoing discussions with NGOs informed the approaches chosen. In late 2003 Dell broadened its national network of approved recyclers by partnering with two private companies to support its environmental programs for retiring, disassembling, reusing, and recycling obsolete computer equipment. Dell discontinued its partnership with UNICOR. These changes helped Dell grow its environmental programs more quickly and efficiently, improve the economics and convenience for customers, and properly dispose of customers’ old systems with minimal environmental or health impact. Moreover, the company began to see value in reclaiming assets rather than just costs in disposing of waste, a fundamental reorientation that would not have been possible without the weak ties that helped the company rethink its relationship with waste. Tod Arbogast, who led Dell’s sustainable business efforts, stated, The early discussions we had with NGOs and SRIs led to brainstorming sessions both within the company and with these stakeholders. Stakeholder input helped shape what we are doing now and it continues to be a valuable dialogue to this day. We came to realize that we could meet both our business objectives as well as the environmental goals we were being asked to adopt with new product recovery services offered to our customers. For example, our product recovery programs for our business customers have both helped grow the amount of used computers we are recovering and have become profitable. We’ve taken this same focus of meeting both sustainability and business goals into many areas since then including workplace conditions in our supply chain, chemical use policies and regular transparent reporting on all of these efforts to a broad set of external stakeholders. Connecting our sustainability objectives to our business objectives helps us get a broader set of internal colleagues supporting our efforts and helps us continue to expand our sustainability programs.Tod Arbobast, interview by author in preparation of book manuscript, summer 2006. By engaging with vocal critics and environmental advocates and having open and honest dialogue with NGOs, the company effectively improved its end-of-life disposal offers by making them easier, more affordable, and more visible to customers. Dell was able to reach outside the company to get the additional information it needed to make this possible. By learning from the feedback it received and adjusting several of its tactics for raising awareness among consumers about responsible computer recycling, Dell created what is today one of the industry’s most aggressive and comprehensive recycling offers. In addition to the positive brand enhancement that came with having an environmentally responsible business offer, Dell also gained from showing customers that it could manage the entire life cycle of its technology equipment. The story of electronics waste is not over. Dell and other leading companies are under intense scrutiny by NGOs to fulfill their commitments on waste management and toxics issues. Moreover, as a society, we still have a long way to go. To inspire more corporate action, in 2005, Calvert Investments and other SRIs filed shareholder resolutions with six computer companies, asking them to begin planning for recycling and take-back. As a result, Dell was the first US computer company to commit to setting recycling and take-back goals for personal computers. ## IKEA Global home furnishings retailer IKEA was stunned by claims in the 1990s that one of its most popular products—the Billy bookcase—was off-gassing formaldehyde at levels above German government safety standards. The resulting crisis for this company led to IKEA’s search for ways to prevent such an issue from happening in the future. After talking with different environmental groups and receiving much criticism but little concrete direction, IKEA turned to The Natural Step (TNS), an environmental educational organization headquartered in Stockholm, Sweden. Karl Henrik Robèrt, founder of TNS and an oncologist who became an environmental health activist due to children’s inexplicably rising cancer rates, was repeatedly invited to talk with IKEA’s senior management team and train them in TNS process. By teaching the group about overlooked market conditions that would increasingly impinge on IKEA’s worldwide practices, Robèrt catalyzed the group to commit to the first step of designing a green furniture line offering—and this weak tie ultimately helped IKEA develop its overarching sustainability strategy. The task of “fixing” the company after its regulatory embarrassment seemed enormous to senior executives at the time. But the basic environmental education and criteria for designing both products and strategy offered by TNS educational framework allowed the senior executives to see a path forward. The major learning point is that without seeking outside perspectives from the very groups that had been most critical of the corporation, IKEA would not have found Dr. Robèrt and TNS ideas that were eventually integrated into the company’s strategy. Working with Robèrt helped IKEA leaders see their industry from the outside; thereafter, they viewed steps transitioning toward “sustainable business” as noncontroversial. IKEA leaders were simply adapting to new scientific and health research data and integrating that data with their strategic choices. In their earliest experience with TNS, that meant certain chemicals known to be toxic to cells (causing cell mutation) would not be used in any production steps required to make residential household furniture. The solution of removing unsafe materials fit with IKEA’s corporate purpose of improving the lives of its customers. The first concrete product that resulted from this solution was IKEA’s “eco-furniture” line, but the perspectives on materials and IKEA’s strategic positioning went far beyond one product line. IKEA continued to set some of the highest environmental strategy standards in the industry. As one of the first adopters of sustainability standards, IKEA has set the bar that others seek to match. The company’s initial corporate environmental action plan was called Green Steps, which was based on four intended actions/conditions posed in the form of questions: 1. Is the company systematically reducing its dependency on mining and nonrenewable sources? 2. Is the company reducing the use of long-lasting, unnatural substances? 3. Is the company reducing its encroachment on nature and its functions? 4. Is the company reducing unnecessary use of resources? To ensure this policy is followed, IKEA trains all employees and regularly provides them with clear and up-to-date environmental information. The company also established an internal Environment Council, and all business plans and reports describe environmental measures and costs pertaining to the Green Steps. IKEA does not manufacture its own products but instead commands a large international supply chain. The IKEA Group has nearly 220 stores in 33 countries. Nearly 1,600 suppliers manufacture products for IKEA. IKEA’s purchasing is carried out through 43 trading service offices around the world. IKEA mainly sources from European countries, but purchases from developing countries and countries in transition are rapidly increasing. A limited part of the supply comes from the industrial group of IKEA, Swedwood, which has 35 factories in 9 countries. IKEA has taken steps to work with and educate current and potential suppliers on its environmental specifications and expectations. In this way, the company is shifting the industry standards, as captured in “The IKEA Way on Purchasing Home Furnishing Products” (IWAY). This guiding document supports the IKEA vision and business idea, outlining in great detail its expectations and procedures for suppliers. IWAY is administered and monitored by IKEA of Sweden Trading Services Office and by a global compliance group.“IKEA & the Environment—An Interview with Anders Berglund,” EarthShare Washington, accessed December 3, 2010, http://www.esw.org/giving/ikea.html. IKEA has won many environmental business awards and is a leader in setting high standards for its products, particularly environmental standards. As one of the early adopters of a green strategic approach to how it conducts business, IKEA now enjoys brand recognition as the company that not only sells low cost, well-designed home furnishings but clean and safe products as well. These examples illustrate senior managers responding to a changing business environment by establishing weak ties to outsiders who provide content on a new strategic direction for the company. These managers took advice from sources considered unconventional—even threatening—and used it for their companies’ financial and strategic gain. In these cases, we see three types of weak ties: to professional experts, to NGOs, and to an environmental educational organization. There is no way to predict what outside source will offer weak tie benefits to your venture. However, a good way to find such sources is to identify the pool of weak ties from among your insider strong-tie group to relevant outsider voices. As noted, environmental groups and other NGOs are not homogeneous; some are more willing and able to work with entrepreneurs and companies than others. Certain leaders and their organizations are well established and widely respected. You need to research the topics that represent opportunities for your venture and then identify individuals and organizations with whom conversation may be fruitful. Ideally, you want to initiate weak tie conversations with individuals and groups aligned with sustainability solutions who do not take issue with your proposed or existing practices. You need a set of weak ties willing to join with you over time to help inform strategy. In summary, if entrepreneurs do not seek outsider perspectives on the shifting state of the competitive game, they will be blinded to forces that hold, in some cases, the overnight potential to undermine the venture’s efforts. On the positive side, access to emergent perspectives and new scientific data on sustainability issues holds promise of strategic advantage. Access to this information enables discerning entrepreneurs to gain relative to competitors because information flows from weak ties bring tighter cohesion between a firm’s strategic thinking and the shifting conditions that shape market opportunities. Weak ties are a bridge to innovation, competitive differentiation, and new market opportunities.This discussion draws on the work of Mark Granovetter, “The Strength of Weak Ties: A Network Theory Revisited,” Sociological Theory 1 (1983): 201–33, accessed March 7, 2011, http://www.si.umich.edu/~rfrost/courses/SI110/readings/In_Out_and_ Beyond/Granovetter.pdf. Using weak ties for sustainability innovation can be understood as a parallel to adaptation in biology. As the complexity of business decisions and market dynamics grows, the effective use of weak ties can mean the difference between learning and not learning, at the individual, corporate, and supply-chain levels. We would argue that in the twenty-first century, it is essential to seek better information drawn from wider sources logically linked to a firm’s social and environmental footprint to adapt intelligently. ### Key Takeaways • Incorporating sustainability considerations into business requires reaching out beyond conventional sources of business information. • Entrepreneurs and businesses that tap into weak tie relationships around sustainability concerns can use them to find new ideas for products and services. • Adaptation to the new business conditions in which environmental, health, and community concerns have become more important requires cultivation of weak ties. ### Exercise 1. Identify a business you would like to create. What health, community, and environmental concerns might emerge as you imagine building your firm? Where would you turn for advice and information to anticipate how you should respond? Why? ## 4.5 Adaptive Collaboration through Value-Added Networks ### Learning Objectives 1. Understand how implementation is carried out. 2. Learn about collaborative processes for adaptation and innovation. Value-added networks (VANs)The action-oriented teams that work collaboratively to execute a sustainability strategy. are necessary to implement sustainability innovation strategies; VANs provide the horsepower to implement projects and are the means to translate your strategic vision into competitive products or services. VANs are action oriented and results driven. VANs are distinct from weak ties. The primary contribution of weak ties is new and diverse information that links strategy more coherently with broader systemic forces. Weak ties bridge the corporation to the “outside” world’s events and stakeholders. In contrast, VANs are composed of closer and stronger ties within your firm and its inner circle of collaborators. They are ties that can be intentionally and strategically joined to add value throughout the implementation process. Weak ties also differ from VANs in that they might be critics or even opponents of your company. The purpose of weak ties is information access beyond the known and the predictable, while the purpose of VANs is to take action. Weak ties serve an essential role for bringing creative alternative perspectives to the business at the options generation stage. VANs enable adaptive collaboration. VANs can offer a wealth of creativity in the implementation process. VANs can be familiar faces in your backyard, or they might include suppliers or customers. They are an untapped, underappreciated resource for implementation ideas, feedback, and adaption as a plan is implemented. Rarely do company executives directly create and monitor VANs. More often they create the circumstances and culture that allow VANs to form and the protection and incentives for them to be effective. Our research indicates that where sustainability innovation strategies are successfully implemented, a group had come together with sufficient senior backing and the skills, resources, and authority to drive the project forward. It should perhaps go without saying that VANs tend to be more successful in implementing sustainability innovations in companies already open to change and known to be culturally innovative. Membership in VANs can be formal or informal. If sustainability goals have been embraced by a company, the process might be more formal. If sustainability is being explored by only a subset of the firm, but resources and legitimacy are present, the process may be more organic. Sometimes all that is lacking to catalyze a VAN is the context for the right question, for example, asking a long-standing supplier, “Can we do this better if we integrate environmental/sustainability attributes?” When asked to provide greener, more benign materials, a supplier replied to one of the managers interviewed for this book, “Yes, sure, we can do that. You just never asked before.” In this situation, the collaborative VAN simply emerged, its leaders and other participants identifying themselves by stepping forward once the space is created for them to act and flourish. VANs are often informal structures; they are interwoven in and under the firm’s formal administrative and functional hierarchies. However VANs are structured for a firm’s circumstances, there are certain things entrepreneurs and managers can do to provide conditions conducive to innovation. First, incentives for innovation and experimentation must be part of the picture. Making it safe to experiment is another essential element, as is fostering a culture where “there are no dumb questions” or “issues off the table.” Creating special, finite committees or advisory panels may be an effective approach for your context; if it is, be sure you reward members for their participation. The VANs discussed here are the sets of relationships mobilized around sustainability innovation that contribute specific resources to converting ideas into action. In short, VANs are your nearest and best resource for inspiration, input, and feedback on how you can improve what you do and for practical ideas on how to implement and modify sustainability practices. The examples that follow illustrate companies and individuals able to implement sustainability strategies by drawing knowledge and resources from VANs. Walden Paddlers’ VAN, under the direction of the entrepreneur-founder, illustrates that organizational boundaries—and as we will discuss, even the existence of an organization in some instances—are irrelevant to successful implementation. This example may seem odd to those unfamiliar with the rise of virtual organizations and virtual companies since the 1990s. The Walden Paddlers example is a powerful way of showing the effectiveness of determined efforts to employ VANs to implement sustainability strategy visions regardless of organizational structure. Moreover, VANs can serve to implement strategy in diverse settings: Walden Paddlers was a fledgling enterprise and United Technologies Corporation (UTC) an established, multibillion-dollar global company. Walden had no existing procedures; UTC has decades of established operations procedures. Walden makes recreational kayaks; UTC makes massive industrial products. The companies have very different circumstances yet use similar strategies and tactics. Walden illustrates how a sustainability innovation vision can create and mobilize a network and resources around cutting-edge product innovations. Perhaps because sustainability goals can resonate strongly with the values of contributors, VANs can build a distinct energy and momentum. The vision defined by sustainability objectives acts like an extra lift under a VAN’s wings. The UTC example shows how VANs form between innovators across functionalities. To borrow from UTC’s experience: work with innovators in other fields. Differentiation is a moving target; your VAN can help you stay on top of it and continually redefine it. ### Tactics for Catalyzing Value-Added Networks • Start with a compelling vision. • Don’t take “no” for an answer—find people whose values align with yours. • Work with innovators in other fields. There will always be pessimists, the lazy, the comfortable, and people whose income depends on continuing the existing way of doing business. These are not the people you want in your VANs. Their attitude is “no,” and they bring imaginations to match. Entrepreneur Paul Farrow’s launch, successful growth, and ultimate sale of Walden Paddlers provide an unusual illustration of building a VAN to successfully implement strategy. All new initiatives and fledgling enterprises are start-ups and need to recruit resource- and information-rich participants by building lateral networks. In most companies, implementing sustainability strategy will, to a certain extent, constitute a deviation from the norm because it represents a new activity with all the characteristics of entrepreneurial initiatives. This means creating networks of like-minded others who understand and rally behind a powerful vision. This account provides the core steps that enabled this VAN to succeed. Grit and determination to proceed despite hearing repeated discouraging feedback is part of the process. VANs share this with any innovation process, but remember that strategy that incorporates sustainability values into the core represents a larger and more far-reaching innovation of knowledge and meaning than a new product alone. ## Walden Paddlers Walden Paddlers represented a sustainability-oriented company from its inception. Paul Farrow built his company and core VAN from scratch. One day, on vacation in Maine, he made a back-of-the-envelope calculation that the economics of recycled plastics made into recreational kayaks was a market opportunity—thirty-five pounds of forty cents per pound of plastic sold for more than four hundred dollars at retail. Farrow saw the possibility for a higher quality product at a lower price to the user, and a profitable company. The question he pondered was whether he could create a new market space for kayaks made from used milk bottles. All he knew at that point was that he had a business idea worth exploring. He knew nothing about kayaks (except enjoying them for recreation) or recycled plastic, but he did know a little about plastics manufacturing. The project began as many sustainability initiatives do. He talked with people he expected to understand his vision, experts in plastics and material science. He was summarily informed by materials specialists from preeminent Boston-area academic establishments that no one could make high-performance plastic for recreational kayaks from recycled materials. It was common knowledge; the composition of recycled plastics made it impossible. The recycled resins, appropriate for downscaling into speed bumps or perhaps waste cans, would not yield high-performance, aesthetically attractive kayak hulls. Furthermore, the industry lacked equipment to handle the new material and specifications. In conclusion, it could not be done. Challenging the received wisdom of experts requires reaching beyond them to more open-minded fellow travelers, those with less invested in existing knowledge, objectives, and methods. With only his aspiration of earning a living doing something he believed in and that would help protect the natural environment, and a vague picture of using recycled resins to create a kayak of some sort (for a market that might or might not exist), Paul Farrow kept talking to people about his idea and gathering data. He sought the advice of materials science experts who would take his ideas seriously. He conducted research on the prospective customer segment and communicated through his extended family and network of friends that he had this crazy idea. In the process, he found a few receptive individuals who were willing to talk with him and consider the possibilities. Your VAN can take form from unexpected locations. Reminded by his wife that he had a brother-in-law attending Rensselaer Polytechnic Institute in New York state, Farrow made some phone calls. His brother-in-law had taken a course on materials with a nationally known professor. Through persistence, several phone calls later Farrow connected with the professor, who had recently started a company with one of his former engineering students, Jeff Allott. Allott, now a product designer for the company General Composites, was coincidentally a paddle sports enthusiast and was intrigued by Farrow’s plan. Allott was also anticipating that the company’s government contracts would taper off in the near future, and General Composites needed to diversify. Moreover, Allott liked the notion of designing an unprecedented material that the experts had deemed impossible to create. Why not create a high-performance, aesthetically attractive, inexpensive recreational kayak from recycled milk bottles? Why can’t positive expectations for health, ecology, community, and financial gains be optimized simultaneously? This was a typical entrepreneurial endeavor during which Farrow repeatedly heard “no” in response to his questions Eventually he received a “maybe” from a more imaginative individual who could see the new market space. The pattern of “no” and a few “maybes” repeated itself with manufacturers, national retailers, distributors, and component suppliers. From his innumerable rejections, Farrow had collected valuable information about how to implement his vision that he used to refine and recalibrate his plan. In this learning process Farrow’s VAN identified itself in a self-selection, self-organizing fashion typical of new enterprises. Each node in the network was a person with close knowledge about how to implement the proposal. Each suggested ways forward and was willing to collaborate with untested strategy, design protocols, product ideas, and market segment definitions that had unknown but possibly significant returns. Farrow also tapped into each individual’s sense of competitive challenge, fun, and creativity posed by accomplishing something the so-called experts said was impossible. The results of the process were a set of innovations, an award-winning kayak, and a profitable company. This story teaches the necessity of carefully selecting VAN participants whose goals are aligned with yours. The first manufacturer to sign on was Hardigg Industries. Its manufacturing manager was curious about working with the new recycled plastic resins and driven by the economic pressure of unused plant capacity. This seasoned manager was also interested in the prospect of a growing a new customer base in recycled plastic molding. In fact, Hardigg’s management was so motivated to try new approaches in recycled plastics that it contributed capital to the start-up by agreeing to generous terms that acknowledged the start-up’s cash-strapped condition. Hardigg invested200,000 in new equipment and drew up a flexible, informal contract based on shared returns and aligned future interests should the venture take off.

The start-up’s next phase illustrates how sustainability innovations are created. Extensive experimentation with different plastic compounds and resin colors followed. There were adjustments to the equipment to modulate temperatures and vary cooling times and methods. Farrow, along with the manufacturer and the designer, spent many hours testing, analyzing, discussing, and retesting. It was a microcosm of any implementation situation characterized by innovation and entrepreneurial process: learn as you go, draw from the creativity and imagination of your partners, collaborate, adapt and incorporate new knowledge along the way, and allow the feedback and events to shape the path and even the destination.

Entrepreneurs need to keep searching for allies to fill in the VAN gaps. The right mix of recycled plastic had to be developed to match the materials specifications of the product and the high heat demands of the molding equipment. Turned down by multiple plastic recyclers, Farrow finally found a Connecticut recycler who was trying to build his business and had a reputation for being open to new ideas. That recycler joined the emerging VAN and experimented with different collected plastics, testing a variety of pellets for melt consistency, texture, and color. More weeks of prototype experimentation unfolded, involving Paul Farrow, Jeff Allott, the recycler, and the head of manufacturing at Hardigg designing and redesigning incrementally but ultimately successfully to produce the first kayak.

Now Farrow had to address how to sell the kayak. What was the least expensive and most leveraged way to test the market? Attracted to the idea of selling more environmentally responsible kayaks, leading national sports equipment retailers were open to Farrow’s product ideas. Through extensive discussions with retailers like REI, Eastern Mountain Sports, L. L. Bean, and others emerged optimal pricing strategies at wholesale and retail, creative in-store marketing, and colorful packaging for the customer to protect the kayak when it is placed on a vehicle roof rack. In other words, the collaborative retailers literally told Farrow what decisions to make on pricing, marketing, and packaging to optimize sales.

A successful VAN process will elicit energy and initiative from those self-selected to be involved because they know that business, the environment, and communities are not separate. Explicit sustainability strategies attract committed people and release their creativity. Dale Vetter, an operations expert and Farrow’s friend and former business colleague, was drawn into the business bringing operating skills that complemented Farrow’s finance know-how and general management experience. Vetter’s creative redesign of the transport system that moved the kayaks from the manufacturer to Walden’s tiny warehouse and office headquarters outside Boston resulted in dramatically improved logistics efficiencies and reduced labor costs. The kayak seat supplier was persuaded by Farrow and Vetter to take back its packaging, ultimately saving itself money when it discovered a method to recycle its packaging materials. This allowed Walden to avoid expensive Boston-area waste disposal fees.

Farrow has downplayed the challenges of creating his company, yet in its time Walden Paddlers implemented an early model of sustainability innovation that functioned under an innovative corporate structure. The company was one of the earliest documented virtual corporationsSee also extensive literature on “network organizations.” See Mark Granovetter, “Economic Action and Social Structure: A Theory of Embeddedness,” American Journal of Sociology 91 (1985): 481–510; Walter W. Powell, “Neither Market Nor Hierarchy: Network Forms of Organization,” in Research in Organizational Behavior, ed. Barry M. Staw and L. L. Cummings (Greenwich, CT: JAI, 1990), 12:295–336; Andrea Larson, “Social Control and Economic Exchange: Conceptualizing Network Organizational Forms” (paper presented at the Annual Meeting of the American Sociological Association, Washington, DC, August 1990); Walter W. Powell, “Hybrid Organizational Arrangements: New Form or Transitional Development?,” California Management Review 30, no. 1 (1983): 67–87; H. B. Thorelli, “Networks: Between Markets and Hierarchies,” Strategic Management Journal 7 (1986): 37–51; Andrea Larson with Jennifer Starr, “A Network Model of Organization Formation,” Entrepreneurship Theory and Practice 17, no. 2 (Winter 1993): 5–15. Andrea Larson, “Network Dyads in Entrepreneurial Settings: A Study of the Governance of Exchange Relationships,” Administrative Science Quarterly 37, no. 1 (March 1992): 76–104; Andrea Larson, “Partner Networks: Leveraging External Ties to Improve Entrepreneurial Performance,” Journal of Business Venturing 6, no. 3 (May 1991): 173–88; Andrea Larson, “Strategic Alliances: A Study of Entrepreneurial Strategies for the 1990s” (paper presented at the Eleventh Annual Babson College Entrepreneurship Research Conference, Babson College, Babson Park, MA, 1991). and continued to innovate in materials, product design, transportation system, vendor relations, and wholesale buyer collaborations. Farrow was a sincere, informed, and modest yet passionate catalyst. Each VAN participant got hooked on his vision, and Farrow worked to ensure their economic interests were aligned. Both vision and potential returns were critical.

VAN participants, along with Farrow, heard discouraging comments throughout the start-up’s early stages. Farrow laughed as he said, “You have to get used to hearing ‘no.’ Your attitude has to be, ‘so what’? So you hear ‘no’ repeatedly.”Paul Farrow, interview with author, July 1996. Farrow’s casual way of talking about the implementation process masked his determination, persistence, and willingness to learn and adapt and to compromise when economic necessity required. The perfect would not shut out the good. His attitude was contagious and created the required commitment to make this idea fly. He commented on the people who said “no” to him: “Those people just have less imagination. But those aren’t the ones you want to work with. Do people think I’m a little odd in my passion for the vision? Sure, but you keep talking to people until you find the right partners who believe and will work hard to make the impossible happen.”

The Walden Paddlers case shows how you may need to create and inspire your VAN while you are on the journey. If there are no precedents, the VAN literally creates what it is doing as it goes forward. Farrow had only one of the requirements needed to build a company: a vague idea backed by some rough financial calculations. He needed a materials specialist to design the first kayak from recycled plastic because he knew nothing about designing kayaks and even less about materials science. He needed manufacturers with knowledge of molding equipment. He needed operations capability, administrative processes for health benefits and hiring, transportation services, and retail and wholesale outlets. Yet within eight years he had built a virtual corporation before “virtual” or “network” organizations were recognized as legitimate forms for business. He defied conventional wisdom on materials design and sold high-performance, aesthetically attractive, 100 percent recycled and recyclable recreational kayaks through nationally known retailer chains. In addition, he sold his company at an undisclosed price, gave himself time off to build a vacation home with his wife and three sons, then took on a new corporate sustainability challenge with a small, growing company. How did he do it? It was important that he didn’t accept the notion that his vision could not be realized. He formed his VAN of like-minded others and together they made it real.

What else can we learn from this case? Farrow questioned the conventional business wisdom—a common practice among entrepreneurial individuals. Their commitment to the unproven premise can be intense, and they may seem as though they will vision into action and results. However, implementation needs and invites collaborators.

Another lesson from the Walden Paddlers’ example is that it took patience to allow solutions to emerge and evolve from the network participants’ contributions. All participants had to be open to learning and finding the right “partners” willing to go outside their comfort and expertise zones to invest time and resources in a new idea. Don’t be surprised if it takes time to find willing partners. There are too many strong influences at work that cause people and firms to be insular.

Finally, you don’t need extensive resources, just enough to get to the next step. At every stage, the VAN became more closely aligned, tapping into its growing collective wisdom, imagination, and resources. The most underrated resource for breakthrough ideas might be the network of people you already know inside your firm or the network you can build outside through your company’s supplier and customer relationships.

Creativity and imagination drawn from people who initially may be considered outsiders can be pivotal to a company’s success. These individuals and their institutions can come to have a strong stake in the outcome, and they have the knowledge to generate paths forward that otherwise would remain latent. In Paul Farrow’s case, there were no vertically integrated functions; he was building from the ground up. Within an established firm, some functional activities in the VAN are typically incorporated into the formal boundaries of the organization (e.g., design, product development, manufacturing, marketing, sales). Others lie outside with suppliers and buyers or other key allies. Implementation requires you to ignore conventional corporate boundaries and view the VAN as a lateral web of information and material flows through which ideas and resources can be mobilized. There is no reason not to tap into this potential power.

## United Technologies Corporation

United Technologies Corporation (UTC), despite its large size and dominance in mature markets with mature products, remains remarkably innovative, including its leadership in sustainability strategy. In the 1990s, UTC CEO George David announced the company’s goal of reducing its environmental footprint by a factor of ten. Explicitly committed to sustainability from the top, UTC was ahead of its time for an aerospace and building products and services firm. Management has since driven resource use efficiency programs through the business units and transitioned into new product designs that provide the power and performance people want for vehicles and operations while delivering on sustainability’s positive health, ecological, and overall natural system robustness agenda.

Its disciplined process of bringing innovative ideas to market explains UTC’s success over the years. The keys to UTC’s success were highly motivated VANs formed across business units and with outside customers and supply-chain participants that drove the new ideas to successful commercialization. These VANs are at the leading edge of solving problems with technology and market receptivity and are characterized by creative and innovative participants who bring extra dedication to sustainability ideas.

The company’s alternative power products business unit, UTC Power, faced a challenge, however. UTC’s goal for that unit was to shift the market paradigm for power generation in stationary applications and transportation. The issues for large power consumers are straightforward. Customers want energy efficiency and reliability, lower bills, and protection from grid outages. They need system resiliency to assure ongoing operations and customer satisfaction in case of weather or other disruptions. For example, supermarket chains, hotels, and hospitals experienced the impact of Hurricane Katrina and the human and financial losses when their doors had to be closed.

UTC Power has a portfolio of solutions that offers power generation solutions in a variety of new technology combinations. However, when you are working with new products and new markets, a paradigm shift requires extraordinary effort. In UTC Power’s case, you see examples that build on the company’s competencies in technology innovation and management of massive supply chains to form VANs with more creativity than the norm. Jan van Dokkum, president of the UTC Power business, described the unique VAN situation as follows: “We carefully analyze the market for opportunities to improve emissions and efficiency. We then work closely with UTRC [UTC Research Center], buy standard, volume-produced equipment, optimize the system, and, finally, work with the customer to deliver high levels of service.”Jan van Dokkum, phone interview with author, June 21, 2001.

UTC’s PureComfort heating and cooling energy system is a good example. The PureComfort system offers the customer three features in one: electrical power, heating, and cooling. The system operates either off the electrical grid or connected to it and thus can serve as a cheaper and more reliable ongoing operating power source, even when the grid goes out. Highly motivated existing VANs at UTC drive conventional products and markets effectively, but for a new product and new markets plus a sustainability focused change, there are extra drivers, particularly once the product goes to market. The PureComfort system project began under the leadership of the corporate UTRC, working with autonomous business units Carrier and UTC Power. The group brainstormed combining their expertise to produce new products for new markets. They looked for ways to improve building system efficiencies by using the “waste” from power generating equipment (e.g., microturbines or reciprocating engines) as a “fuel” for heating and cooling equipment. They collected the hot exhaust from the supplier-produced microturbines and ran it to a Carrier double-effect absorption chiller, which produces hot and cool water. They found the flow rate temperature ideal to generate cold or hot water, thus creating three-in-one equipment producing on-site electricity, hot water, and cold water for refrigeration.

The A&P supermarket chain installed a PureComfort system in its store in Mount Kisco, New York. A&P chose the highly efficient heating, cooling, and power system because it leads to energy savings and ultimately reduces the store’s dependence on the grid. The new rooftop unit uses underground-supplied natural gas to generate electricity for the store. Then it generates cold water, runs it to refrigerator “chillers,” and provides heat when needed. The UTC PureComfort unit produces combined power, heating, and cooling at greater than 80 percent efficiency rates compared to approximately 33 percent from the electric grid. Distance monitoring by UTC Power means the company’s service people will be at the A&P store to fix a problem before the people at A&P even realize one exists.

Meeting customers’ multiple cooling, heating, and power needs with an innovative integrated, reliable on-site system solution at a cost reduction from existing options addressed UTC Power’s strategic goals to deliver new products and new revenues. At the same time these offerings provided very low emissions, reduced customers’ energy costs, lowered grid dependence, and assured standby power supply. While it would not have necessarily called its strategy “green,” and its sales force is not necessarily hearing the term “sustainability” from its customers, UTC Power nonetheless has incorporated the core ideas into its strategy. These products provide safer, cleaner, and more reliable power sources than the alternatives available, at commensurate prices that are less expensive when full costs are considered.

However, the issue was not whether the PureComfort system met buyer needs or satisfied sustainability requirements; it did. The challenge was whether customers’ standard way of meeting power needs—paying for electricity from the grid—could change to a solution that required new purchase practices and economic calculations as well as different impacts on the company’s profit and loss statement and balance sheets.

Breakthroughs happen when VAN teams can tap into an intangible creativity source in sustainability agendas: the energy, the extra little bit of horsepower, or a passion for the technology and market changes. UTC Power experienced this type of breakthrough in its work with the city of London and the Ritz Carlton hotel chain in San Francisco. In each situation the VAN participants were well known for being creative, innovative, and willing to spend extra time to find solutions. New competitive space and successful positioning in that space were realized by firms working with other firms also positioned in the same market frontier.

The catalyst for this creativity is the process dynamics of UTC Power’s technology design to achieve clean, safe, reasonably priced products combined with supply-chain partners that want to save money and assure performance but also have an absolute commitment to creating sustainability solutions through redesign of products and procedures. This means there is more continuity and commitment in teams because participants are passionate about seeing their ideas come to fruition. VAN participants will go the extra distance. When innovators talk with other innovators about how to implement sustainability innovations, results are achieved.

UTC Power uses its internal, highly disciplined product development process and committed working relationships with buyers and original equipment manufacturers to accelerate learning and feedback and to improve its power products. UTRC also employs an innovation effort, working with the business units that have identified UTC technologies for new, market-ready products and markets. The PureComfort system process started with a small, multidivisional group looking at opportunities at the intersection of power, heating, and cooling.

Brainstorming engineers, who did not usually work together, found the intersection of power, heating, and cooling rife with possibilities and developed a second product, known as the PureCycle 200 system. Together they altered standard Carrier industrial cooling equipment by converting it to run “backward”; instead of using electricity to produce cooling, the system uses waste heat to produce electricity. The system uses field-tested Carrier technology to provide turnkey, zero-emission, reliable, low-cost electricity from various industrial heat sources. The electricity can be used on-site where it is produced or sold to the electric utility grid. Customers can potentially make money by offsetting traditional fossil fuel electricity generation. The payback and savings depend on the geographic location in the United States and the price of the displaced energy.

It is not necessarily easy building new types of supply-chain relationships to implement sustainability innovations. In UTC Power’s case, cross-business unit sales and service provisions had to be tightly coordinated, and getting electric utilities to buy excess power from buyers has been an uphill battle. Even with these challenges, a major obstacle is in developing trust with the end users, specifically the facility leader who makes the purchase decision and who is paid to be conservative. It is a tough sell because the system (though not the components) is new. It is mechanical and therefore may need servicing. Facility managers fear the unit will fail, and they have to be educated about the system, which takes time. Finally, having the system installed may seem “inconvenient,” as it can disrupt current operations during the switch.

Thus the value proposition has to be communicated effectively. UTC Power has developed economic models that show payback time frames for equipment installed in different geographic locations according to size of facility, electricity rates based on different fuel sources, and seasonal demand. In addition, a turnkey service contract is offered that monitors units from UTC centers in Charlotte or Hartford where operators have the technological ability to locate errors. As UTC Power continued to refine its extensive supply-chain coordination, more new opportunities for innovation emerged.

Fuel price volatility, changing and more violent weather patterns, deregulation, supply interruptions, and rolling blackouts and brownouts in the Northeast and California have generated considerable interest in distributed (nongrid, noncentralized), on-site, clean and reliable electricity, heat, and cooling power sources. To capture this interest while overcoming the natural resistance of cautious buyers is still a challenge. UTC Power and UTC are addressing this challenge by creating an “all in service” solution. Through a long-term contract, a customer avoids the up-front cash cost and spreads it over time, thereby better matching the cost with the energy savings.

Another value proposition involves public health. An important sign of change that should be noted by all managers is occurring in UTC Power’s urban bus transportation markets. Buyers such as the city of London and AC Transit in Oakland, California, are building previously externalized health costs into their purchase decisions. A regional public transit authority, AC Transit considers the cost of respiratory and other air-pollution-related illness resulting from diesel gasoline combustion, particularly from buses. Incorporating more of the full system costs into the equation shifts the price-performance calculation for conventional bus drivetrains compared with fuel cell systems. The price of the latter looks more attractive when adjusted downward by health cost savings due to reduced particulate matter and other air pollutants from transportation.

Through product take-back, UTC Power is getting a handle on design for disassembly. The company’s team must determine what parts are recoverable and recyclable and the economics of remanufacturing the leased units brought back for repair or at the end of their useful life. Extending this concept to field-installed stationary fuel cell power units, UTC Power found that the reverse logistics and reuse/recycling of materials and parts could actually make money. The notion of leasing transportation or stationary power plant fuel cell stacks has engaged UTC Power even more closely with its suppliers and buyers along the value chain to source recyclable materials and components. Successful supply-chain coordination within the company and outside is important to the success of any leasing solution and to the systems redesign for disassembly and recyclability.

Because new ideas that challenge existing ways of operating require early adopters, innovators initially tend to work with and sell to other innovators. UTC Power is building new markets through cooperation with forward-thinking internal UTC executives and staff in other business units, and combining that synergy with eager corporate buyers trying to solve urgent problems (e.g., harsh storms in tropical geographies, zero-downtime requirements for electrical power) or open-minded municipalities searching for creative cost-cutting measures.

## Conclusion

As we noted at the outset of this section, VANs are necessary to implement sustainability strategies. VANs provide the horsepower to implement projects. They are the means to translate vision into competitive products or services. Whatever your business is, catalyzing VANs is essential to put your nascent strategy into action. The following are strategies for working with VANs:

• Don’t take “no” for an answer; find people whose values align with yours.
• Work with innovators in other fields.

Since by definition you will be forging a new path, you will hear “no” a lot. Don’t stop there: seek out those who understand the bigger vision and are inspired by the prospect of inventing the way forward with you. Source participants from your existing suppliers or find new ones inspired by your green strategic vision and the multiple gains, including financial, that would come to participating organizations that develop new capacities. Collaborate closely with other innovators in other functions or fields. Since differentiation is a moving target, call upon your VANs to help you continuously redesign and improve, moving individual participants in and out of the constellation of skill sets and leadership attributes you need. Implementing strategy requires new approaches to your existing relationships, tapping into the latent creativity that is there.

### Key Takeaways

• Innovation is carried out by teams working collaboratively.
• Create teams that foster creativity by including individuals who are open to change.

### Exercise

1. Working with a partner, imagine a new product or process you want to create. Identify who would want it as well as what VANs and weak ties could help you implement it. How could they help? What would be the benefit for them?

### Learning Objectives

1. Examine the role of incremental steps in innovation.
2. Understand how systems changes can result from combining small steps.

Some companies enter the market with a mission of challenging existing products with sustainable replacements. Their strategy is radical from the start. Others, typically larger established firms, gain momentum in sustainability innovation by building upon incremental improvements in products and systems. Business analysis often juxtaposes incremental change with radical or dramatic change; a common assumption is that the two are mutually exclusive. Moreover, literature in the sustainability field privileges the latter over the former, dismissing incremental change as timid at best and “greenwash” at worst—accusations that may indeed hold true at times. Separating the two concepts, incremental and radical, can be useful for heuristic purposes. Perhaps doing so is also psychologically satisfying; it’s either this or it’s that.

In real life, however, people in business make a series of small steps over time that add up to larger, more profound change. Sometimes early successes build momentum for bigger changes that previously were viewed as too radical or risky. Alternatively, incremental successes can build courage and internal support, stimulating requisite imagination and energy to design more radical and innovative changes. By consciously pursuing incremental changes with a radical ultimate goal and tracking progress, one can catalyze significant innovation and ultimately differentiate the firm.

Radical incrementalismSmall steps that accumulate and inform participants and consequently stimulate more dramatic changes (often at a systems level) over time. involves small, carefully selected steps that result in learning that in turn reveals new opportunities. It means taking marginal, integrated progress toward more ambitious sustainability goals. Ideally, your whole company would participate in discussing and defining ideal characteristics of this goal, track milestones along the way, observe lessons, and feed this data back into the definition of the goal and the next steps forward.

Others have used the term radical incrementalism to describe a deliberate strategy for business operations (particularly in information technology) in which a series of small changes are enacted one after the other, resulting in radical cumulative changes in infrastructure. Our use of the concept differs in that while company strategists should have a vision of what sustainability means for their company, the incremental steps to get there necessarily shape the course. In other words, the feedback you get along the way will accelerate, alter, and inform your next actions. This is iterative and adaptive learning—one gains knowledge along the way that affects future decisions. The companies we examine here demonstrate this strategy.

## Kaiser Permanente

Kaiser Permanente (KP) deliberately adopted a radically incremental approach to implementing its strategy. The company has a sustainability perspective on its corporate purpose (health care) that widens the meaning of “health care” to include not only medical treatment but the broader community health impacts of its facilities and operations and the materials it sources. We examine here one relatively small decision in KP’s broader strategy: the company’s decisions on the use of polyvinyl chloride (PVC), a material of increasing environmental concern. Specifically, we will look at KP’s choices regarding flooring. KP measured everything it did to build the business case for greening each incremental step and discovered there were significant economic benefits to be gained by seemingly small changes. Moreover, these incremental decisions have had radical impacts on the company’s success and have facilitated moving forward on other sustainability fronts. This discussion puts KP’s incremental step on flooring in the wider context of green buildings as an important arena for companies to measure the collective impact of seemingly small decisions. We present the business case for greener buildings and the economic and environmental benefits that they generate for companies as an integral part of their strategy. Next, we will discuss SC Johnson’s award-winning product sustainability assessment tool, Greenlist. As SC Johnson (SCJ) evolved its efforts to incorporate sustainability into its corporate strategy, it constructed a powerful tool to measure the range of environmental impacts of chemical inputs into its products. As a result, the company has significantly altered its environmental footprint, improved product performance, and achieved significant cost savings. Moreover, this tool has had broader catalytic effects on SCJ’s supply chain and competitors. By patenting Greenlist, SCJ hopes to widen the circle even more.

Both of our company examples, KP and SCJ, illustrate the following three radically incremental tactics:

1. Set big goals but take moderate, integrated steps.
3. Incorporate knowledge gained back into new product and process design.

Both KP and SCJ illustrate the tactics we advocate: set big goals but take moderate, integrated steps to get there. Both companies have religiously monitored and measured their progress to build the business case for the next ambitious step. Now both are grappling with incorporating the knowledge gained from their earlier successes into future product designs, process designs, or both.

KP is the largest health management organization in the United States, with 8.2 million members and over 500 hospitals and medical buildings under management. KP’s Green Building Committee first met in 2001 to determine priority projects it would take on. Seated at the table were representatives from interior design firms, construction companies, health nongovernmental organizations (NGOs), and architects, along with KP’s national environment health and safety people (labor joined later). KP’s interest focused on identifying an area where the firm could move relatively quickly to eliminate a problematic chemical and thereby make a demonstrable difference for human and community health and ecological well-being. The group made the decision to investigate PVC-free flooring. Given growing research on PVC’s toxicity to humans throughout its life cycle, this choice met the groups’ selection criteria. It was a radically incremental step.

KP does not move precipitously. Prudent spending and sound financial performance enable KP to deliver quality care, convenience, and access and affordability. KP is also dedicated to individual and community health and is science-driven and acutely sensitive to lowering the costs of health care. In this last respect, there is no choice in the health care industry; new drugs and procedures, health care worker shortages, provider consolidation, aging populations, and the rise of chronic health conditions across population segments continually drive costs up. Careful consideration of costs therefore must be part of the equation for procurement and strategic change. Strong core values, however, including resource stewardship and leadership in improving the quality of life of the communities in which it operates, were taken seriously by senior management.

John Kouletsis, director of strategic planning and design, called the organization “fearlessly incremental” in its strategic approach. Though it takes on big issues, the company is meticulous in accumulating quantitative and qualitative evidence to support decisions, especially major changes in purchasing. Company leadership is akin to the old political notion of statesmanship. The belief that what is good for the environment and the community is good for the health maintenance organization (HMO) members and therefore good for KP’s financial success guides strategy. KP employs a systems view of health care, incorporating environmental and community aspects, and this wider perspective on health informs the company’s green strategic decisions.

Jan Stensland was half of the duo in strategic sourcing and technology for KP. Her friendly, easy-going exterior belied intensity, intelligence, and absolute dedication to achieving the multidimensional objectives of her job. She conversed equally comfortably about material costs per square foot, parts per million contaminants, construction specifications, human health, and PVC exposure research. She also tracked internal rates of return for new decisions—for example, alternative flooring technology projects under consideration to renovate dozens of medical buildings throughout California, ten states, and Washington, DC, where thousands of patients and staff would spend time over the next several decades. While health is in the forefront of her mind, her proposals must show how the company will save money or get better spaces for the same cost. The national health care crisis of escalating costs is the elephant in her office, and she stares it down with an optimizing strategy across financial, community, health, and environmental objectives.

Stensland’s team sought ways to influence KP’s suppliers’ research and development (R&D) shops to redesign products so that health care facilities would be more effective measured in terms of patient treatment, disease prevention, and costs. Thus business effectiveness is viewed in a larger social context. Stensland thinks in terms of today and fifteen years out in talks with suppliers, working through negotiations to maximize health benefits and minimize costs for multiple stakeholders.

For example, 16 percent of KP’s 8.2 million person membership suffers from asthma. The rate of children’s asthma recently has risen to an epidemic level of 27 to 30 percent in some counties in California. Chronic respiratory and immune systems problems increasingly have been linked to low exposures to different chemical compounds. There are considerable health impacts and significant monies at stake; therefore, suppliers bid with particular attention to KP’s interests. Moreover, the health care industry often follows KP’s lead. When KP was first among HMOs to move away from PVC gloves due to escalating allergic reactions and their associated costs, the industry followed, opening up opportunities for firms able to provide substitutes. However, that was only KP’s first effort involving PVC.

### PVC

KP’s decision in early 1999 to begin to phase out the use of PVC was commendable but controversial. PVC is ubiquitous; it is used to make many everyday materials and is a key component of medical products such as IV bags and tubing. There is also growing evidence that it is a substance of concern. According to the Healthy Building Network, dioxin (the most potent carcinogen known), ethylene dichloride, hydrochloric acid, and vinyl chloride are unavoidably created in the production of PVC and can cause severe health problems, including cancer and birth defects.

Kathy Gerwig, director of environmental stewardship at KP, views the firm taking a precautionary approach, meaning that where there is credible evidence that a material it is using may result in health and environmental harm, it should strive to replace that material with safer alternatives. As a senior manager, Gerwig is convinced there is enough evidence about the hazards of vinyl that the responsible course of action for a health care organization is to replace it with healthier commercially available alternatives that are equal or superior in performance, especially in the design and construction of their buildings.

Stensland described the company’s efforts on non-PVC flooring as an ongoing effort—one piece of a larger puzzle with short-term wins and long-term goals. Thinking this intently about materials takes time but yields good results. The subcommittee assigned to investigate whether substitutes were available for PVC flooring found the inexpensive per-square-foot price of vinyl did not reflect true life-cycle, health, and environmental costs. PVC flooring was discovered to carry high maintenance costs not previously considered because they were not included in the first-cost price of the flooring. True costs are often disguised when budgets are divided between purchasing for new construction or renovation, and ongoing operations once the flooring is installed.

KP conducted pilot projects in several of its medical office buildings and hospitals, administering tests and comparing maintenance budgets in vinyl and nonvinyl flooring buildings, and interviewed the people who cleaned the floors in those facilities. These investigations revealed that up to 80 percent of flooring maintenance costs could be eliminated with the use of a rubber flooring product (Nora, from Freudenberg Building Systems) and another non-PVC flooring product, Stratica, an ecopolymeric product. The rubber and non-PVC vinyl flooring products were more stain and slip resistant and had improved acoustic properties. But that was not the end of the story.

Qualitative issues related to flooring often translated into significant ongoing expenses. “Slips, trips, and falls” are major problems in buildings and an early indicator of problems with flooring. Accidents require expensive settlements awarded to employees and visitors to buildings. Stensland analyzed the square footage costs across buildings and examined data for two years running. The company’s new attention to the nature of, and differences across, various flooring materials uncovered two KP locations where rubber flooring was installed and for which data showed zero slips, trips, and falls. Furthermore, data from nurses revealed the harder vinyl floors generated more complaints and work absences by nurses who are on their feet all day. Non-PVC rubber flooring improved conditions for nurses and accomplished the environmental and health strategic goals. Analyses were conducted at multiple facilities. The magnitude of the flooring issue was significant for the company and its contract suppliers; in 2005, the company managed sixty-four million square feet of flooring. By 2015, it expects to have eighty-four million square feet under management.

However, that doesn’t solve the problem of flooring replacement in existing facilities. With regularly scheduled replacement of flooring in the more than five hundred medical buildings in the system, could PVC be eliminated there as well in a variety of areas? KP turned to the Collins and Aikman Corporation (C&A), its carpet supplier, and required that C&A develop a non-PVC carpet backing (the underlayer of carpeting contained most of the materials of concern), preferably at the same price. The manufacturer brought the new offering back to KP six months ahead of schedule. An equivalently priced new carpet backing whose performance exceeded the PVC-backed carpet was now available not just for KP but for all the manufacturer’s customers. The new material used postconsumer recycled polyvinyl buterol, the film used on safety glass for windshields that protects car passengers from broken glass in accidents. An enterprising engineer had discovered he could use the discarded sticky “waste” compound found at recyclers and brought it back into the materials stream for new applications.

By asking suppliers for alternative, safer products, KP—due to its size—has been driving the market toward products that reduce resource use and improve health conditions by eliminating chemical hazards and lowering maintenance expenses. Incremental steps are taken toward sustainability goals, pulling markets and supply chains along in what ultimately constitutes radical change: the substitution of a new, better product design for the old.

There are other examples. Refrigerants used in medical facility chiller systems have had the same problems as refrigerants in general use. When contracts for refrigerants came up for reconsideration, KP put bidders on notice that any problematic chemical in use or being phased out by 2008 could not be used in chillers. York Incorporated, an award-winning firm for its product efficiency and advanced technical designs, won the bid, producing new chillers with benign refrigerants in a unit that was 25 percent more energy efficient than the market standard. Thousands of chillers across hundreds of medical office buildings and hospitals now drive substitution of a radically more effective system for the existing products.

KP’s incremental steps to upgrade facilities add up to radical change. KP has put sustainable building design and construction practices into all new construction and “rebuilds” (KP renovations) through facility templates. These practices incorporate the following:

• Implementing efficient water and energy systems
• Using the least toxic building materials
• Recycling demolition debris, diverting thousands of tons of materials from landfills
• Making use of daylight whenever possible
• Managing storm water to enhance surrounding habitats
• Reducing site development area (e.g., total gross square footage) to concentrate and limit total paving and other site disturbances
• Installing over fifty acres of reflective roofing
• Publishing an Eco Toolkit reference book and providing it to KP capital project team members and more than 50 architects and design alliance partners

KP also incorporates health and ecosystem considerations into national contracts. These considerations include the following:

• Reducing the toxicity and volume of waste
• Increasing postconsumer recycled content
• Selecting reusable and durable products
• Eliminating mercury content
• Selecting products free from PVC and di-2-ethylhexyl phthalate (DEHP)

Successful changes include replacing three DEHP-containing medical products in the neonatal intensive care units with alternatives, ensuring the continued elimination of mercury-containing medical equipment from standards, and negotiating a national recycling contract. KP’s purchasing standards include 30 percent postconsumer content office paper and mercury-free and latex-free products.

In addition, KP facilities often partner with local community organizations to implement community initiatives. One example is a mercury thermometer exchange at Kaiser Permanente Riverside (CA) Medical Center. A total of 540 pounds of material were collected from 3,000 mercury thermometers. Over 1,200 digital thermometers were distributed. “Kaiser Permanente’s accomplishments in environmental performance are impressive and unique,” said Kathy Gerwig, director of environmental stewardship. “We hope that by changing our practices, we can drive change throughout the health care industry.”GreenBiz Staff, “Kaiser Permanente Turns Green,” GreenBiz, April 22, 2003, accessed January 7, 2011, http://www.greenbiz.com/news/2003/04/22/kaiser-permanente -turns-green.

KP’s metrics demonstrating the benefits of its sustainability efforts include the following:

• In 2003, KP diverted 8,000 tons of solid waste from landfills.
• In 2003, KP reused or safely redeployed more than 40,000 pieces of electronic equipment, weighing 410 tons and containing 10,500 pounds of lead.
• KP eliminated 27,000 grams of mercury from KP health care operations by phasing out mercury-containing blood pressure devices, thermometers, and gastrointestinal equipment.
• KP phased out one hundred tons of single-use devices in 2003.

The impact of energy conservation measures at KP prevented the creation of more than seventy million pounds of air pollutants annually. The aggregate impact of pollution prevention activities eliminated the purchase and disposal of forty tons of hazardous chemicals. Other activities reported by the company in 2005 are as follows:

• Waste minimization resulting in the recycling of nine million pounds of solid waste
• Electronic equipment disposition resulting in the recycling of 36,000 electronic devices containing 10,500 pounds of lead
• Optimal reuse of products that led to reprocessing 53,851 pounds of medical devices and supplies
• Capital equipment redistribution
• Greening janitorial cleaning products, eliminating exposure risks for employees, lowering costs, gaining system efficiencies, and improving performance
• Recycling and reuse of 8,300 gallons of solvents
• Energy conservation resulting in the recycling of 30,000 spent fluorescent lamps

In conclusion, KP provides a compelling example of the immediate gains to be had through pursing sustainability practices in radically incremental steps. KP’s senior management team works from the premise that human health and environmental health are the same thing. As an institution engaged with human health, it makes sense for KP to be active in resolving a paradox facing the health care industry: that hazardous chemicals used in medical products and buildings have harmful effects on patients and employees. It makes sense to coordinate purchasing across member medical centers and hospitals to ensure improved health conditions for members and the communities in which they live. The opportunities are vast for KP. That means the hundreds of suppliers that provide technical and routine needs for the company and the more than two thousand minor and major construction projects under way at any one time also can take advantage of new sustainability-inspired market space opportunities. The question is which ones will step up to the challenge and follow KP into the next generation of “good business”?

Radical incrementalism means taking small, carefully selected steps that result in learning that in turn reveals new opportunities. In this case a seemingly small decision on a seemingly innocuous issue—flooring—resulted in larger systemic changes across the company and its supply chains, even sending an urgent signal to the flooring industry. By greening its flooring, KP is improving health by eliminating a questionable material, improving working conditions and health for nurses, and reducing costs by bringing employee absences down and lowering accident liability costs. Putting the pieces together took time; KP staff members measured each step and outcome to evaluate the effects on cost and performance. Moreover, the results are driving bigger goals. Three years from the start-up of the project, KP made a new-construction standards change: no PVC vinyl flooring would be used in any future facilities. If we take into account all the other incremental changes KP is making, the systemic and company benefits are profound. KP’s radically incremental steps are part of its strategy to better support community health while it grows its operations.

We turn next to sustainability ideas applied to facilities. Buildings are not just where your business activities happen. Your facilities—and the decisions you make about resources, energy, materials, and so forth—are a significant investment and can either add to or subtract from your bottom line. They can also add to or subtract from your overall strategy. Buildings and their operating systems are an excellent area in which you can realize the benefits of radically incremental steps.

Among the many industries developing innovative strategies to increase profits and address environmental and related community quality of life concerns, the building sector presents some of the most accessible incremental opportunities that can aggregate into radical returns. Compared to standard buildings, “green” buildings can provide greater economic and social benefits over the life of the structures, reduce or eliminate adverse human health effects, and even contribute to improved air and water quality. Opportunities for reducing both costs and natural system impacts include low-disturbance land use techniques, improved lighting design, high-performance water fixtures, careful materials selection, energy-efficient appliances and heating and cooling systems, and on-site water treatment and recycling. Less familiar innovations include natural ventilation and cooling without fans and air conditioners; vegetative roofing systems that cool buildings, provide wildlife habitat, and reduce storm water runoff; and constructed wetlands that help preserve water quality while reducing water treatment costs.

The building industry and growing numbers of private companies are responding to these opportunities. Valuable economic benefits are being realized in improved employee health and productivity, lower costs, and enhanced community quality of life. Since 2000, adoption of green design and construction techniques has been greatly aided and accelerated by the Leadership in Energy and Environmental Design (LEED) rating system.

LEED is a voluntary green building rating system established by architects, interior designers, and the construction industry through a consensual process during the 1990s. The US Green Building Council (USGBC), a voluntary membership coalition, developed and continues to review the LEED standards. LEED guides building owners, architects, and construction firms to use industry standards and advances in those standards for environmental and health performance across a wide range of building criteria including site design, building materials selection, and energy systems. While each modification and upgrade to the building and site may seem small unto itself, the changes combine to create a dramatically more efficient building system with far lower operating costs and more satisfied owners over the life of the structure. While there is valid criticism about some of the specifications within LEED and its impact on innovation in the materials industry, overall the system has helped green the building industry.The Healthy Building Network criticizes the USGBC and LEED for continuing to include PVC in green building specifications. Others have criticized the LEED process for inhibiting innovation because it freezes the specific definition of “green” in a moment in time. This can mean that unforeseen, even greener, innovations will be left out of the criteria.

Green buildings perform the same functions and serve the same purposes as conventional buildings but with a smaller ecological footprint. They employ optimized and often innovative design features to reduce natural systems impacts throughout a building’s life cycle and all across the supply chain of materials, components, and operations.

Green buildings provide a range of benefits to stakeholders, from developers and owners to occupants and communities. Structural, mechanical, and landscape design elements can maintain comfort and indoor air quality, conserve resources, and minimize use of toxic materials while reducing pollution and damage to local ecosystems. A broad range of green design techniques, technologies, and operational strategies are available to building architects, engineers, and owners. Every building is different, and there is no single green design formula. However, there are common design objectives and classes of benefits. The potential benefits of green building practices include the following:

• Less disruption of local ecosystems and habitats
• Resource conservation
• Decreased air, water, and noise pollution
• Superior indoor air quality
• Fewer transportation impacts

While they may entail higher up-front costs (but not necessarilyLisa Fay Matthiessen and Peter Morris, “Costing Green: A Comprehensive Cost Database and Budgeting Methodology,” US Green Building Council, July 2004, accessed January 10, 2011, http://www.usgbc.org/Docs/Resources/Cost_of_Green_Full.pdf.), in the long term, green buildings can make up the shortfall. Careful design choices for particular locations can reduce that difference to zero. Some of the economic benefits they generate include the following:

• Lower capital costs. With careful design, measures such as passive solar heating, natural ventilation, structural materials and design improvements, and energy and water efficiency can reduce the size and cost of heating and cooling systems and other infrastructure. A new bank in Boise, Idaho, was able to take advantage of such considerations to go from an initially planned LEED Silver to an actual LEED Platinum with no added cost.US Green Building Council, “Banner Bank Building: Green Is Color of Money,” 2006, available from the project profiles at http://www.usgbc.org/DisplayPage.aspx?CMSPageID=1721.
• Lower operations and maintenance (O&M) costs. On average, lower energy and water consumption reduces energy demand 25–45 percent per square foot for LEED buildings versus conventional buildings.Cathy Turner and Mark Frankel (New Buildings Institute), Energy Performance of LEED for New Construction Buildings (Washington DC: US Green Building Council, 2008), accessed January 31, 2011, http://www.usgbc.org/ShowFile.aspx?DocumentID=3930; Greg Kats, Greening Our Built World: Costs, Benefits, and Strategies (Washington, DC: Island Press, 2009). The US Environmental Protection Agency (EPA) reported that office buildings that meet the energy efficiency requirements of the Energy Star program use 40–50 percent less energy than other buildings.Energy Star is familiar to many people for rating the energy efficiency of appliances, but a separate Energy Star certification system also exists for entire buildings. For the comparison, see EPA, Energy Star and Other Climate Protection Programs 2007 Annual, October 2008, accessed January 11, 2011, http://www.energystar.gov/ia/news/downloads/annual_report_2007.pdf.
• Increased market value. Green buildings can increase market value through reduced operating costs, higher lease premiums, competitive features in tight markets, and increased residential resale value. For instance, a 2008 study of Energy Star and LEED-certified office buildings versus conventional ones found that the green office buildings had higher occupancy rates and could charge slightly higher rents, making the market value of a green building typically $5 million greater than its conventional equivalent.Piet Eichholtz, Nils Kok, and John M. Quigley, “Doing Well by Doing Good? Green Office Buildings” (Program on Housing and Urban Policy Working Paper No. W08-001, Institute of Business and Economic Research, Fisher Center for Real Estate & Urban Economics, University of California, Berkeley, 2008), accessed January 28, 2011, http://www.jetsongreen.com/files/doing_well_by_doing_good_green_ office_buildings.pdf. • Less risk and liability. Using best practices yields more predictable results, and healthier indoor environments reduce health hazards. Some insurers offer discounts for certified green buildings, and others offer to pay to rebuild to green standards after damage.For instance, Fireman’s Fund Insurance Company, “Insurers Offer Rewards for Going Green,” 2010, accessed January 11, 2011, http://www.firemansfund.com/about-fireman-s-fund/our-commitments/about-our-green-insurance/Pages/insurers-offer-rewards-for-going-green.aspx; or Zurich in North America, “Green Buildings Insurance Article,” 2010, accessed January 11, 2011, http://www.zurichna.com/zna/realestate/greenbuildingsinsurancearticle.htm. • Increased employee productivity. Green buildings increase occupant productivity due to better lighting and more comfortable, quiet, and healthy work environments. This improvement can be at least equal to buildings’ lifetime capital and O&M costs and is the largest potential economic benefit of green buildings. For example, a survey of employees at two companies that moved from conventional buildings into LEED-certified ones found the new buildings added on average about 40 hours per year per employee in increased productivity.Amanjeet Singh, et al., “Effects of Green Buildings on Employee Health and Productivity,” American Journal of Public Health 100, no. 9 (2010): 1665–68. Nationwide, the value of improved office worker productivity from indoor environmental improvements is estimated to be in the range of$20–160 billion.William J. Fisk, “Health and Productivity Gains from Better Indoor Environments and Their Relationship with Building Energy Efficiency,” Annual Review of Energy and the Environment 25 (2000): 537–66.
• Reduced absenteeism. Lawrence Berkeley National Laboratory calculates that improvements to indoor environments could reduce health care cost and work losses by 9 percent to 20 percent from communicable respiratory diseases, 18 percent to 25 percent from reduced allergies and asthma, and 20 percent to 50 percent from other nonspecific health and discomfort effects, saving $17–48 billion annually.William J. Fisk, “Health and Productivity Gains from Better Indoor Environments and Their Relationship with Building Energy Efficiency,” Annual Review of Energy and the Environment 25 (2000): 537–66. • Market perception of quality. Green buildings require careful design attention and the use of best practices and display superior performance. • Promotion of innovation. Green buildings employ new ideas and methods that produce significant improvements. • Access to government incentives. A growing number of federal, state, and local agencies require green features and offer tax credits and other incentives such as faster, less costly planning and permit approvals. Green buildings provide a tangible means of measuring incremental steps that can aggregate into radical system-level benefits. Moreover, they are a visible area in which to demonstrate corporate sustainability strategy—the benefits derived from greening facilities and building systems add up to significant cost savings and represent a demonstrable area in which to see near-term return on investment in green technologies and operating systems. ## SC Johnson We turn next to the example of incremental changes creating system innovations at SC Johnson. By the mid-1990s, SC Johnson (SCJ) had a very respectable record on corporate environmental responsibility. In 1975, SCJ voluntarily removed ozone-threatening chlorofluorocarbon (CFC) propellants from its products worldwide. This was three years before the US government banned CFCs. In 1992, when eco-efficiency was introduced as a cost savings measure by the World Business Council for Sustainable Development (WBCSD), SCJ of the first companies to join the WBCSD. Millions of dollars of unnecessary costs were trimmed by using fewer resources far more efficiently. The company was able to eliminate over 420,000,000 pounds of waste from products and processes over the ten-year period prior to 2004, resulting in cost savings of more than$35 million.

In addition, the company built a landfill gas–powered turbine cogeneration energy plant that delivers 6.4 megawatts of electricity and some 40,000 pounds per hour of steam for SCJ’s Waxdale manufacturing facility in Wisconsin. This energy project enabled SCJ to halve its use of coal-generated utility electricity and thereby cut its carbon emissions.

SCJ is a 120-year-old family-owned (sixth generation) firm with explicit commitments to innovation, high-quality products, environmental concerns, and the communities in which it operates. SCJ is a consumer packaged goods (CPG) company and a “chemical formulator”—a company that chooses from a menu of chemical inputs to make its consumer products. With such well-known brands as Pledge, Windex, and Ziploc, the company had over $6.5 billion in sales in 2006 and sold its products in more than 110 countries. In holding up sustainability criteria as goals, SCJ had set off on a journey in which the end destination was not entirely clear, and by the new millennium company strategists knew it was time to evaluate the systems currently in place. SCJ’s earlier positive results motivated the company to look for more opportunities, so it stepped back and looked at the progress it made over a decade. Company strategists discovered that while eco-efficiency had become second nature to product design at SCJ, strategy needed to shift beyond capturing relatively easy efficiencies and move deeper. They engaged outside expertise to help develop and introduce product design tools that could be used to build preferred ingredient choices into product and packaging design. The result of this assessment was the development of a new product evaluation tool, Greenlist. Greenlist is a tool SCJ developed to improve the quality of its products through better understanding of the health and environmental impact of material inputs. In the Greenlist database are 2,300 chemicals including surfactants, insecticides, solvents, resins, propellants, and packaging. Criteria measured include the chemicals’ biodegradability, aquatic toxicity, vapor pressure, and so forth. Through Greenlist, SCJ has reduced its environmental impact while simultaneously witnessing increases in production and sales growth. Greenlist is a patented rating system (US Patent No. 6,973,362) that classifies raw materials used in SCJ’s products according to their impact on the environment and human health. Greenlist has helped SCJ phase out certain raw materials and use materials considered to be environmentally “better” and “best.” The result is a process that gives SCJ scientists access to ingredient ratings for any new product or reformulation and enables them to continuously improve the environmental profile of the company’s products. The Greenlist screening process covers over 90 percent of the company’s raw materials volume and is continually updated as new findings emerge. Materials are assigned a score from a high of 3 to a low of 0. An ingredient with a 3 rating is considered “best,” 2 is “better,” and 1 is “acceptable.” Any material receiving a 0 is called a restricted use material (RUM) and requires company vice presidential approval for use. If a material is unavoidable and has a low score, the goal is to reduce and eliminate its use as soon as substitutes are available. When existing products are reformulated, the scientist must include ingredients that have ratings equal to or higher than the original formula. While some raw materials with a 0 score are not restricted by government regulatory requirements, over the years SCJ has elected to limit their use. SCJ replaces these 0-rated materials with materials that are more biodegradable and have a better environment and health profile. An example of Greenlist in action involves one of SCJ’s glass cleaner products. In 2002 and again in 2004, SCJ assessed the formulation of Windex blue glass cleaner to reduce volatile organic compounds. The reformulations reduced health and environmental impacts while increasing the product’s cleaning performance by 40 percent and growing its market share by 4 percent. When SCJ introduced Greenlist in 2001, the company set a goal to improve its baseline Greenlist score for all raw material purchases from 1.2 to 1.41 by 2007. This goal was accomplished in early 2005. In 2001, SCJ’s use of “better” and “best” materials was at 9 percent of all raw materials scored, and by 2005, this number increased to 28 percent of all raw materials scored. The company uses an annual planning process to help drive these scores, and the Greenlist results are shared in the company’s annual public report.SC Johnson, “RESPONSIBILITY = SCIENCE: SC Johnson Public Report 2009,” accessed March 7, 2011, http://www.scjohnson.com/Libraries/Download_Documents/2009_SC_Johnson_Public_Report.sflb.ashx. Moreover, SCJ has eliminated all PVC packaging (a step taken to eliminate risk and liability) and, as performance results remain stable or improve, the company has moved to 10 percent of surfactants made from bio-based as opposed to oil-based materials. Each change required coordination with suppliers, which have made the more efficient or benign substitute available for other customers as demand for “clean” materials grows. SCJ has patented Greenlist, but it has made the process licensable by other companies at no charge (although SCJ’s formulations remain protected). The goal is to encourage application of Greenlist thinking and analysis across industry sectors. The company has already shared its Greenlist process with the US EPA, Environment Canada, the Chinese Environmental Protection Agency, industry associations, universities, and other corporations. Moreover, the company has been able to use insights from Greenlist to work with partner suppliers to help identify and develop ingredients that are more environmentally sustainable. To date, “the company has been recognized with over 40 awards for corporate environmental leadership from governments and non-governmental organizations, including the World Environment Center Gold Medal, and Environment Canada’s Corporate Achievement Award. SCJ received the first-ever Lifetime Atmospheric Achievement Award from the US Environmental Protection Agency.”Five Winds International, “Greening the Supply Chain at SC Johnson: A Case Study,” accessed December 3, 2010, http://www.fivewinds.com/_uploads/documents/g60tzmxo.pdf. In 2005, SCJ announced that it had entered into a voluntary partnership with the EPA under the agency’s Design for the Environment (DfE) program. SCJ is the first major CPG company to partner with EPA on the program, which promotes innovative chemical products, technologies, and practices that benefit human health and the environment. In 2006, SCJ received the Presidential Green Chemistry Challenge Award for its Greenlist process. SCJ has evolved its sustainability strategy from well-meant but relatively piecemeal efficiency efforts to developing an award-winning, innovative product assessment tool. The company has achieved real leadership in the world of consumer products manufacturing. Not only has the company strategically positioned itself ahead of the pack by anticipating regulatory restrictions before they happen, but it has developed enviable preferred purchaser relationships with its suppliers. SCJ has simplified its materials inputs list to fewer, greener inputs and is helping suppliers develop market leadership in supplying greener inputs. Moreover, SCJ is trying to teach the world how it does what it does—and it is doing this for free. An area in which the company has recognized it needs to take further steps is in incorporating Greenlist further upstream in the product design process. SCJ’s goal is to use the tool not only to assess existing products but also to inspire breakthrough green innovations to capture new market space. Given the company’s track record of conscious evolution of its strategy, this is not an unrealistic goal. Radical incrementalism, as we have seen, offers a path that can both deliver real-time benefits and lead to market-shifting innovation. KP and SCJ demonstrate the tactics we advocate here: set big goals but take moderate, integrated steps to get there. Both companies have religiously monitored and measured their progress to build the business case for the next ambitious steps. Consequently, both now grapple with incorporating the knowledge gained from their earlier successes into future product designs, process designs, or both. Being radically incremental requires having an ambitious goal of corporate sustainability, but it does not imply that you will be able to map out all the steps with clockwork accuracy. It does mean, however, that one’s incremental steps must be integrated, that each success and failure must be evaluated, and that the road map under one’s feet must be redrawn accordingly. Being radical takes courage but so does radical incrementalism. Courage and resolve builds, however, with each successful step. ### Key Takeaway Radically incremental tactics include the following: 1. Setting big goals but taking moderate, integrated steps toward those goals. 2. Measuring everything (metrics are critical)—to build your business case. 3. Incorporating knowledge gained back into the process for new product and process design. ### Exercises 1. List the small incremental steps Kaiser Permanente and SC Johnson took and the larger changes they added up to over time. 2. Select a familiar product and list all the incremental small steps that could be applied to its design, use and disposal that would reduce the product’s ecological/health footprint. As you consider these changes, look for imaginative leaps you could make to redesign the entire product, provide for the buyer’s need in new ways altogether, or consolidate incremental changes into a systems redesign involving supply chain partners that could improve the product and lower costs at the same time. # Chapter 5 Energy and Climate The cases in this chapter offer an opportunity to apply many of the ideas introduced in Chapter 1 "History" through Chapter 4 "Entrepreneurship and Sustainability Innovation Analysis". The key approach that differentiates this collection is the systems perspective used throughout. Thus while “Energy and Climate” is the chapter title, this chapter will discuss materials, building design, community equity implications, and health impacts as well, topics that can also be part of case discussions in later chapters. Typically such conversations are segregated into different courses and even different schools within universities. Appreciation of the interconnections across disciplines and functional areas should be one of the core takeaways from this book. The chapter begins with a climate change technical note to provide broad background for the reader. Climate science has altered our world as well as the way we think about it. Governments and companies are reacting, with businesses on the leading edge of sustainability innovation often gaining advantages. Interestingly, the recent economic downturn has made environmental and resource use topics (e.g., reducing a firm’s resource footprint) even more salient to financial survival and success. Today it is accepted that cost-cutting measures enabled by viewing operating practices through a sustainability lens can yield significant bottom-line improvements (increased profitability). Companies with sustainability strategic awareness and sufficient resources to invest during a downturn understand that systems and product redesigns can position them for enhanced growth and advantage over less prescient competitors as the economy recovers. State and federal investments currently support a recovery that builds US capacity around “green” economic expansion. While there will be those who deny climate change is happening or reject the role assigned humans, we still need to understand the history and science of climate analysis. Furthermore, governments and companies are actively engaged in carbon market trading, carbon pricing, and reduction of carbon footprints, thus the issues must be discussed and, where opportunities present themselves, any well-managed firm will need to be positioned to respond. Entrepreneurs and innovative companies will seek new opportunities for product and process designs that can reduce climate change effects. ## 5.1 Climate Change ### Learning Objectives 1. Understand the basic causes and effects of climate change. 2. Know the regulatory frameworks governments have used to address climate change. 3. Identify business responses and opportunities related to climate change. The thickness of the air, compared to the size of the Earth, is something like the thickness of a coat of shellac on a schoolroom globe. Many astronauts have reported seeing that delicate, thin, blue aura at the horizon of the daylit hemisphere and immediately, unbidden, began contemplating its fragility and vulnerability. They have reason to worry.Carl Sagan, Billions and Billions (New York, NY: Random House 1997), 86. Carl Sagan Since the beginning of their history, humans have altered their environment. Only recently, however, have we realized how human activities influence earth’s terrestrial, hydrological, and atmospheric systems to the extent that these systems may no longer maintain the stable climate and services we have assumed as the basis of our economies. The science of climate change developed rapidly in the late twentieth century as researchers established a correlation between increasing atmospheric concentrations of certain gases, human activities emitting those gases, and a rapid increase in global temperatures. Many, but by no means all, international policy makers spurred research as it became apparent that impacts ranging from melting polar ice caps to acidified oceans and extreme weather patterns were attributed to anthropogenic (human) influences on climate. Global businesses, many of which initially balked at potential economic disruption from changes in the use of fossil fuel and other business practices, have largely acceded to the need for change. Nonetheless, the overall response to the challenge has been slow and not without resistance, thereby increasing the potential opportunities and urgency. ## The Science of Global Climate Change In the early 1820s, Joseph Fourier, the French pioneer in the mathematics of heat diffusion, became interested in why some heat from the sun was retained by the earth and its atmosphere rather than being reflected back into space. Fourier conceived of the atmosphere as a bell jar with the atmospheric gases retaining heat and thereby acting as the containing vessel. In 1896, Swedish Nobel laureate and physicist Svante August Arrhenius published a paper in which he calculated how carbon dioxide (CO2) could affect the temperature of the earth. He and early atmospheric scientists recognized that normal carbon dioxide levels in the atmosphere contributed to making the earth habitable. Scientists also have known for some time that air pollution alters weather. For example, certain industrial air pollutants can significantly increase rainfall downwind of their source. As intensive agriculture and industrial activity have expanded very rapidly around the world since 1850 (Figure 5.1 "Increase in Global Carbon Emissions from Fossil Fuel Combustion, 1750–2006"), a growing body of scientific evidence has accumulated to suggest that humans influence global climate. Figure 5.1 Increase in Global Carbon Emissions from Fossil Fuel Combustion, 1750–2006 Units of carbon are often used instead of CO2, which can be confusing. One ton of carbon equals 3.67 tons of CO2. Hence emissions of CO2 in 2006 were roughly eight billion tons of carbon, or twenty-nine billion tons of CO2. The earth’s climate has always varied, which initially raised doubts about the significance of human influences on climate or suggested our impact may have been positive. Successive ice ages, after all, likely were triggered by subtle changes in the earth’s orbit or atmosphere and would presumably recur. Indeed, changes in one earth system, such as solar energy reaching the earth’s surface, can alter other systems, such as ocean circulation, through various feedback loops. The dinosaurs are thought to have gone extinct when a meteor struck the earth, causing tsunamis, earthquakes, fires, and palls of ash and dust that would have hindered photosynthesis and lowered oxygen levels and temperatures. Aside from acute catastrophes, however, climate has changed slowly, on the scale of tens of thousands to millions of years. The same paleoclimatological data also suggest a strong correlation between atmospheric CO2 levels and surface temperatures over the past 400,000 years and indicate that the last 20 years have been the warmest of the previous 1,000.National Oceanic and Atmospheric Administration Paleoclimatology, “A Paleo Perspective on Global Warming,” July 13, 2009, accessed August 19, 2010, http://www.ncdc.noaa.gov/paleo/globalwarming/home.html. In the last decades of the twentieth century, scientists voiced concern over a rapid increase in “greenhouse gases.” Greenhouse gases (GHGs)Gases that trap heat in the earth’s atmosphere, leading to elevated surface and air temperatures. The GHGs of most concern due to their potency or prevalence are carbon dioxide, nitrous oxide, methane, and chlorofluorocarbons. were named for their role in retaining heat in earth’s atmosphere, causing a greenhouse effect similar to that in Fourier’s bell jar. Increases in the atmospheric concentration of these gases, which could be measured directly in modern times and from ice core samples, were correlated with a significant warming of the earth’s surface, monitored using meteorological stations, satellites, and other means (see Figure 5.2 "Increases in the Concentration of Atmospheric CO"). Figure 5.2 Increases in the Concentration of Atmospheric CO2, 1958–2009 The gases currently of most concern include CO2, nitrous oxide (N2O), methane (CH4), and chlorofluorocarbons (CFCs). CO2, largely a product of burning fossil fuels and deforestation, is by far the most prevalent GHG, albeit not the most potent. Methane, produced by livestock and decomposition in landfills and sewage treatment plants, contributes per unit twelve times as much to global warming than does CO2. N2O, created largely by fertilizers and coal or gasoline combustion, is 120 times as potent. CFCs, wholly synthetic in origin, have largely been phased out by the 1987 Montreal Protocol because they degraded the ozone layer that protected earth from ultraviolet radiation (Figure 5.3 "Sources and Types of GHG Emissions, 2000"). The successor hydrochlorofluorocarbons (HCFCs), however, are GHGs with potencies one to two orders of magnitude greater than CO2. Figure 5.3 Sources and Types of GHG Emissions, 2000 In response to such findings, the United Nations and other international organizations gathered in Geneva to convene the First World Climate Conference in 1979. In 1988, a year after the Brundtland Commission called for sustainable development, the World Meteorological Organization (WMO) and the United Nations Environment Programme (UNEP) created the Intergovernmental Panel on Climate Change (IPCC)An international body of scientific experts who regularly assess the scientific, technical, and socioeconomic aspects of climate change, its risks, and possible mitigation.. The IPCC gathered 2,500 scientific experts from 130 countries to assess the scientific, technical, and socioeconomic aspects of climate change, its risks, and possible mitigation.The IPCC comprises three working groups and a task force. Working Group I assesses the scientific aspects of the climate system and climate change. Working Group II addresses the vulnerability of socioeconomic and natural systems to climate change, negative and positive consequences of climate change, and options for adapting to those consequences. Working Group III assesses options for limiting greenhouse gas emissions and otherwise mitigating climate change. The Task Force on National Greenhouse Gas Inventories implemented the National Greenhouse Gas Inventories Program. Each report has been written by several hundred scientists and other experts from academic, scientific, and other institutions, both private and public, and has been reviewed by hundreds of independent experts. These experts were neither employed nor compensated by the IPCC nor by the United Nations system for this work. The IPCC’s First Assessment Report, published in 1990, concluded that the average global temperature was indeed rising and that human activity was to some degree responsible (Figure 5.4 "Temperature Elevation, 1880–2009"). This report laid the groundwork for negotiation of the Kyoto Protocol, an international treaty to reduce GHG emissions that met with limited success. Subsequent IPCC reports and myriad other studies indicated that climate change was occurring faster and with worse consequences than initially anticipated. Figure 5.4 Temperature Elevation, 1880–2009 ### Charles David Keeling Modern systematic measurement of CO2 emissions began with the work of scientist Charles David Keeling in the 1950s. The steady upward trajectory of atmospheric CO2 graphed by Dr. Keeling became known as the Keeling curve. This comment is from a front page New York Times article on December 21, 2010: “In later years, as the scientific evidence about climate change grew, Dr. Keeling’s interpretations became bolder, and he began to issue warnings. In an essay in 1998, he replied to claims that global warming was a myth, declaring that the real myth was that ‘natural resources and the ability of the earth’s habitable regions to absorb the impacts of human activities are limitless.’ In an interview in La Jolla, Dr. Keeling’s widow, Louise, said that if her husband had lived to see the hardening of the political battle lines over climate change, he would have been dismayed. “He was a registered Republican,” she said. “He just didn’t think of it as a political issue at all.”Justin Gillis, “Temperature Rising: A Scientist, His Work and a Climate Reckoning,” New York Times, December 21, 2010, http://www.nytimes.com/2010/12/22/science/earth/22carbon.html?_r=1&pagewanted=2. ## Effects and Predictions The IPCC Fourth Assessment Report in 2007 summarized much of the current knowledge about global climate change, which included actual historical measurements as well as predictions based on increasingly detailed models.Rajendra K. Pachauri and Andy Reisinger, eds. (core writing team), Climate Change 2007: Synthesis Report (Geneva, Switzerland: Intergovernmental Panel on Climate Change, 2008). Available from the Intergovernmental Panel on Climate Change, “IPCC Fourth Assessment Report: Climate Change 2007,” accessed August 19, 2010, http://www.ipcc.ch/publications_and_data/ar4/syr/en/contents.html. A fifth assessment report was begun in January 2010 but has yet to be completed. Unless otherwise footnoted, all numbers in this list are from the fourth IPCC assessment. These findings represent general scientific consensus and typically have 90 percent or greater statistical confidence. The global average surface temperature increased 0.74°C ± 0.18°C (1.3°F ± 0.32°F) from 1906 to 2005, with temperatures in the upper latitudes (nearer the poles) and over land increasing even more. In the same period, natural solar and volcanic activity would have decreased global temperatures in the absence of human activity. Depending on future GHG emissions, the average global temperature is expected to rise an additional 0.5°C to 4°C by 2100, which could put over 30 percent of species at risk for extinction. Eleven of the twelve years from 1995 to 2006 were among the twelve warmest since 1850, when sufficient records were first kept. August 2009 had the hottest ocean temperatures and the second hottest land temperatures ever recorded for that month, and 2010 tied 2005 as the warmest year in the 131-year instrumental record for combined global land and ocean surface temperature.Data more current than the fourth IPCC report are available from NASA and NOAA, among other sources, at NASA, “GISS Surface Temperature Analysis (GISTEMP),” accessed January 27, 2011, http://data.giss.nasa.gov/gistemp; and National Oceanic and Atmospheric Administration, “NOAA: Warmest Global Sea-Surface Temperatures for August and Summer,” September 16, 2009, accessed January 27, 2011, http://www.noaanews.noaa.gov/stories2009/20090916_globalstats.html. Precipitation patterns have changed since 1900, with certain areas of northern Europe and eastern North and South America becoming significantly wetter, while the Mediterranean, central Africa, and parts of Asia have become significantly drier. Record snowfalls in Washington, DC, in the winter of 2009–10 reflected this trend, as warmer, wetter air dumped nearly one meter of snow on the US capital in two storms.Bryan Walsh, “Another Blizzard,” Time, February 10, 2010, accessed January 7, 2011, http://www.time.com/time/health/article/0,8599,1962294,00.html. Coral reefs, crucial sources of marine species diversity, are dying, due in part to their sensitivity to increasing ocean temperatures and ocean acidity. Oceans acidify as they absorb additional CO2; lower pH numbers indicate more acidic conditions. Ocean pH decreased 0.1 points between the years 1750 to 2000 and is expected to decrease an additional 0.14 to 0.35 pH by 2100. (A pH difference of one is the difference between lemon juice and battery acid.) Figure 5.5 Healthy Reefs Figure 5.6 Dead and Dying Reefs Glaciers and mountain snowpacks, crucial sources of drinking water for many people, have been retreating for the past century. From 1979 to 2006, Arctic ice coverage declined between 6 and 10 percent, with declines in summer coverage of 15–30 percent (Figure 5.7 "Decrease in Arctic Sea Ice, 1979–2009"). Figure 5.7 Decrease in Arctic Sea Ice, 1979–2009 Seas have risen 20 to 40 centimeters over the past century as glaciers melted and water expanded from elevated temperatures. Sea levels rose at a rate of 1.8 (±0.5) millimeters per year from 1961 to 2003. From 1993 to 2003 alone, that rate was dramatically higher: 3.1 (±0.7) millimeters per year. An additional rise in sea level of 0.4 to 3.7 meters (1.3 to 12.1 feet) is expected by 2100. The former amount would threaten many coastal ecosystems and communities;James G. Titus, K. Eric Anderson, Donald R. Cahoon, Dean B. Gesch, Stephen K. Gill, Benjamin T. Gutierrez, E. Robert Thieler, and S. Jeffress Williams (lead authors), Coastal Elevations and Sensitivity to Sea-Level Rise: A Focus on the Mid-Atlantic Region (Washington, DC: US Climate Change Science Program, 2009), accessed August 19, 2010, http://www.epa.gov/climatechange/effects/coastal/sap4-1.html. the latter would be enough to submerge completely the archipelago nation of the Maldives. If trends continue as predicted, inundation of global coastal areas and island communities may soon present major human migration and resettlement challenges. Many consider this the most critical climate change issue. Trees are moving northward into the tundra. A thawing permafrost, meanwhile, would release enough methane to catastrophically accelerate global warming.National Science Foundation, “Methane Releases from Arctic Shelf May Be Much Larger and Faster Than Anticipated,” news release, March 4, 2010, accessed January 7, 2011, http://www.nsf.gov/news/news_images.jsp?cntn_id=116532&org=NSF and http://www.nsf.gov/news/news_summ.jsp?cntn_id=116532&org=NSF&from=news. Other species, too, are migrating or threatened, such as the polar bear. The population of polar bears is expected to decline two-thirds by 2050 as their ice pack habitats disintegrate under current trends.US Geological Survey, “USGS Science to Inform U.S. Fish & Wildlife Service Decision Making on Polar Bears, Executive Summary,” accessed January 27, 2011, http://www.usgs.gov/newsroom/special/polar_bears/docs/executive_summary.pdf. Warmer waters will also increase the range of cholera and other diseases and pests.World Health Organization, “Cholera,” June 2010, accessed August 19, 2010, http://www.who.int/mediacentre/factsheets/fs107/en/index.html. At the same time that humans have increased production of GHGs, they have decreased the ability of the earth’s ecosystems to reabsorb those gases. Deforestation and conversion of land from vegetation to built structures reduces the size of so-called carbon sinks. Moreover, conventional building materials such as pavement contribute to local areas of increased temperature, called heat islands, which in the evenings can be 12°C (22°F) hotter than surrounding areas. These elevated local temperatures further exacerbate the problems of climate change for communities through energy demand, higher air-conditioning costs, and heat-related health problems.US Environmental Protection Agency, “Heat Island Effect,” accessed January 27, 2011, http://www.epa.gov/heatisland. By impairing natural systems, climate change impairs social systems. A shift in climate would alter distributions of population, natural resources, and political power. Droughts and rising seas that inundate populous coastal areas would force migration on a large scale. Unusually severe weather has already increased costs and death tolls from hurricanes, floods, heat waves, and other natural disasters. Melting Arctic ice packs have also led countries to scramble to discover and dominate possible new shipping routes. When the chairman of the Norwegian Nobel Committee awarded the 2007 Nobel Peace Prize to the IPCC and Al Gore, he said, “A goal in our modern world must be to maintain ‘human security’ in the broadest sense.” Similarly, albeit with different interests in mind, the United States’ 2008 National Intelligence Assessment, which analyzes emerging threats to national security, focused specifically on climate change.Ole Danbolt Mjøs, “Award Ceremony Speech” (presentation speech for the 2007 Nobel Peace Prize, Oslo, Norway, December 10, 2007), accessed January 7, 2011, http://nobelprize.org/nobel_prizes/peace/laureates/2007/presentation-speech.html. Scientists have tried to define acceptable atmospheric concentrations of CO2 or temperature rises that would still avert the worst consequences of global warming while accepting we will likely not entirely undo our changes. NASA scientists and others have focused on the target of 350 parts per million (ppm) of CO2 in the atmosphere.James Hansen, Makiko Sato, Pushker Kharecha, David Beerling, Valerie Masson-Delmotte, Mark Pagani, Maureen Raymo, Dana L. Royer, and James C. Zachos, “Target Atmospheric CO2: Where Should Humanity Aim?” The Open Atmospheric Science Journal 2 (2008): 217–31. Their paleoclimatological data suggest that a doubling of CO2 in the atmosphere, which is well within some IPCC scenarios for 2100, would likely increase the global temperature by 6°C (11°F). Atmospheric CO2 levels, however, passed 350 ppm in 1990 and reached 388 ppm by early 2010. This concentration will continue to rise rapidly as emissions accumulate in the atmosphere. Worse, even if the CO2 concentration stabilizes, temperatures will continue to rise for some centuries, much the way a pan on a stove keeps absorbing heat even if the flame is lowered. Hence scientists have begun to suggest that anything less than zero net emissions by 2050 will be too little, too late; policy makers have yet to embrace such aggressive action.H. Damon Matthews and Ken Caldeira, “Stabilizing Climate Requires Near-Zero Emissions,” Geophysical Research Letters 35, no. 4: L04705 (2008), 1–5. ## International and US Policy Response The primary international policy response to climate change was the United Nations Framework Convention on Climate Change (UNFCCC)An international convention adopted in 1992 and entered in force in 1994 that became the first binding international legal instrument dealing directly with climate change.. The convention was adopted in May 1992 and became the first binding international legal instrument dealing directly with climate change. It was presented for signature at the Earth Summit in Rio de Janeiro and went into force in March 1994 with signatures from 166 countries. By 2010 the convention had been accepted by 193 countries.United Nations Framework Convention on Climate Change, “Status of Ratification of the Convention,” accessed January 27, 2011, http://unfccc.int/kyoto_protocol/status_of_ratification/items/2613.php. UNFCCC signatories met in 1997 in Kyoto and agreed to a schedule of reduction targets known as the Kyoto Protocol. Industrialized countries committed to reducing emissions of specific GHGs, averaged over 2008–12, to 5 percent below 1990 levels. The European Union (EU) committed to an 8 percent reduction and the United States to 7 percent. Other industrialized countries agreed to lesser reductions or to hold their emissions constant, while developing countries made no commitments but hoped to industrialize more cleanly than their predecessors. Partly to help developing countries, the Kyoto Protocol also created a market for trading GHG emission allowances. If one country developed a carbon sink, such as by planting a forest, another country could buy the amount of carbon sequestered and use it to negate the equivalent amount of its own emissions. The Kyoto Protocol has ultimately suffered from a lack of political will in the United States and abroad. The United States signed it, but the Senate never ratified it. US President George W. Bush backed away from the emission reduction targets and eventually rejected them entirely. By the time he took office in 2001, a 7 percent reduction from 1990 levels for the United States would have translated into a 30 percent reduction from 2001 levels. US GHG emissions, instead of declining, rose 14 percent from 1990 to 2008 (see Figure 5.8 "Increase in US Energy Consumption, Total and Renewable, in Billions of BTU, 1949–2008" for related energy consumption).US Environmental Protection Agency, 2010 Greenhouse Gas Inventory Report (Washington, DC: US Environmental Protection Agency, 2010), accessed January 29, 2011, http://www.epa.gov/climatechange/emissions/downloads10/US-GHG -Inventory-2010_ExecutiveSummary.pdf. Almost all other Kyoto signatories will also fail to meet their goals. The EU, in contrast, is on track to meet or exceed its Kyoto targets.European Union, “Climate Change: Progress Report Shows EU on Track to Meet or Over-Achieve Kyoto Emissions Target,” news release, November 12, 2009, accessed August 19, 2010, http://europa.eu/rapid/pressReleasesAction.do?reference=IP/09/1703&format=HTML&aged=0&language=EN&guiLanguage=en. GHG pollution allowances for major stationary sources have been traded through the EU Emissions Trading System since 2005. The consensus in Europe is that the Kyoto Protocol is necessary and action is required to reduce GHGs. Figure 5.8 Increase in US Energy Consumption, Total and Renewable, in Billions of BTU, 1949–2008 The Kyoto Protocol expires in 2012, so meetings have begun to negotiate new goals. In December 2007, UNFCCC countries met in Bali to discuss a successor treaty. The conference made little headway, and countries met again in December 2009 in Copenhagen. That conference again failed to generate legally binding reduction goals, but the countries confirmed the dangers of climate change and agreed to strive to limit temperature increases to no more than 2°C total. A subsequent meeting was held in Cancun, Mexico, in late 2010. Individual countries and US states and agencies have acted, nonetheless, in the absence of broader leadership. In 2007, EU countries set their own future emissions reduction goals, the so-called 20-20-20 strategy of reducing emissions 20 percent from 1990 levels by 2020 while reducing energy demand 20 percent through efficiency and generating 20 percent of energy from renewable resources. In January 2008 the European Commission proposed binding legislation to implement the 20-20-20 targets. This “climate and energy package” was approved by the European Parliament and Council in December 2008. It became law in June 2009.European Commission, “The EU Climate and Energy Package,” accessed January 29, 2011, http://ec.europa.eu/clima/policies/brief/eu/package_en.htm and http://ec.europa.eu /environment/climat/climate_action.htm. In the Northeast United States, ten states collaborated to form the Regional Greenhouse Gas Initiative (RGGI), which caps and gradually lowers GHG emissions from power plants by 10 percent from 2009 to 2018. A similar program, the Western Climate Initiative, is being prepared by several western US states and Canadian provinces, and California’s Assembly Bill 32, the Global Warming Solutions Act, set a state GHG emissions limit for 2020.California Environmental Protection Agency Air Resources Board, “Assembly Bill 32: Global Warming Solutions Act,” accessed August 19, 2010, http://www.arb.ca.gov/cc/ab32/ab32.htm. Likewise, the federal government under President Barack Obama committed to reducing its emissions, while the US Environmental Protection Agency (EPA), in response to a 2007 lawsuit led by the state of Massachusetts, prepared to regulate GHGs under the Clean Air Act. On December 23, 2010, the New York Times reported, “The Environmental Protection Agency announced a timetable on Thursday for issuing rules limiting greenhouse gas emissions from power plants and oil refineries, signaling a resolve to press ahead on such regulation even as it faces stiffening opposition in Congress. The agency said it would propose performance standards for new and refurbished power plants next July, with final rules to be issued in May 2012.”Matthew L. Wald, “E.P.A. Says It Will Press on With Greenhouse Gas Regulation,” New York Times, December 23, 2010, http://www.nytimes.com/2010/12/24/science/earth/24epa.html?_r=1&ref=environmentalprotectionagency. Members of Congress, however, have threatened to curtail the EPA’s power to do so, either by altering the procedures for New Source Review that would require carbon controls or by legislatively decreeing that global warming does not endanger human health.“Coal State Senators Battle EPA to Control Greenhouse Gases,” Environmental News Service, February 23, 2010, accessed January 7, 2011, http://www.ens-newswire.com/ens/feb2010/2010-02-23-093.html; Juliet Eilperin and David A. Fahrenthold, “Lawmakers Move to Restrain EPA on Climate Change,” Washington Post, March 5, 2010, accessed January 7, 2011, http://www.washingtonpost.com/wp-dyn/content/article/2010/03/04/AR2010030404715.htm. In contrast, one bill to combat climate change would have reduced US emissions by 80 percent from 2005 levels by 2050. It passed the House of Representatives in 2009 but failed to make it to a Senate vote. ## Corporate Response and Opportunity Certain industries are more vulnerable than others to the economic impacts of climate change. Industries that are highly dependent on fossil fuels and high CO2 emitters, such as oil and gas companies, cement producers, automobile manufacturers, airlines, and power plant operators, are closely watching legislation related to GHGs. The reinsurance industry, which over the past several years has taken large financial losses due to extreme weather events, is deeply concerned about global climate change and liabilities for its impacts. Given the potential costs of ignoring climate change, the costs of addressing it appear rather minimal. In 2006, the UK Treasury released the Stern Review on the Economics of Climate Change. The report estimated that the most immediate effects of global warming would cause damages of “at least 5% of global GDP each year, now and forever. If a wider range of risks and impacts is taken into account, the estimates of damage could rise to 20% of GDP or more.” Actions to mitigate the change, in contrast, would cost only about 1 percent of global GDP between 2010 and 2030.Lord Stern, “Executive Summary,” in Stern Review on the Economics of Climate Change (London: HM Treasury, 2006), 1, accessed January 7, 2011, http://www.hm-treasury.gov.uk/sternreview_index.htm. Corporate reactions have ranged from taking action now to reduce or eliminate emissions of GHGs and active engagement with carbon trading markets to actively opposing new policies that might require changes in products or processes. Anticipatory firms are developing scenarios for potential threats and opportunities related to those policies, public opinion, and resource constraints. Among those companies actively pursuing a reduction in GHGs, some cite financial gains for their actions. Walmart and General Electric both committed to major sustainability efforts in the first decade of the twenty-first century as have many smaller corporations. Central to their strategies are GHG reduction tactics. Excessive GHG emissions may reflect inefficient energy use or loss of valuable assets, such as when natural gas escapes during production or use. The Carbon Disclosure Project emerged in 2000 as a private organization to track GHG emissions for companies that volunteered to disclose their data. By 2010, over 1,500 companies belonged to the organization, and institutional investors used these and other data to screen companies for corporate social responsibility. Out of concern for good corporate citizenship and in anticipation of potential future regulation, GHG emissions trading has become a growing market involving many large corporations. The emissions trading process involves credits for renewable energy generation, carbon sequestration, and low-emission agricultural and industrial practices that are bought and sold or optioned in anticipation of variable abilities to reach emissions reduction targets. Some companies have enacted internal, competitive emissions reduction goals and trading schemes as a way to involve all corporate divisions in a search for efficiency, cleaner production methods, and identification of other opportunities for reducing their contribution to climate change. In parallel to tracking GHG emissions, clean tech or clean commerce has become increasingly prevalent as a concept and a term to describe technologies, such as wind energy, and processes, such as more efficient electrical grids, that do not generate as much or any pollution. New investments in sustainable energy increased between 2002 and 2008, when total investments in sustainable energy projects and companies reached$155 billion, with wind power representing the largest share at $51.8 billion.Rohan Boyle, Chris Greenwood, Alice Hohler, Michael Liebreich, Eric Usher, Alice Tyne, and Virginia Sonntag-O’Brien, Global Trends in Sustainable Energy Investment 2009, United Nations Environment Programme, 2008, accessed January 29, 2011, http://sefi.unep.org/fileadmin/media/sefi/docs/publications/Global_Trends_2008.pdf. Also in 2008, sustainability-focused companies as identified by the Dow Jones Sustainability Index or Goldman Sachs SUSTAIN list outperformed their industries by 15 percent over a six-month period.Daniel Mahler, Jeremy Barker, Louis Belsand, and Otto Schulz, Green Winners (Chicago: A. T. Kearney, 2009), 2, http://www.atkearney.com/images/global/pdf/Green_winners.pdf. ## Conclusion Our climate may always be changing, but humans have changed it dramatically in a short time with potentially dire consequences. GHGs emitted from human activities have increased the global temperature and will continue to increase it, even if we ceased all emissions today. International policy makers have built consensus for the need to curb global climate change but have struggled to take specific, significant actions. In contrast, at a smaller scale, local governments and corporations have attempted to mitigate and adapt to an altered future. Taking a proactive stance on climate change can make good business sense. At a minimum, strategic planning should be informed by climate change concerns and the inherent liabilities and opportunities therein. Whether operationalized by large firms or smaller companies, one important form of entrepreneurial innovation inspired by climate change challenges today is to apply tools associated with reduced climate and resource footprints that result in systemic reduction of energy and material inputs. When applied within firms and across supply chains, such tools increase profitability by lowering costs. More important, these measures can lead to innovations made visible by the efforts. At minimum, opportunities for product design and process improvements that both reduce climate change impact and increase resource efficiency and consumer loyalty make sense. Companies that chart a course around the most likely set of future conditions with an eye to competitive advantage, good corporate citizenship, and stewardship of natural resources are likely to optimize their profitability and flexibility—and hence their strategic edge—in the future. ### Key Takeaways • Scientific consensus concludes human activity now influences global climate. • Greenhouse gases (GHGs), of which carbon dioxide (CO2) is predominant, trap heat through their accumulation in the atmosphere. • Governments at all levels and corporations are designing mechanisms and strategies for addressing climate change by monetizing impacts. • Companies are well advised to stay current with the science and analyze their liabilities and opportunities as emissions restrictions are increasingly imposed through tax or market means. ### Exercises 1. Gradual warming of the earth’s temperature is one indication/prediction of climate scientists. What other impacts are being felt today, or are likely to be felt in the future? 2. Given the climate change trends, what social and environmental concerns appear most significant? 3. What are the implications of climate change, and of regulation of GHG emissions, for companies? 4. Under what conditions does a climate change strategy become an opportunity or otherwise make sense for a firm? ## 5.2 East West Partners: Sustainability Strategy ### Learning Objectives 1. Understand the conditions under which entrepreneurial leaders can work inside large companies. 2. Examine how and why sustainability implementation can require working with multiple stakeholders to increase social, environmental, and business benefits. 3. Identify how to translate sustainability thinking into viable corporate strategy. 4. Illustrate how to positively pair ecosystems, climate, sustainable development, and community contribution. The first case looks at how a young entrepreneur, who recently completed his graduate training, successfully built an innovative pilot effort within a large real estate firm that manages real estate and ski resorts. It might seem unlikely that a real estate developer, much less a project focused on expanding a ski resort, could provide a model of sustainable business practices, but real estate developer East West Partners (EWP) has done just that through its collaboration with a ski resort called Northstar Tahoe. Land conservation, waste reduction, and the adoption of wind energy are all part of EWP’s incorporation of environmental and community considerations into every aspect of the project. At the same time the developer realizes significant cost savings and builds a reputation that enhances its competitive advantage. This was accomplished through top leadership’s creating the opportunity for a young man with a newly minted MBA to innovatively integrate sustainability thinking into strategy. ## East West Partners and the Northstar Development East West Partners was founded in the 1970s by a group of real estate professionals working in the Richmond, Virginia, area. To “protect what we’re here to enjoy” was a founding principle for EWP. In the mid-1980s, two senior EWP partners formed autonomous divisions in North Carolina and Colorado, maintaining a commitment to community and environmental quality and a loose affiliation with the Virginia group. In 2000, Booth Creek Holdings, Northstar ski resort’s parent company, approached EWP’s Colorado office about a joint venture to develop land owned by the resort. Their subsequent agreement created East West Partners, Tahoe. EWP’s initial decision to partner in the redevelopment of Northstar was based on the project’s positive economic potential and sense of fit between EWP’s and Northstar’s business philosophy. The project was big. Northstar, a popular, family-oriented ski resort, owned hundreds of acres of land that could be developed into residential home sites, each with a market value of hundreds of thousands of dollars. The expansion and redevelopment of Northstar-at-Tahoe, which included a ski village with an ice rink and a massive increase in resort housing, including fractional-ownership condominiums, was expected to cost$2.7 billion over fifteen years. EWP would get zoning approvals, develop land, and build residences and commercial properties, profiting ultimately from property sales and management.

EWP Tahoe’s chief executive, Roger Lessman, and project manager, David Tirman, reasoned that through careful design and the latest green building techniques they could develop new homes with limited environmental impact that would save money on owner operations, particularly energy and water costs. Furthermore, environmentally responsible development and a proactive approach with the local communities would enhance community relations, possibly ease government approvals, and add to the sales appeal of their properties.

By mid-2002, however, the importance of environmental performance and the level of effort necessary to incorporate it into branding and marketing had exceeded initial expectations. Within a year of helping area residents develop a new community plan, EWP discovered that a small but vocal group of citizens was unilaterally antigrowth and opposed to any development, regardless of efforts toward sustainability. It became clear to Lessman and Tirman that they would need help working with the community and establishing EWP as a resort development industry leader sensitive to local social and environmental concerns.

## The Ski Resort Industry

In the early 1990s, no single ski company could claim more than 3 percent of the North American market. But industry shifts were under way and by 2002, about 20 percent of US ski resorts captured 80 percent of skier visits. The total for US ski visits in 2001–2 was 54,411,000, with the four largest companies accounting for about 15,000,000. The trends toward acquisitions and larger companies with multiple resorts were accelerating. So too were the industry’s awareness and concern about global warming and its accompanying changing weather patterns influencing snowfalls and spring melts. Because of the industry’s intimate links to well-functioning natural systems, its acute weather dependence, and the protection of aesthetic beauty associated with nature, which customers travel there to enjoy (and pay to surround themselves with), the term sustainability was an increasingly familiar one in ski resort strategy discussions.

During the 1990s the industry emphasized ski villages and on-mountain residences. The affluence of aging baby boom generation skiers and their growing affinity for amenities such as shopping, restaurant dining, and off-season recreation alternatives led to a development surge in ski area villages and mountain communities. Unfortunately, social and environmental issues developed alongside the economic windfall provided by ski area land development. The second homes and high-end shops that attracted wealthy skiers also displaced lower-income residents who lived and worked in or near resort areas. Wildlife that was dependent on the fragile mountain habitat was displaced as well.

## The Vision for a More Sustainable Snack Company

By the 1990s, PepsiCo’s Frito-Lay business unit was experiencing healthy growth in earnings and was continuing to expand internationally. In the United States and Canada, Frito-Lay North America was operating more than forty manufacturing facilities, hundreds of distribution centers and sales offices, and a sizeable fleet of delivery vehicles. As the company grew, the costs associated with operating these assets increased as well.

Increasing resource costs, fuel price volatility, and emerging concerns about future resource availability started to worry managers during this time period. Members of the environmental compliance group took the initiative and expanded their traditional regulatory compliance role to also focus proactively on resource conservation as a cost-reduction strategy. Later, a resource conservation and energy team was formed at Frito-Lay’s Plano, Texas, headquarters to coordinate efficiency initiatives across the portfolio of manufacturing and distribution facilities. At the facility level, “Green Teams” and “Energy Teams,” consisting of plant operators and line workers, assembled to closely monitor daily energy and water usage and to identify and implement productivity-boosting resource conservation projects.

Initial results of the resource conservation program were positive, with projects paying back well within the corporate financial benchmark of two to three years and achieving incremental reductions in energy and water use. The company’s senior management, including then CEO Al Bru, took notice of these results and set the stage for a more ambitious program at a time when competitors were only dabbling in the implementation of more efficient business processes.

In 1999, Senior Vice President of Operations Jim Rich challenged the team to expand its efforts into a company-wide effort to reduce resource use and costs. Managers at headquarters defined a set of stretch goals that, if achieved, would take the company’s efforts to the cutting edge of what was feasible on the basis of available technologies while still meeting corporate financial hurdles for the approval of capital expense projects. This set of goals, affectionately known as the BHAGs (“Big Hairy Audacious Goals”),The term “Big Hairy Audacious Goals” is borrowed from James Collins and Jerry Porras’s book Built to Last: Successful Habits of Visionary Companies (New York: HarperCollins, 1997). called for the following efforts:

• A reduction in fuel consumption per pound of product (primarily natural gas) by 30 percent
• A reduction in water consumption per pound of product by 50 percent
• A reduction in electricity consumption per pound of product by 25 percent

Over the next eight years, the Resource Conservation Team and facility Green Teams set about designing, building, and implementing projects across the portfolio of FLNA facilities. Both new and established technologies were piloted, and responsibility was placed on line employees to implement improved operating practices and to monitor variances in resource usage from shift to shift. A growing group of in-house engineering experts—both at headquarters and at manufacturing facilities—oversaw these initiatives, bypassing the need to hire energy service companies (ESCOs), outside consultants often hired for these types of projects, and ensuring that FLNA developed and retained valuable institutional knowledge.

By 2007, the team estimated that it was saving the company $55 million annually in electricity, natural gas, and water expenses, compared with 1999 usage, as a result of the projects implemented to date. Piloted technologies included photovoltaic cells, solar concentrators, landfill gas capture, sky lighting, process steam recapture, and many other energy and water efficiency measures. In 2006, Indra Nooyi was selected as the new chairman and CEO of the PepsiCo. As a thirteen-year veteran of the company, and the former CFO, she was supportive of the resource conservation initiatives at Frito-Lay and within other operating divisions. Nooyi set forth her vision for PepsiCo of “Performance with Purpose” in a speech on December 18, 2006, in New Delhi. “I am convinced that helping address societal problems is a responsibility of every business, big and small,” she said. “Financial achievement can and must go hand-in-hand with social and environmental performance.”Indra K. Nooyi, “Performance with a Purpose” (speech by PepsiCo President and CEO at the US Chamber of Commerce–India/Confederation of Indian Industry, New Delhi, India, December 18, 2006), accessed January 10, 2011, http://www.wbcsd.org/DocRoot/61wUYBaKS2N35f9b41ua/IKN-IndiaSpeechNum6FINAL.pdf. This statement established her triple-bottom-line vision for growth at the company.The term triple-bottom-line refers to a concept advanced by John Elkington in his book Cannibals with Forks: The Triple Bottom Line of 21st Century Business (Mankato, MN: Capstone Publishers, 1998). Companies that embrace triple-bottom-line thinking believe that to achieve sustained growth in the long term, they must demonstrate good financial, environmental, and social performance, also referred to as “sustainable business.” In line with this new vision, and with the support of the FLNA finance team, what started as a productivity initiative began to push the boundaries of traditional business thinking about the value of “sustainable” operating practices. By the end of the twenty-first century’s first decade, all PepsiCo business units were adding environmental and resource conservation criteria to the capital expense approval process. With buy-in from the FLNA CFO, the benchmarks for capital expenditure projects were extended if a project could demonstrate additional benefits outside of traditional net present value calculations. This change was justified on the following grounds: • New technological and manufacturing capabilities are of long-term value to the company and can result in future cost-cutting opportunities. • Pilot projects that combine multiple technologies serve as a proof of concept for previously undiscovered operational synergies. • Such projects are a part of overall corporate risk mitigation strategy to reduce dependence on water, energy, and raw materials in the face of resource cost pressures and an increasingly resource-constrained world. • Sustainably manufactured products will have a place in the marketplace and will contribute to sales dollars, customer loyalty, and increased market share relative to competitors who do not innovate. • Emerging government regulation, particularly with regard to carbon, could create additional value streams. For example, under a cap-and-trade system, projects that reduce net emissions would potentially generate carbon credits, which could be sold in a market. • Water, electric, and natural gas inflation rates have been increasing even beyond expectations. ## Measuring and Reporting GHG Emissions A secondary benefit of FLNA’s conservation initiatives was the collection of rich data about operations, productivity, and resource usage. The efforts of each facility Energy Team to implement the corporate resource conservation program resulted in an in-depth understanding of the impact each project had on fuel and electricity consumption in the manufacturing process. Managers at headquarters were able to piece together an aggregate picture of energy consumption across the organization. Around the same time period, managers within the environmental compliance group started to voice their opinion that the company should be documenting its success in improving the energy efficiency of its operations. During the 1990s, the issue of climate change was receiving increased attention globally—and the Clinton administration was warning that reductions in US emissions of GHGs would be necessary in the future as a part of the solution to this emerging global problem. FLNA managers believed that future climate regulation was likely and were concerned that they might be penalized relative to their competitors in the event that the government limited GHG emissions from manufacturing operations. Future emissions caps were likely to freeze a company’s emissions at their current levels or to mandate a reduction to a lower level. Managers were concerned that all the reductions in emissions made by the company prior to the establishment of a regulatory limit would be ignored. As a result, they sought out potential venues for documenting their successes. Through dialogues with the US Environmental Protection Agency (EPA), the company learned about a new voluntary industry partnership program aimed at the disclosure and reduction of corporate emissions of GHGs. The Climate Leaders program was the flagship government initiative aimed at working with US companies to reduce GHG emissions, and it provided its partners with a number of benefits. The program, a government-sponsored forum for disclosure of emissions information, offered consulting assistance to companies in the creation of a GHG emissions inventory. In exchange for these benefits, Climate Leaders partners were required to annually disclose emissions and to set a meaningful goal and date by which they would achieve reductions. In 2004, FLNA signed a partnership agreement with Climate Leaders—publicly disclosing its corporate emissions since 2002.The Climate Leaders program allowed individual business units or parent corporations to sign partnership agreements. In the years since FLNA signed its partnership with Climate Leaders, PepsiCo started reporting the aggregate emissions of all business units via the Carbon Disclosure Project (CDP). The emissions data presented in this case are included in the consolidated emissions reported by PepsiCo through the CDP. By joining the program, FLNA challenged itself to improve the efficiency of its operations even more. A corporate goal of reducing carbon dioxide (CO2) equivalent emissions per ton of manufactured product by 14 percent from 2002 to 2010 was included as a part of the partnership agreement. Public inventory results through 2007 are provided in Table 5.1 "FLNA Public GHG Inventory Results, 2002–7" and include emissions from the following sources: • Scope 1.The terms Scope 1 and Scope 2 refer to categories of greenhouse gas emissions as defined by the World Business Council for Sustainable Development/World Resource Institute Greenhouse Gas Protocol, which is the accounting standard used by Climate Leaders, the Carbon Disclosure Project, and other organizations. Scope 1 emissions are direct. Scope 2 emissions are indirect. Natural gas, coal, fuel oil, gasoline, diesel, refrigerants (hydrofluorocarbons [HFCs], perfluorocarbons [PFCs]). • Scope 2. Purchased electricity, purchased steam. Table 5.1 FLNA Public GHG Inventory Results, 2002–7 Scope 1 Emissions (Metric Tons CO2 Eq) Scope 2 Emissions (Metric Tons CO2 Eq) Total Emissions (Metric Tons CO2 Eq) Metric Tons of Product Manufactured Normalized Total 2002 1,072,667 459,088 1,530,755 1,287,069 1.19 2003 1,081,634 452,812 1,534,446 1,304,939 1.18 2004 1,066,906 455,122 1,522,028 1,324,137 1.15 2005 1,113,061 464,653 1,577,714 1,401,993 1.13 2006 1,076,939 456,466 1,533,405 1,394,632 1.10 2007 (Projected) 1,084,350 442,425 1,526,775 1,442,756 1.06 ## Taking the Next Step By 2007, FLNA was well on its way to achieving the goal of a 14 percent reduction in normalized emissionsEmissions reduction goals are generally stated in either “absolute” or “normalized” terms. In the former, a company commits to reduce the total emissions generated over some period of time. In the latter, a commitment is made to reduce the emissions generated per some unit of production (e.g., pounds of product, units manufactured, etc.). A normalized emissions metric can illustrate increased efficiency in manufacturing a product or producing a service over time and is often preferred by businesses that are growth oriented.—having reduced emissions by 11 percent in the prior five years. Resource conservation projects had been rolled out at plants and distribution centers across North America to improve the efficiency with which products were manufactured and distributed to retailers. Over the same seven-year period, top-line sales grew by 35 percent.Sales data are extracted from publicly available PepsiCo Inc. annual reports, 2002–7. PepsiCo, “Annual Reports,” accessed January 7, 2011, http://www.pepsico.com/Investors/Annual-Reports.html. As a result of the increase in sales and decrease in emissions intensity, absolute emissions, or the sum total of emissions from all sources, remained relatively flat during this period. (See Figure 5.10 "Growth in FLNA Sales and Emissions over Time" for a summary of growth in sales and emissions over time.) Figure 5.10 Growth in FLNA Sales and Emissions over Time For most companies, this substantial reduction in emissions intensity per unit of production would be cause for celebration. Although FLNA managers were pleased with their progress, they were hopeful that future projects could reduce absolute emissions—enabling the company to meet or exceed future regulatory challenges by arresting the growth of GHG emissions while continuing to deliver sustained growth in earnings to shareholders. For the innovators at FLNA, and PepsiCo as a whole, this strategy was part of fulfilling the “Performance with a Purpose” vision set forth by their CEO. It was time to set a new goal for the team. As they had done almost ten years before, members of the resource conservation team floated ideas about how they could push the limits of available technologies to achieve a new, more aggressive goal of cutting absolute resource usage without limiting future growth prospects. A variety of technologies was available to the team, many of which had been piloted separately at one or more facilities. One manager asked the question, “What if we could package all these technologies together in one place? How far off the water, electricity, and natural gas grids could we take a facility?”Andrea Larson, Frito-Lay North America: The Making of a Net Zero Snack Chip, UVA-ENT-0112 (Charlottesville: Darden Business Publishing, University of Virginia, May 4, 2009).The team developed this kernel of an idea, which came to be the basis for what would be a new type of facility. The vision for this net-zero facility was simple: to maximize the use of renewable energy and to dramatically reduce the consumption of water in a manufacturing plant. ## Going Net Zero at Casa Grande Planning for its pilot net-zero facility began in earnest. Rather than build a new manufacturing facility, managers selected one of the company’s existing plants for extensive upgrades. But selecting which plant to use for the pilot was in itself a challenge, due to the varying effectiveness of certain renewable technologies in different geographic regions, production line characteristics, plant size considerations, and other factors. With the assistance of the National Renewable Energy Laboratory (NREL), members of the headquarters operations team began evaluating a preselected portfolio of seven plants on the basis of a number of key criteria. Available energy technologies were mapped over geographic facility locations to predict potential effectiveness (e.g., solar panels were more effective in sunnier locales). An existing software model was modified to determine the best combination of renewable technologies by location while minimizing life-cycle costs of the proposed projects. The results of the NREL model, when combined with a number of other qualitative factors, pointed to the Casa Grande, Arizona, manufacturing plant as the best location to pilot the net-zero facility. Casa Grande’s desert location in the distressed Colorado River watershed made it a great candidate for water-saving technologies, and the consistent sunlight of the Southwest made it a prime facility for solar energy technologies. Approximately one hundred acres of available land on the site provided plenty of space for deploying new projects. In addition, Casa Grande was a medium-size manufacturing operation, ensuring that the project would be tested at a significant scale to produce transferable results. Casa Grande was a manufacturing location for Lay’s potato chips, Doritos tortilla chips, Fritos corn chips, and Cheetos cheese-flavored snacks and was the planned location for a future SunChips multigrain snacks production line. Although the ingredients for each product were different, the production processes were somewhat similar. Water was used in the cleaning and processing of ingredients. Energy in the form of electricity and natural gas was used to power production equipment, heat ovens, and heat cooking oil. A summary diagram of the production process for the snacks is provided in Figure 5.11 "Production Process at Casa Grande, Arizona, Plant". Figure 5.11 Production Process at Casa Grande, Arizona, Plant Per the net-zero vision, a number of new technologies were being evaluated in concert as replacements for current technologies. These proposals included the following: • A concentrated solar heating unit. Hundreds of mirrors positioned outside the facility would concentrate and redirect solar energy to heat water in a pipe to very high temperatures. The water would be pumped into the facility and used as process steam to heat fryer oil. Frito-Lay had successfully tested this technology at a Modesto, California, plant. • Photovoltaic solar panels to generate electricity. • A membrane bioreactor and nanofiltration system to recover and filter processing wastewater to drinking water quality for continuous reuse in the facility. • A biomass-burning power plant to generate process steam or electricity. Sources of biomass for the plant could include crop waste from suppliers, waste from the production process, and sediments collected in the membrane bioreactor. Although this combination of technologies had never before been piloted at a single facility, the results from individual projects at other facilities suggested that results at Casa Grande would be very promising. Based on these past experiences, the resource conservation team expected to achieve a 75 percent reduction in water use, an 80 percent reduction in natural gas consumption, and a 90 percent reduction in purchased electricity. Approximately 80 percent of the reduction in natural gas would come through the substitution of biomass fuels. (See Table 5.2 "Summary of Resource Use and Production at Casa Grande, Arizona, 2002–10 (Projected)" for a summary of historical and projected resource use and production at Casa Grande.) Table 5.2 Summary of Resource Use and Production at Casa Grande, Arizona, 2002–10 (Projected) Electricity Usage (kWh) Average per kWh Price (Dollars) Natural Gas Usage (mmBtu) Average per mmBtu Price (Dollars) Water Usage (Kilo-Gallons) Average per Kilo-Gallon Price (Dollars) Metric Tons of Product Manufactured 2002 18,000,000 0.072 350,000 4.00 150,000 1.20 45,455 2003 18,360,000 0.074 357,000 4.60 153,000 1.26 46,818 2004 18,727,200 0.076 364,140 5.29 156,060 1.32 48,223 2005 19,101,744 0.079 371,423 6.08 159,181 1.39 49,669 2006 19,483,779 0.081 378,851 7.00 162,365 1.46 51,159 2007 19,873,454 0.083 386,428 8.05 165,612 1.53 52,694 2008 (Projected) 20,270,924 0.086 394,157 9.25 168,924 1.61 54,275 2009 (Projected) 20,676,342 0.089 402,040 10.64 172,303 1.69 55,903 2010 (Projected) 21,089,869 0.091 410,081 12.24 175,749 1.77 57,580 Note: Actual operating data are disguised but directionally correct. ## Making the Call: Evaluating the Project at Casa Grande After months of preparation and discussions, the net-zero team gathered in Plano, Texas, and via teleconference to decide the fate of the Casa Grande project. In the room were representatives from Operations, Marketing, Finance, and Public Affairs. On the phone from Arizona was Jason Gray, chief engineer for the Casa Grande facility and head of its Green Team. Leading the discussion were Al Halvorsen, the Resource Conservation Team leader, and Dave Haft, group vice president for Sustainability and Productivity. The meeting was called to order and Halvorsen welcomed the team members, who had spent several months evaluating Casa Grande’s viability as the net-zero pilot facility. “Each of you was charged with investigating the relevant considerations on the basis of your functional areas of expertise,” Halvorsen said. “I’d like to start by going around the table and hearing the one-minute version of your thoughts and concerns before digging into the details. Let’s begin by hearing from the facility team.”Andrea Larson, Frito-Lay North America: The Making of a Net Zero Snack Chip, UVA-ENT-0112 (Charlottesville: Darden Business Publishing, University of Virginia, May 4, 2009). Unless otherwise specified, quotations in this section are from this source. Each of the managers shared his or her synopsis. Jason Gray, chief facility engineer at Casa Grande, said, There’s a strong interest among the Green Team and our line workers about the possibility of being the proving ground for a new company-wide environmental initiative. But we need to recognize the potential challenges associated with layering in all these technologies together at once. In the past, our efficiency-related projects have involved proven technologies and were spread out incrementally over time. These projects will hit in rapid succession. That being said—we’ve always rallied around a challenge in the past. I imagine that we’ll hit a few snags on the way, but we’re up for it. Larry Perry, group manager for environmental compliance and engineering, said, On the whole, we are very optimistic about the reductions in energy and water usage that can be achieved as a result of the proposed mix of technologies at the facility. These reductions will have a direct impact on our bottom line, taking operating costs out of the equation and further protecting the company against future spikes in resource prices. In addition, our improved energy management will yield significant reductions in greenhouse gas emissions—perhaps even opening the door for our first absolute reductions of company-wide emissions. Although the carbon numbers are not yet finalized, we are working to understand the potential financial implications if future government regulations are imposed. Anne Smith, brand manager, said, Casa Grande is the proposed site of a new manufacturing line for a new SunChips manufacturing line. Although this line won’t account for all our production of SunChips snacks, it could strengthen our existing messaging tying the brand to our solar-energy-driven manufacturing initiatives. While we are optimistic that our sustainable manufacturing initiatives will drive increased sales and consumer brand loyalty, we have been unable to directly quantify the impact to our top line. As always, although we want to share our successes with the consumer, we want to continue to make marketing decisions that will not be construed as “green-washing.” Bill Franklin, financial analyst, said, I’ve put together a discounted cash-flow model for the proposed capital expense projects, and over the long term we just clear the hurdle. Although this is an NPV-positive project, we’re a few years beyond our extended payback period for energy projects. I know there are additional value streams that are not included in my analysis. As a result, I’ve documented these qualitative benefits but have excluded any quantitative impacts from my DCF analysis. Aurora Gonzalez, public affairs, said, As we look to the future, we all need to be aware that potential green-washing accusations are a primary concern. We must balance the desire to communicate our positive strides, while continuing to emphasize that our efforts in sustainability are a journey with an undetermined ending point. Al Halvorson and David Haft listened attentively, aware that the decision had to accommodate the diverse perspectives and resonate strategically at the top level of the corporation. Discussion ensued, with strong opinions expressed. After the meeting ended, Halverson and Haft agreed to talk privately to reach a decision. An assessment of the facility’s carbon footprint would be part of that decision. The following discussion provides background and analytic guidance for understanding carbon footprint analysis. It can be used with the preceding case to provide students with the tools to calculate the facility’s carbon footprint. The material is broadly applicable to any facility, thus the formulas provided in this section may be useful in applying carbon footprint analysis to any company’s operations. ## Corporate GHG Accounting: Carbon Footprint AnalysisThis section is a reprint of Andrea Larson and William Teichman, “Corporate Greenhouse Gas Accounting: Carbon Footprint Analysis,” UVA-ENT-0113 (Charlottesville: Darden Business Publishing, University of Virginia, May 4, 2009). For much of the twentieth century, scientists speculated that human activities, such as the widespread burning of fossil fuels and large-scale clearing of land, were causing the earth’s climate system to become unbalanced. In 1979, the United Nations took a preliminary step to address this issue when it convened the First World Climate Conference. In the years that followed, governments, scientists, and other organizations continued to debate the extent and significance of the so-called climate change phenomenon. During the 1990s, scientific consensus on climate change strengthened significantly. By the turn of the century, approximately 99 percent of peer-reviewed scientific articles on the subject agreed that human-induced climate change was a reality.See Naomi Oreskes, “Beyond the Ivory Tower: The Scientific Consensus on Climate Change,” Science 306, no. 5702 (December 3, 2004): 1686, accessed February 6, 2009, http://www.sciencemag.org/cgi/content/full/306/5702/1686; Cynthia Rosenzweig, David Karoly, Marta Vicarelli, Peter Neofotis, Qigang Wu, Gino Casassa, Annette Menzel, et al., “Attributing Physical and Biological Impacts to Anthropogenic Climate Change,” Nature 453 (May 15, 2008): 353–57; National Academy of Sciences Committee on the Science of Climate Change, Climate Change Science: An Analysis of Some Key Questions (Washington, DC: National Academy Press, 2001); and Al Gore, An Inconvenient Truth (New York: Viking, 2006). While modelers continued to refine their forecasts, a general consensus emerged among the governments of the world that immediate action must be taken to reduce human impacts on the climate system.A broader discussion of the history and science of climate change is beyond the scope of this note. For additional information synthesized for business students on this subject, see Climate Change, UVA-ENT-0157 (Charlottesville: Darden Business Publishing, University of Virginia, 2010). Large numbers of businesses initially responded to the climate change issue with skepticism. The American environmental regulatory landscape of the 1970s and 1980s was tough on business, with sweeping legislative initiatives relating to air quality, water quality, and toxic waste remediation. Private industry was still reacting to this legislation when scientific consensus was building on climate change. Many companies were content to wait for scientists and government officials to reach an agreement on the best path forward before taking action or, in some instances, to directly challenge the mounting scientific evidence. In recent years, however, a number of factors have contributed to a shift in corporate opinion. These factors include growing empirical data of human impacts on the global climate system, definitive reports by the UN Intergovernmental Panel on Climate Change, and increased media and government attention on the issue. Perhaps most significant, however, is the impact that rising energy costs and direct pressure from shareholders to disclose climate-related operating risks are having on business managers who can for the first time connect this scientific issue with financial considerations. A number of leading companies and entrepreneurial start-ups are using the challenge of climate change as a motivating force to shift strategic direction. These companies are measuring their GHG emissions, aggressively pursuing actions that will reduce emissions, and shifting product and service offerings to meet new customer demands. In the process, they are cutting costs, reducing exposure to weather and raw material risks, and unlocking growth opportunities in the emerging markets for carbon trading. This technical note introduces a number of concepts relating to how companies are responding to the issue of climate change, with the goal of helping business managers develop a practical understanding in several key areas. The purposes of this note are to (1) present a working language for discussing climate issues, (2) introduce the history and motivation behind corporate emissions disclosure, and (3) describe a basic calculation methodology used to estimate emissions. ## Carbon, Footprints, and Offsets As with any emerging policy issue, a vocabulary has evolved over time to support climate change discussions. Academics, policy makers, nongovernmental organizations (NGOs), and the media speak in a language that is at times confusing and foreign to the uninitiated. An exhaustive introduction of these terms is not possible in this section, but a handful of frequently used terms that are central to understanding the climate change issue in a business context are introduced in the following paragraphs. ## The Greenhouse Effect Earth’s atmosphere allows sunlight to pass through it. Sunlight is absorbed and reflected off the planet’s surfaces toward space. The atmosphere traps some of this reflecting energy, retaining it much like the glass walls of a greenhouse would and maintaining a range of temperatures on the planet that can support life. Climate scientists hypothesize that human activity has dramatically increased concentrations of certain gases in the atmosphere, blocking the return of solar energy to space and leading to higher average temperatures worldwide. ## GHGs The atmospheric gases that contribute to the greenhouse effect include (but are not limited to) CO2, methane (CH4), nitrous oxide (N2O), and chlorofluorocarbons (CFCs). Note that not all the gases in earth’s atmosphere are GHGs; for example, oxygen and nitrogen are widely present but do not contribute to the greenhouse effect. ## Carbon Carbon is a catchall term frequently used to describe all GHGs. “Carbon” is short for carbon dioxide, the most prevalent of all GHGs. Because carbon dioxide (CO2) is the most prevalent GHG, it has become the standard by which emissions of other GHGs are reported. Emissions of gases such as methane are “converted” to a “CO2 equivalent” in a process similar to converting foreign currencies into a base currency for financial reporting purposes. The conversion is made on the basis of the impact of each gas once it is released into the earth’s atmosphere, as measured relative to the impact of CO2. ## Footprint A footprint is the measurement of the GHG emissions resulting from a company’s business activities over a given time period. In general, companies calculate their corporate emissions footprint for a twelve-month period. Established guidelines for GHG accounting are used to define the scope and methodology to be used in the creation of the footprint calculation. The term carbon footprint is sometimes used interchangeably with greenhouse gas inventory. In addition to enterprise-wide inventories, companies and individuals are increasingly calculating the footprint of individual products, services, events, and so forth. ## Offset In the most basic sense, an offset is an action taken by an organization or individual to counteract the emissions produced by a separate action. If, for example, a company wanted to offset the GHG emissions produced over a year at a manufacturing facility, it could either take direct actions to prevent the equivalent amount of emissions from entering the atmosphere from other activities or compensate another organization to take this action. This latter arrangement is a fundamental concept of some government-mandated emissions regulations. Within such a framework, a paper mill that switches from purchasing coal-generated electricity to generating on-site electricity from scrap-wood waste could generate offset credits and sell these credits to another company looking to offset its emissions. Offsets are known by a variety of names and are traded in both regulated (i.e., government-mandated) and unregulated (i.e., voluntary) markets. Standards for the verification of offsets continue to evolve due to questions that have been raised about the quality and validity of some products. ## Carbon-Neutral A company can theoretically be characterized as carbon-neutral if it causes no net emissions over a designated time period, meaning that for every unit of emissions released, an equivalent unit of emissions has been offset through other reduction measures. Companies that have made a carbon-neutrality commitment attempt to reduce their emissions by becoming as operationally efficient as possible and then purchasing offsets equivalent to the remaining balance of emissions each year. Although most companies today emit some level of GHGs via operations, carbon markets enable the neutralization of their environmental impact by paying another entity to reduce its emissions. In theory, such arrangements result in lower net global emissions of GHGs and thereby give companies some credibility to claim relative neutrality with regard to their impact on climate change. ## Cap-and-Trade System A number of policy solutions to the climate change challenge are currently under consideration by policy makers. A direct tax on carbon emissions is one solution. An alternative market-based policy that has received a great deal of attention in recent years is the cap-and-trade system. Under such a system, the government estimates the current level of a country’s GHG emissions and sets a cap (an acceptable ceiling) on those emissions. The cap represents a target level of emissions at or below the current level. After setting this target, the government issues emissions permits (i.e., allowances) to companies in regulated industries. The permits provide the right to emit a certain quantity of GHGs in a single year. The permits in aggregate limit emissions to the level set by the cap. Initial permit distribution approaches range from auctions to government allocation at no cost to individual firms. In either case, following the issuance of permits, a secondary market can be created in which companies can buy and sell permits. At the end of the year, companies without sufficient permits to cover annual corporate emissions of GHGs either purchase the necessary permits in the marketplace or are required to pay a penalty. Companies who have reduced their emissions at a marginal cost lower than the market price of permits typically choose to sell their allotted permits to create additional revenue streams. To steadily reduce economy-wide emissions over time, the government lowers the cap (and thus further restricts the supply of permits) each year, forcing regulated companies to become more efficient or pay penalties. The cap-and-trade approach is touted as an efficient, market-based solution to reducing the total emissions of an economy. ## Corporate Climate Change Corporate attitudes about climate change shifted dramatically between 2006 and 2009, with dozens of large companies announcing significant sustainability initiatives. During this time, major business periodicals such as BusinessWeek and Fortune for the first time devoted entire issues to “green” matters, and the Wall Street Journal launched an annual ECO:nomics conference to bring together corporate executives to answer questions on how their companies are solving environmental challenges. Today, a majority of large companies are measuring their carbon footprints and reporting the information to the public and shareholders through established channels. (See the discussion of the Carbon Disclosure Project later in this section.) A number of companies that were silent or openly questioned the validity of climate science during the 1990s are now engaged in public dialogue and are finding ways to reduce emissions of GHGs. In 2007, a group including Alcoa, BP, Caterpillar, Duke Energy, DuPont, General Electric, and PG&E created the US Climate Action Partnership (USCAP) to lobby Congress to enact legislation that would significantly reduce US GHG emissions. By 2009, USCAP had added approximately twenty more prominent partners and taken steps to pressure legislators for a mandatory carbon cap-and-trade system. The organization included the Big Three US automakers, a number of major oil companies, and some leading NGOs. In addition to financial considerations, the case for corporate action on climate change is strengthened by a number of other factors. First, the proliferation of emissions regulations around the world creates a great deal of uncertainty for US firms. A company operating in Europe, California, and New England could face three separate emissions regulatory regimes. Without a more coordinated effort on the part of the United States and other governments to create unified legislation, firms could face an even more kaleidoscopic combination of regulations. Business leaders are addressing these concerns by becoming more actively engaged in the policy debate. A second motivator for corporate action is shareholder pressure for increased transparency on climate issues. As our understanding of climate change improves, it is clear that impacts in the natural world as well as government-imposed emissions regulations will have a tremendous effect on the way that companies operate. Climate change has emerged as a key source of risk—an uncertainty that shareholders feel entitled to more fully understand. In 2002, a group of institutional investors united to fund the nonprofit Carbon Disclosure Project (CDP). The organization serves as a clearinghouse through which companies disclose emissions data and other qualitative information to investors. The CDP has become the industry standard for voluntary corporate emissions reporting, and each year the organization solicits survey questionnaire responses from more than three thousand firms. In 2008, three hundred institutional investors representing over$57 trillion in managed assets supported the CDP.For details about the questionnaire, see the Carbon Disclosure Project, “Overview,” https://www.cdproject.net/en-US/Respond/Pages/overview.aspx.

In 2007, the CDP received survey responses from 55 percent of the companies in the Fortune 500 list. This high level of participation speaks to the seriousness with which many companies are addressing climate change.

## The Greenhouse Gas Protocol

The measurement of GHG emissions is important for three reasons: (1) a complete accounting of emissions allows for voluntary disclosure of data to organizations such as the CDP, (2) it provides a data set that facilitates participation in mandatory emissions regulatory systems, and (3) it encourages the collection of key operational data that can be used to implement business improvement projects.

GHG accountingThe practice of measuring corporate emissions, similar to generally accepted accounting principles in the financial world. is the name given to the practice of measuring corporate emissions. Similar to generally accepted accounting principles in the financial world, it is a set of standards and principles that guide data collection and reporting in this new field. The Greenhouse Gas Protocol is one commonly accepted methodology for GHG accounting and is the basis for voluntary reporting initiatives such as the CDP. It is an ongoing initiative of the World Resources Institute and the World Business Council for Sustainable Development to provide a common standard by which companies and governments can measure and report emissions of GHGs.

The Greenhouse Gas Protocol provides critical guidance for companies attempting to create a credible inventory of emissions resulting from its operations. In particular, it explains how to do the following:

• Determine organizational boundaries. Corporate structures are complex and include wholly owned operations, joint ventures, subsidiaries, collaborations, and a number of other entities. The protocol helps managers define which elements compose the “company” for emissions quantification purposes. A large number of companies elect to include all activities over which they have “operational control” and can thus influence decision making about how business is conducted.
• Determine operational boundaries. Once managers identify which branches of the organization are to be included in the inventory, they must identify and evaluate which specific emissions sources will be included. The protocol identifies two major categories of sources:

Direct sources. These are sources owned or controlled by the company that produce emissions. Examples include boilers, furnaces, vehicles, and other production processes.

Indirect sources. These sources are not directly owned or controlled by the company but are nonetheless influenced by its actions. A good example is electricity purchased from utilities that produce indirect emissions at the power plant. Other indirect sources include employee commuting, emissions generated by suppliers, and activities that result from the customer use of products, services, or both.

• Track emissions over time. Companies must select a “base year” against which future emissions will be measured, establish an accounting cycle, and determine other aspects of how they will track emissions over time.
• Collect data and calculate emissions. The protocol provides specific guidance about how to collect source data and calculate emissions of GHGs. The next section provides an overview of these concepts.

## A Basic Methodology for Calculating Emissions

The calculation of GHG emissions is a process that differs depending on the emissions source.Although fossil fuel combustion is one of the largest sources of anthropogenic GHG emissions, other sources include process emissions (released during chemical or manufacturing processes), landfills, wastewater, and fugitive refrigerants. For the purposes of this note, we only present energy-related emissions examples. As a general rule of thumb, a consumption quantity (fuel, electricity, etc.) is multiplied by a series of source-specific “emissions factors” to estimate the quantity of each GHG produced by the source. (See Table 5.3 "Emissions Factors for Stationary Combustion of Fuels" for a list of relevant emissions factors by type of fuel for stationary sources, Table 5.4 "Emissions Factors for Mobile Combustion of Fuels" for mobile sources, and Table 5.5 "Source-Specific Emissions Factors" for electricity purchases from producers.) Each emissions factorA measure of the average amount of a given greenhouse gas, reported in weight, that is generated from the combustion of a unit of the energy source. Emissions factors permit easy conversion from fuel input to emissions. is a measure of the average amount of a given GHG, reported in weight, that is generated from the combustion of a unit of the energy source. For example, a gallon of gasoline produces on average 8.7 kg of CO2 when combusted in a passenger vehicle engine.Time for Change, “What Is a Carbon Footprint—Definition,” accessed January 29, 2011, http://timeforchange.org/what-is-a-carbon-footprint-definition.

Table 5.3 Emissions Factors for Stationary Combustion of Fuels

Emissions Source GHG Type Emissions Factor Starting Unit Ending Unit
Natural gas CO2 52.79 MMBtu kg
Natural gas CH4 0.00475 MMBtu kg
Natural gas N2O 0.000095 MMBtu kg
Propane CO2 62.73 MMBtu kg
Propane CH4 0.01 MMBtu kg
Propane N2O 0.000601 MMBtu kg
Gasoline CO2 70.95 MMBtu kg
Gasoline CH4 0.01 MMBtu kg
Gasoline N2O 0.000601 MMBtu kg
Diesel fuel CO2 73.2 MMBtu kg
Diesel fuel CH4 0.01 MMBtu kg
Diesel fuel N2O 0.000601 MMBtu kg
Kerosene CO2 71.58 MMBtu kg
Kerosene CH4 0.01 MMBtu kg
Kerosene N2O 0.000601 MMBtu kg
Fuel oil CO2 72.42 MMBtu kg
Fuel oil CH4 0.01 MMBtu kg
Fuel oil N2O 0.000601 MMBtu kg

Table 5.4 Emissions Factors for Mobile Combustion of Fuels

Emissions Source GHG Type Emissions Factor Starting Unit Ending Unit
Gasoline, cars CO2 8.79 gallons kg
Diesel, cars CO2 10.08 gallons kg
Gasoline, light trucks CO2 8.79 gallons kg
Diesel, light trucks CO2 10.08 gallons kg
Diesel, heavy trucks CO2 10.08 gallons kg
Jet fuel, airplanes CO2 9.47 gallons kg

Table 5.5 Source-Specific Emissions Factors

eGRID Subregion Acronym eGRID Subregion Name CO2 Emissions Factor (lb/MWH) CH4 Emissions Factor (lb/MWH) N2O Emissions Factor (lb/MWH)
AKGD ASCC Alaska Grid 1,232.36 0.026 0.007
AKMS ASCC Miscellaneous 498.86 0.021 0.004
AZNM WECC Southwest 1,311.05 0.017 0.018
CAMX WECC California 724.12 0.030 0.008
ERCT ERCOT All 1,324.35 0.019 0.015
FRCC FRCC All 1,318.57 0.046 0.017
HIMS HICC Miscellaneous 1,514.92 0.315 0.047
HIOA HICC Oahu 1,811.98 0.109 0.024
MROE MRO East 1,834.72 0.028 0.030
MROW MRO West 1,821.84 0.028 0.031
NEWE NPCC New England 927.68 0.086 0.017
NWPP WECC Northwest 902.24 0.019 0.015
NYCW NPCC NYC/Westchester 815.45 0.036 0.005
NYLI NPCC Long Island 1,536.80 0.115 0.018
NYUP NPCC Upstate NY 720.80 0.025 0.011
RFCE RFC East 1,139.07 0.030 0.019
RFCM RFC Michigan 1,563.28 0.034 0.027
RFCW RFC West 1,537.82 0.018 0.026
RMPA WECC Rockies 1,883.08 0.023 0.029
SPNO SPP North 1,960.94 0.024 0.032
SPSO SPP South 1,658.14 0.025 0.023
SRMV SERC Mississippi Valley 1,019.74 0.024 0.012
SRMW SERC Midwest 1,830.51 0.021 0.031
SRSO SERC South 1,489.54 0.026 0.025
SRTV SERC Tennessee Valley 1,510.44 0.020 0.026
SRVC SERC Virginia/Carolina 1,134.88 0.024 0.020

Because multiple GHGs are measured in the inventory process, the accounting process calculates emissions for each type of gas. As common practice, emissions of non-CO2 gases are converted to a “CO2 equivalent” to facilitate streamlined reporting of a single emissions number. In this conversion, emissions totals for a gas like methane are multiplied by a “global warming potential” to convert to a CO2 equivalent. (See Table 5.6 "Global Warming Potentials" for a list of GHGs and their global warming potentials.)

Table 5.6 Global Warming Potentials

GHG Global Warming Potential
CO2 1
CH4 25
N2O 298

Given the scale of many companies, it is easy to become overwhelmed by the prospect of accounting for all the GHG emissions produced in a given year. In reality, quantifying the emissions of a Fortune 50 firm or a small employee-owned business involves the same process. The methodology for calculating emissions from a single facility or vehicle is the same as that used to calculate emissions for thousands of retail stores or long-haul trucks.

For the purposes of this note, we will illustrate the inventory process for a sole proprietorship. The business owner is a skilled cabinetmaker who manufactures and installs custom kitchen cabinets, bookshelves, and other high-end products for homes. She leases several thousand square feet of shop space in High Point, North Carolina, and owns a single gasoline-powered pickup truck that is used for delivering products to customers.

The business owner consults the Greenhouse Gas Protocol and identifies three emissions sources. Direct emissions sources include the gasoline-powered truck and a number of natural-gas-powered tools on the shop floor. Indirect emissions sources include the electricity that the company purchases from the local utility on a monthly basis.

The owner starts by collecting utility usage data. She reviews accounts payable records for the past twelve months to determine the quantities of fuel and electricity purchased. The records reveal total purchases of 26,700 MMBtus of natural gas; 2,455 gallons of gasoline; and 115,400 kWh of electricity. The calculations for emissions from each source are illustrated in Table 5.7 "Direct and Indirect Emissions from All Sources".

Table 5.7 Direct and Indirect Emissions from All Sources

 (a) Direct emissions from natural gas combustion $MMBtus of natural gas consumed × GHG emissions factor × Global warming potential =kg of gas MathType@MTEF@5@5@+=feaagyart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLnhiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr4rNCHbGeaGqiVu0Je9sqqrpepC0xbbL8F4rqqrFfpeea0xe9Lq=Jc9vqaqpepm0xbba9pwe9Q8fs0=yqaqpepae9pg0FirpepeKkFr0xfr=xfr=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@83EA@$ Assumption: The combustion of natural gas emits three GHGs: CO2, CH4, and N2O. GHG MMBtus of natural gas Emissions factor Global warming potential kg CO2 equivalent CO2 26,700 52.79 1 1,409,493 CH4 26,700 0.00475 25 3,171 N2O 26,700 0.000095 298 756 Total kg 1,413,420 (b) Direct emissions from vehicle gasoline combustionFor the purposes of this note, we assume that emissions of CH4 and N2O are so small from the combustion of gasoline that they amount to a negligible difference. For the purposes of estimating emissions from gasoline combustion, many technical experts take this approach. The omission of calculations for CH4 and N2O is justified on the basis that the emissions factor used for CO2 assumes that 100 percent of the fuel is converted into gas during the combustion process. In reality, combustion in a gasoline engine is imperfect, and close to 99 percent of the fuel is actually converted to gases (the rest remains as solid matter). The resulting overestimation of CO2 emissions more than compensates for the omission of CH4 and N2O. $Gallons of gasoline consumed × GHG emissions factor × Global warming potential =kg of gas MathType@MTEF@5@5@+=feaagyart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLnhiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr4rNCHbGeaGqiVu0Je9sqqrpepC0xbbL8F4rqqrFfpeea0xe9Lq=Jc9vqaqpepm0xbba9pwe9Q8fs0=yqaqpepae9pg0FirpepeKkFr0xfr=xfr=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@817D@$ Assumption: The combustion of gasoline in vehicles produces negligible amounts of GHGs other than CO2. GHG Gallons of gasoline Emissions factor Global warming potential kg CO2 equivalent CO2 2,455 8.79 1 21,579 Total kg 21,579 (c) Indirect emissions from the consumption of purchased electricity $kWh of electricity purchased × GHG emissions factor × Global warming potential =kg of gas MathType@MTEF@5@5@+=feaagyart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLnhiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr4rNCHbGeaGqiVu0Je9sqqrpepC0xbbL8F4rqqrFfpeea0xe9Lq=Jc9vqaqpepm0xbba9pwe9Q8fs0=yqaqpepae9pg0FirpepeKkFr0xfr=xfr=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@8187@$ Assumption: The electricity the cabinetmaker’s business uses is generated in a region in which the mix of fuels used by utilities, when combusted, emits three GHGs: CO2, CH4, and N2O. GHG kWh of electricity purchased Emissions factorEmissions factors for purchased electricity differ depending on the method of power production used by an electric utility (e.g., coal-fired boilers emit greenhouse gases, whereas hydroelectric generation does not). In the United States, region-specific emissions factors are published that reflect the mix of fuels used by electric utilities within a given region to generate electricity. An in-depth explanation of the process for deriving these emissions factors is beyond the scope of this note; however, a listing of recent regional emissions factors for purchased electricity is provided in Exhibit 3. For the purposes of this calculation, the emissions factors in Exhibit 3 were converted to provide an emission factor for kg CO2/kWh. Global warming potential kg CO2 equivalent CO2 115,400 0.515 1 59,405 CH4 115,400 0.00001089 25 31 N2O 115,400 0.00000907 298 312 Total kg 59,748

The total kilogram emissions from all three sources represent the total annual footprint for this business (subject to the boundary conditions defined in this exercise). This total is stated as “1,494,747 kg of CO2 equivalent.”

### Key Takeaways

• Efficiency improvements can lead to larger systems changes.
• Companies seek greater control over their energy and resource inputs and use to save costs, protect the environment, and improve their image.
• Firms can cooperate with and contribute to the communities in which they reside.
• Basic carbon footprint can be calculated for facilities or larger entities.

### Exercises

1. If you are Al Halverson, what considerations are in the forefront of your mind as you consider the net-zero facility decision? If you oppose the idea, what arguments would you garner? If you favor the decision, what is your rationale?
2. Optional: For the Casa Grande facility, calculate the metric tons of GHG emissions from electricity and natural gas usage for each year from 2002 to 2007. (Pay close attention to units when applying emissions factors.)
3. Optional: Project the estimated reduction in GHG emissions and operating cost savings that will result from the proposed net zero project in years 2008–2010. Assume for the purposes of your analysis that all equipment upgrades are made immediately at the start of 2008.

## 5.4 Calera: Entrepreneurship, Innovation, and Sustainability

### Learning Objectives

1. Give an example of how biomimicry can be used to help solve business problems.
2. Identify the unique challenges of a sustainability-oriented start-up in a mature and conservative industry.
3. Analyze how a highly innovative company, still in the research and demonstration stage, will identify early customers and generate revenues to prove the commercial viability of the technology.

In our last case, we have the opportunity to see the early stage challenges of a high-potential entrepreneurial venture in California. Based on the entrepreneur’s patented scientific knowledge, this firm is scaling up technology to sequester carbon emissions.

Brent Constantz had three decades of entrepreneurial experience, starting with companies based on how cements formed in coral reefs and seashells. Yet those same reefs and shells were threatened by ocean acidification from anthropogenic carbon dioxide (CO2) emissions (Figure 5.12 "Anthropogenic GHG Emissions (A)"). Constantz had a simple insight: if humans could make cement as marine life did (biomimicry), without burning fuel and converting minerals in high-temperature processes, then we could significantly reduce our greenhouse gas (GHG) emissions. With that idea, the Calera Corporation was born.

Figure 5.12 Anthropogenic GHG Emissions (A)

MtCO2eq = million metric tons of CO2 equivalent.

Figure 5.13 Anthropogenic GHG Emissions (B)

Values for power generation are from 2000; other values are from 2003. Ninety percent of all emissions from stationary sources come from those that emit more than 0.1 Mt/yr. Asia has about 40 percent of such sources, followed by 20 percent in North America.

Calera’s goal was to make synthetic limestone and a carbonate cement, both used as major feedstocks for concrete, by mimicking nature’s low-energy process. Calera’s process aimed to precipitatePrecipitate means to separate from a solution or suspension, in this case to form solids from an aqueous solution. carbonate cement from seawater (ideally retentate left by desalination) and combine it with a strong alkaline base. When Constantz accidentally discovered CO2 could enhance his process, he sought a source of CO2. When he brought his technology and his challenge to clean tech venture capitalist Vinod Khosla, Calera became a carbon capture and sequestration (CCS)Also known as carbon capture and storage, this is the general term for any process that removes CO2 from the atmosphere and traps it somewhere else. In practice, CCS often refers to removing CO2 emissions from fossil fuel-fired power plants and injecting it underground. technology company, one with massive storage potential if located proximate to point sources of pollution: power plants emitted 40 percent of US carbon dioxide in 2008 and industrial process facilities another 20 percent. Yet a high level of technical risk and a number of unknowns remained about the breadth of applicability due to the requirement for brines and alkaline materials. Khosla, as the principal investor, shared Constantz’s vision and saw the huge promise and the attendant risk of failure as a high-risk, high-impact home run to completely change assumptions about the power and cement industry or a strikeout swing.

In two and one-half years, Calera went from small batch processing in a lab as a proof of concept to constructing a continuously operating demonstration plant that suggested the feasibility of large-scale operations. In the process Constantz continued to uncover new possibilities. Since his process stripped magnesium and calcium ions from any water charged with minerals, such as seawater, some wastewaters, and brines, it could potentially yield potable water. Could the venture provide water purification technology as well? Could it be economic? Furthermore, wherever seawater and strong bases were not available, Calera needed to replace or produce them. Consequently, Calera developed a more energy-efficient process to use saltwater to produce sodium hydroxide, the base it needed. With that technology, Calera could potentially impact the mature chlor-alkali industry. There were also environmental remediation possibilities. Calera’s initial process had used the base magnesium hydroxide that had been discarded by other companies at its Moss Landing demonstration site. In lieu of seawater, Calera could use subsurface brines, which were often left behind by oil and gas drilling as hazardous wastes. As Constantz and his growing team saw their opportunities expand, the company grew rapidly. If everything worked as hoped, Calera’s method seemed a magic sponge capable of absorbing multiple pollutants and transforming them into desirable products. The reality, though full of possibilities, was complex with many practical hurdles.

Along the way, the Calera team had identified and added to the firm’s multiple areas of expertise—often as the company ran into the complexity of a developing process. Calera also attracted a wide range of curious onlookers who could someday become prospective customers. Government agencies and other companies were eager to get in on the action. To position itself favorably, Calera needed to understand its core competencies and identify key collaborators to bring the new technology to full-scale operation at multiple sites. Simultaneously, it needed to protect its intellectual property and forge a defensible market position. As a high-risk, highly capital-intensive start-up with a huge number of uncertainties and potential ways to address many markets and positively affect the environment, what business model made sense?

## The Cement Industry

CO2-sequestering cement could make a significant impact. In 2008, 2.5 billion metric tons of Portland cement were produced with between 0.8 and 1 ton of CO2 emitted for every ton of cement.All tons indicate metric tons throughout this case. For production information, see Carrie Sturrock, “Green Cement May Set CO2 Fate in Concrete,” San Francisco Chronicle, September 2, 2008, accessed January 8, 2011, http://articles.sfgate.com/2008-09-02/news/17157439_1_cement-carbon-dioxide-power-plants. In 2001 in the United States, the world’s third-largest producer of cement, the average CO2 intensity of cement production was 0.97 tons CO2/ton cement, ranging by kiln from 0.72 tons CO2/ton cement to 1.41 tons CO2/ton cement. Coal was the overwhelming energy source (71 percent) of cement kilns, followed by petroleum coke and other fuels. See Lisa Hanle, Kamala Jayaraman, and Joshua Smith, CO2 Emissions Profile of the U.S. Cement Industry (Washington, DC: US Environmental Protection Agency, 2006), accessed January 8, 2011, http://www.epa.gov/ttnchie1/conference/ei13/ghg/hanle.pdf. Globally, the average CO2 intensity for cement production in 2001 was around 0.82 tons CO2/ton cement. See Ernst Worrell, Lynn Price, C. Hendricks, and L. Ozawa Meida, “Carbon Dioxide Emissions from the Global Cement Industry,” Annual Review of Energy and Environment 26, no. LBNL-49097 (2001): 303–29, accessed January 8, 2011, http://industrial-energy.lbl.gov/node/193. Numbers from California alone in 2008 put CO2 intensity there at 0.85 tons CO2/ton cement. See California Environmental Protection Agency Air Resources Board, “Overview: AB 32 Implementation Status” (presentation at the California Cement Industry workgroup meeting, Sacramento, CA, April 10, 2008), accessed May 29, 2010, http://www.arb.ca.gov/cc/cement/meetings/041008/041008presentations.pdf. China produced nearly 1.4 billion tons of cement in 2008, followed by India (about 200 million tons) and the United States (100 million tons).“Research Report on China’s Cement Industry, 2009,” Reuters, March 5, 2009, accessed January 8, 2011, http://www.reuters.com/article/pressRelease/idUS108100+05-Mar-2009+BW20090305; David Biello, “Cement from CO2: A Concrete Cure for Global Warming?” Scientific American, August 7, 2008, accessed January 8, 2011, http://www.scientificamerican.com/article.cfm?id=cement- from-carbon-dioxide; India Brand Equity Foundation, “Cement,” accessed January 8, 2011, http://www.ibef.org/industry/cement.aspx. Consequently, production of Portland cement, the main binder for conventional concrete, accounted for between 5 and 8 percent of global GHG emissions, making it one of the more GHG-intense industries (Figure 5.14 "Stationary CO").

Figure 5.14 Stationary CO2 Emissions

Values for power generation are from 2000; other values are from 2003.

Portland cement production generates CO2 in two ways (Figure 5.15 "Life Cycle for Portland Cement Produced by Dry Process and Mixed into Concrete"). The first source of emissions is calcination, which decomposes quarried limestone (calcium carbonate) into quicklime (calcium oxide) and releases CO2 as a by-product. The second source is the heat needed to achieve calcination, which requires temperatures over 2700°F (1500°C), or almost one-third the surface temperature of the sun. These temperatures are generally achieved by burning fossil fuels or hazardous wastes containing carbon. Sustaining such temperatures consumes around 3 to 6 gigajoules (1,000 to 2,000 kWh) of energy per ton of cement, making energy costs around 14 percent of the value of total shipments.An alternative method, wet production, has largely been phased out due to its higher energy consumption. Ernst Worrell, “Energy Use and Efficiency of the U.S. Cement Industry” (presentation to the Policy Implementation Committee of the Energy Conservation and GHG Emissions Reduction in Chinese TVEs Project, Berkeley, CA, September 18, 2003). (By comparison, the typical US home uses around 11,000 kWh per year.US Energy Information Administration, “Frequently Asked Questions,” accessed January 29, 2011, http://www.eia.doe.gov/ask/electricity_faqs.asp#electricity_use_home.)

Figure 5.15 Life Cycle for Portland Cement Produced by Dry Process and Mixed into Concrete

Since emissions from calcination are dictated by the chemistry of the reaction and cannot be changed, to save energy and lower emissions, kilns have striven to use heat more efficiently. In California, for instance, emissions from calcination remained steady at 0.52 tons of CO2 per ton of cement from 1990 to 2005, while emissions from combustion declined from 0.40 tons of CO2 per ton of cement to 0.34 tons.California Environmental Protection Agency Air Resources Board, “Overview: AB 32 Implementation Status” (presentation at the California Cement Industry workgroup meeting, Sacramento, CA, April 10, 2008), accessed May 29, 2009, http://www.arb.ca.gov/cc/cement/meetings/041008/041008presentations.pdf. Lowering emissions further, however, had proven difficult.

### Video Clip

Given the carbon intensity of cement production, governments increasingly have attended to emissions from cement kilns. Calcination alone emitted 0.7 percent of US CO2 in 2007, a 34 percent increase since 1990 and the most of any other industrial process except energy generation and steel production.US Environmental Protection Agency, Fast Facts: Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990–2008 (Washington DC: US Environmental Protection Agency, 2010), accessed January 8, 2011, http://www.epa.gov/climatechange/emissions/downloads10/US-GHG-Inventory-Fast-Facts-2008.pdf. California’s Assembly Bill 32, the Global Warming Solutions Act of 2006, includes cement kilns under its GHG emissions reduction program, which would require kilns to further reduce their emissions starting in 2012. The EPA’s Greenhouse Gas Reporting Rule from April 2009 also requires kilns to send data about their GHG emissions to the EPA, a prerequisite for any eventual mandatory emissions reductions.

In addition to being energy and CO2 intense, cement production is also a capital-intense industry. A kiln and its concomitant quarrying operations may require an investment on the order of $1 billion. Consequently, about a dozen large multinational companies dominate the industry. In 2010 there were 113 cement plants in the United States in 36 states, but foreign-owned companies accounted for about 80 percent of US cement production. Despite this ownership structure, actual cement production and consumption is largely regional. The cement industry moves almost 100 percent of its product by truck; the majority goes to ready-mix concrete operators, from plant to use. The entire US cement industry shipped$7.5 billion of products in 2009, a decline from $15 billion in 2006 since domestic construction had declined.Portland Cement Association, “Overview of the Cement Industry: Economics of the U.S. Cement Industry,” December 2009, accessed January 8, 2011, http://www.cement.org/basics/cementindustry.asp. Worldwide, the cement industry represented a$140 billion market in 2009 with about 47 percent poured in China.

Although cement can be used to produce mortar, stucco, and grout, most cement is used to produce concrete. To make concrete, cement is mixed in various proportions with water and aggregates, including fine aggregates such as sand and coarse aggregates such as gravel and rocks. (Concrete cement is commonly called simply concrete, although asphalt is also technically a type of concrete where the binder is asphalt instead of Portland cement.) The cement itself comes in five basic classes, depending on the desired strength, time to set, resistance to corrosion, and heat emitted as the cement sets, or hydrates. Though cement plays a crucial role in the properties of concrete, the other ingredients also matter. Aggregates help give concrete its strength and appearance. Plasticizers can be added in smaller quantities, as can materials such as coal fly ash or slag from blast furnaces to vary the concrete’s strength, weight, workability, and resistance to corrosion. Some states, such as California, require fly ash and slag be added to concrete to reduce its GHG intensity, improve the durability of the final material, and prevent these aggregates from entering landfills as waste materials.

A typical mix of concrete might contain by mass one part water, three parts cement, six parts fine aggregate, and nine parts coarse aggregate. Thus a cubic yard of concrete, which weighs roughly two and one-half tons (2,000 to 2,400 kg/m3), would require approximately 300 pounds (36 gallons) of water, 900 pounds of cement (9.5 bags, or 9.5 cubic feet), and 4,500 pounds of total aggregates. Varying amounts of air can also be trapped, or entrained, in the product. Cement, at around $100/ton in 2010, is normally about 60 percent of the total cost of poured concrete. Aggregates, in contrast, cost closer to$10/ton.

Making concrete adds more GHG emissions from, for instance, quarrying and transporting stone and keeping the water at the right temperature (from 70 to 120°F) to mix effectively. As the cement in concrete cures, it carbonates, which is the process in which CO2 interacts with the alkaline pore solutions in the concrete to form calcium carbonate. This process takes decades to occur and never accounts for more than a few percent of carbon sequestrations in cement.

By using less energy, Calera’s process already promised lower emissions. More important, using a standard construction material, cement, to capture CO2 would mean sequestration capacity scaled directly with economic activity as reflected in new construction. For instance, the Three Gorges Dam in China used approximately fifty-five million tons of concrete containing eight million tons of cement. The concrete in the dam is enough to pave a sixteen-lane highway from San Francisco to New York.Bruce Kennedy, “China’s Three Gorges Dam,” CNN, accessed January 8, 2011, http://www.cnn.com/SPECIALS/1999/china.50/asian.superpower/three.gorges. The comparison road value is derived from the Hoover Dam, which used approximately 6 million tons of concrete. US Department of the Interior, “Hoover Dam: Frequently Asked Questions and Answers,” accessed January 8, 2011, http://www.usbr.gov/lc/hooverdam/faqs/damfaqs.html. Hence if Calera cement had been used in that dam, it could have sequestered roughly four million tons of CO2 rather than emitting approximately seven million additional tons of it, for a net difference of eleven million tons. If Calera had manufactured the stones used as aggregate in the dam’s concrete, emissions potentially could have been reduced even more, so long as Calera’s process produced fewer emissions than quarrying the equivalent aggregate. The promise remained but so did the question: in how many places was the Calera process viable, and where did the economics make sense?

## Constantz Looks for an Opening

Brent Constantz had focused his career on how nature makes cements and how we can apply those techniques to other problems. He now faced the challenge of moving from niche markets for small-scale, specialty medical cements to the mainstream of international construction, commodity materials, and carbon sequestration. For these markets Calera’s product promised negative net CO2 emissions but first had to compete on cost, set time, strength, and durability. Calera would need to pass all appropriate standards as well as target applications for which people would be willing to pay a premium for carbon-negative concrete. In addition, the chain of liability often terminated at the cement producer in the highly litigious construction industry. Consequently, Calera cement had to be deemed beyond reproach to penetrate the market. But if it was, then its ability to reduce GHG emissions would appeal to many in the construction industry who sought to lower costs and improve their environmental image.

A rock climber and wind surfer, Constantz earned his BA in Geological Sciences and Aquatic Biology from the University of California–Santa Barbara in 1981 and went on to earn his master’s (1984) and PhD (1986) in Earth Sciences from University of California–Santa Cruz. He received a US Geological Survey postdoctoral fellowship in Menlo Park, California, during which he studied isotope geochemistry. Next as a Fulbright Scholar in Israel, he studied the interaction of crystals and proteins during biomineralization. At that time, Constantz developed medical cements to help heal fractured or worn bones, and in 1988 he founded his first company, Norian Corporation, in Cupertino, California, to commercialize those medical cements. When Norian was sold in 1998 to Synthes, a company with $3.4 billion in sales in 2009,Synthes, “Synthes Reports 2009 Results with 9% Sales Growth and 13% Net Earnings Growth in Local Currency (6% and 12% in US$),” news release, February 17, 2010, accessed January 8, 2011, http://www.synthes.com/html/News-Details.8013.0 .html?&tx_synthesnewsbyxml_pi1[showUid]=39. Constantz became a consulting professor at Stanford University, where he continued to teach courses on biomineralization, carbonate sedimentology, and the “Role of Cement in Fracture Management” through 2010.Stanford biography at Stanford Biodesign, “People: Brent Constantz Ph.D.,” accessed January 8, 2011, http://biodesign.stanford.edu/bdn/people/bconstantz.jsp.

During his time at Stanford, Constantz founded and provided leadership for three more medical cement companies: Corazon, bought by Johnson & Johnson; Skeletal Kinetics, bought by Colson Associates; and Biomineral Holdings, which Constantz still controlled. He served on the board of directors of the Stanford Environmental Molecular Science Institute and also won a variety of awards, including a University of California–Santa Cruz Alumni Achievement Award in 1998 and a Global Oceans Award in 2004 for advancing our understanding of and helping to conserve oceans.

Indeed, climate change’s impact on oceans was increasingly on Constantz’s mind. In an interview with the San Francisco Chronicle, Constantz stated, “Climate change is the largest challenge of our generation.”Carrie Sturrock, “Green Cement May Set CO2 Fate in Concrete,” San Francisco Chronicle, September 2, 2008, accessed January 8, 2011, http://articles.sfgate.com/2008-09-02/news/17157439_1_cement-carbon-dioxide-power-plants. Constantz was concerned specifically with ocean acidification, which was destroying coral, the very topic that had inspired him for years. As CO2 is emitted into the atmosphere, a portion is absorbed by the oceans, forming carbonic acid by roughly the same process that gives carbonated beverages their bubbles. Constantz recognized that the process threatened by CO2 emissions—natural biomineralization—was also a solution. He founded Calera Corporation in 2007.

The name Calera is Spanish for lime kiln, but it also refers to a stratum of limestone underlying parts of California. That layer likely formed one hundred million years ago when seafloor vents triggered precipitation of calcium carbonate. Constantz found that a similar inorganic process to precipitate carbonates could make construction-grade cement. In fact, early lab work revealed the surprising finding that adding CO2 could increase the reaction’s yield eightfold. In one of his regular conversations with Khosla about the company, Constantz wondered out loud where to get more CO2. Khosla, a prominent clean tech investor, immediately saw the answer: carbon sequestration. If Calera could make cement with CO2, cement could now be produced that was, in fact, carbon negative. First-round funding for the enterprise came from Khosla in 2007. No business plan was written, and in 2010 there still was no formal board or enough clarity to develop a strategic plan.

Figure 5.16 Approximate Life Cycle for Calera Cement

Calera’s method puts power plant flue gases that contain CO2 in contact with concentrated brines or concentrated seawater, which contain dissolved magnesium and calcium ions. Hydroxides and other alkaline materials are added to the seawater to speed the reaction between the CO2 and minerals.See Brent R. Constantz, Cecily Ryan, and Laurence Clodic, Hydraulic cements comprising carbonate compound compositions, US Patent 7735274, filed May 23, 2008, and issued June 15, 2010. That reaction precipitates carbonates of magnesium and calcium, the cementitious materials found in coral reefs and seashells, thus storing the CO2 and leaving behind demineralized water. Unlike conventional cement kilns, Calera can produce its cement at temperatures below 200°F (90°C), dramatically lowering emissions of CO2 from fuel combustion (Figure 5.16 "Approximate Life Cycle for Calera Cement" and Figure 5.17 "Calera Industrial Ecosystem Material and Energy Flows"). In principle, Calera could produce and sell its aggregate, essentially manufactured stones; powdered stones, or cement, the binder in concretes; or supplementary cementitious material (SCM), an additive to improve the performance of concrete that can be added to the cement blend directly or later added to the concrete.

Yet in 2010, each of these materials was in the midst of optimization and testing. Some were early in their product development phase. Furthermore, even though Constantz held nearly two hundred patents or pending patents, including two for Calera’s processes, one for producing the carbonate cement, and another for demineralizing water, the medical cements he was accustomed to in earlier ventures typically used grams or less at a time, not tons or kilotons, and did not require massive machinery, tracts of land, and large capital investments. Calera faced another challenge: the industrial ecosystem.

Figure 5.17 Calera Industrial Ecosystem Material and Energy Flows

One practical application of industrial ecology concepts refers to the collocation of factories or processes that can use each others’ wastes as feedstocks. When the waste stream of one plant becomes the material input of the next, the net effect is to save energy and material and reduce the necessary infrastructure. The most famous industrial ecology park, in Kalundborg, Denmark, included a power plant, a refinery, a pharmaceutical company, a drywall manufacturer, and a fish farm.The park has a website: Industrial Symbiosis, “Welcome to the Industrial Symbiosis,” accessed January 8, 2011, http://www.symbiosis.dk. The power plant, for instance, treated its flue gas to trap sulfur dioxide emissions and thereby produced gypsum, the raw material for drywall. Hot water from the power station went to the fish farm, as did wastes from the pharmaceutical company that could be used as fertilizer. Constantz saw an existing symbiosis between cement plants, power stations, and water supplies, but he would have to plan carefully to insert Calera effectively into that ecology.

If he could enter the markets, Constantz felt the opportunity was there. He commented on the global market for Calera’s technology:

Almost everywhere else in the world but the U.S. can projects get the value for carbon emission reductions. In cap and trade systems, the government sets a “cap” on emissions; if a business’s emissions fall below the cap, it can sell the difference on the market to companies that want to exceed their cap. If Calera proves out, it can go anywhere, set up next to a power plant and get our revenue just by selling carbon credits. That means we could produce cement in a developing country where they basically can’t afford concrete, so they otherwise couldn’t build out their infrastructure or even build houses. And the more cement Calera produces, the more carbon dioxide we remove from the atmosphere.Andrea Larson and Mark Meier, Calera: Entrepreneurship, Innovation, and Sustainability, UVA-ENT-0160 (Charlottesville: Darden Business Publishing, University of Virginia, September 21, 2010).

Figure 5.18 Brent Constantz

As Constantz reflected in his Los Gatos office on Calera’s potential impact on climate change, he observed, “A sufficiently high carbon price would enable a number of business models. Low prices limited the options available to Calera.” Calera planned to offer sequestration services to power plants or other heavy industrial users as its primary business and was therefore interested in any CO2 emissions. “We look at CO2 as a resource—not a pollutant—and a scarce resource. To replace all Portland cement with Calera cement, which we want to do, we would need about 19 billion tons of CO2 annually, forever.”Andrea Larson and Mark Meier, Calera: Entrepreneurship, Innovation, and Sustainability, UVA-ENT-0160 (Charlottesville: Darden Business Publishing, University of Virginia, September 21, 2010).

Government carbon regulations could help Calera generate revenue and customers but were not viewed as crucial. In the European Union’s Emissions Trading Scheme, CO2 in July 2010 traded at around €14/ton, or $18/ton. The Northeastern states’ Regional Greenhouse Gas Initiative (RGGI) that began in 2009 capped GHG emissions from power plants at 188 million tons immediately, roughly a quarter of total US emissions, and will cut GHG emissions of RGGI sources 10 percent from that level by 2018. RGGI allowances sold at between$1.86 and $2.05 per ton at auction in December 2009.European Energy Exchange, “Emission Rights,” accessed January 10, 2011, http://www.eex.com/en; Regional Greenhouse Gas Initiative, “Auction Results: Auction 6,” December 2, 2010, accessed January 10, 2011, http://www.rggi.org/market/co2_auctions/results/auction6. Since RGGI allowed sources to cover up to 10 percent of their emissions by buying offsets, Calera planned to try to convince power companies to enter agreements with Calera rather than buy permits to meet their obligations. On the other side of the country, the Western Climate Initiative (WCI) was designing a cap-and-trade system for power generation and fuel consumption. The WCI comprised 11 Canadian provinces and western US states and would take full effect in 2015, with earlier phases beginning in 2012. In many cases there was strong interest for the future but little appetite for risk or actual implementation in the present, with the possible exception of suppliers to the California electricity market. At the federal level, Calera also lobbied to have the American Clean Energy and Security Act of 2009 (HR 2454, the Waxman-Markey Bill) include sequestration other than by solely geological means; otherwise, Calera would not be recognized as providing offsets worth allowances in a trading program. The bill exited committee in May 2009 with the expanded sequestration options but then stalled. Before that, carbon capture and sequestration (CCS) debates had focused on geological sequestration, but that solution was expensive, required massive federal subsidies to CO2 emitters, and, according to a 2008 McKinsey & Company report, would not be commercially feasible for another twenty years.McKinsey Climate Change Initiative, Carbon Capture and Storage: Assessing the Economics (New York: McKinsey, 2008), accessed January 10, 2011, http://www.mckinsey.com/clientservice/sustainability/pdf/CCS_Assessing_the_Economics.pdf. Despite the enticing estimates that centuries’ worth of CO2 emissions could be stored underground,Joseph B. Lassiter, Thomas J. Steenburgh, and Lauren Barley, Calera Corporation, case 9-810-030 (Boston: Harvard Business Publishing, 2009), 3, accessed January 10, 2011, http://www.ecch.com/casesearch/product_details.cfm?id=91925. skeptics wondered how long it would stay there, as a sudden release of stored CO2 would be catastrophic. They further noted that gradual leaks would defeat the technology’s purpose and potentially acidify groundwater, causing new problems. Everyone, meanwhile, agreed that much depended on the price of carbon, which was contingent on evolving carbon markets in the United States and Europe. A new bill with a mix of carbon trading and taxes was in the works in March 2010, and in the absence of congressional action, the EPA was preparing to regulate CO2 under the Clean Air Act per order of the Supreme Court in its 2007 decision Massachusetts v. EPA.Massachusetts v. Environmental Protection Agency, 549 US 497 (2007), accessed January 10, 2011, http://www.supremecourt.gov/opinions/06pdf/05-1120.pdf. Despite the overall failure of the Copenhagen Climate Conference in December 2009—Constantz considered the attempt to negotiate a successor to the Kyoto Protocol “a joke”Andrea Larson and Mark Meier, Calera: Entrepreneurship, Innovation, and Sustainability, UVA-ENT-0160 (Charlottesville: Darden Business Publishing, University of Virginia, September 21, 2010).—the United States did pledge, nonbindingly, to reduce its GHG emissions 17 percent from 2005 levels by 2020 and ultimately 83 percent by 2050, a significant departure from the previous Bush administration. In January 2010, President Obama announced via Executive Order 13514 that the federal government would reduce its GHG emissions 28 percent from 2008 levels by 2020. The federal government was the single largest consumer of energy in the United States. Nonetheless, Constantz claimed that even without climate change regulations, “We will be profitable, we don’t care, we don’t need a price on carbon.” ## Moss Landing Aside from climate change legislation, Constantz witnessed regulatory agencies “bending over backward to help us. Fortunately, people are in favor of what we’re doing because I think they see the higher purpose toward which we’re dedicated.”Andrea Larson and Mark Meier, Calera: Entrepreneurship, Innovation, and Sustainability, UVA-ENT-0160 (Charlottesville: Darden Business Publishing, University of Virginia, September 21, 2010). Calera’s process had proven effective, for instance, at trapping sulfur dioxide emissions, currently regulated in the United States under the Acid Rain Program and other standards. Water regulators and air boards alike, a total of nine agencies, eased the way for Calera’s first plant at Moss Landing, California. The site, two hundred acres along Monterey Bay, had seven three-million-gallon tanks for storing seawater, a total volume equivalent to thirty Olympic swimming pools, and permits for pumping sixty million gallons of seawater per day, or nearly seven hundred gallons per second, through the original World War II–era redwood pipe. The site also had five million tons of magnesium hydroxide left from earlier operations, which included making bombs. In June 2008, Calera collaborated with the nearby Monterey Bay Aquarium Research Institute and Moss Landing Marine Lab to assess and minimize impacts on the bay’s marine ecosystems. Water is a key element of the Calera process, and everything was done to minimize its use. Constantz told a local paper, “We wanted to make sure we weren’t going to do any harm. We’re right next to these world-class oceanographic institutions. These places can publish papers about [the process], whereas most parts of the world don’t have scientists of that caliber to sign off on it.”Lizzie Buchen, “A Green Idea Set in Cement,” Monterey County Herald, October 4, 2008, accessed January 10, 2011, http://www.montereyherald.com/news/ci_10637168. Calera was interested in using the power plant’s water, potentially reducing demand for and impacts on Monterey Bay water. Constantz knew Moss Landing would set the standard for future plants. In fact, turning a site with a negative environmental history into a location that demonstrated clean energy and potable water technologies was very appealing to the entire management team. The magnesium hydroxide, meanwhile, formed a gray and white crust that stretched for hundreds of yards and was visible from the sky. It provided the alkalinity for Calera’s early production. Massive metal sheds on the otherwise muddy soil housed a variety of production lines. Equally important, across the street stood the largest power plant on the West Coast, Dynegy’s 2,500 MW natural gas-fired plant. In August 2008, Calera opened its test cement production plant. In April 2009, it achieved continuous operation and was capturing with 70 percent efficiency CO2 emissions from a simulated 0.5 MW coal-fired power plant.Joseph B. Lassiter, Thomas J. Steenburgh, and Lauren Barley, Calera Corporation, case 9-810-030 (Boston: Harvard Business Publishing, 2009), 1, accessed January 10, 2011, http://www.ecch.com/casesearch/product_details.cfm?id=91925. In December 2009, Calera ran a pipe beneath the road to tap into Dynegy’s flue stack, somewhat like sticking a straw in a drink, to capture emissions equivalent to a 10 MW plant as Calera moved up to a demonstration scale project. By spring 2010 the demonstration plant, twenty times the size of the pilot plant, had achieved continuous operation. Figure 5.19 Moss Landing The smokestacks at the center are part of the Dynegy power plant. To the right is Calera’s Moss Landing Cement Company, including its demonstration plant, seawater holding tanks, and remaining magnesium hydroxide. A typical cement plant may produce between five hundred thousand and two million tons of cement annually, which meant Calera’s Moss Landing Cement Company would remain a rather small player—or become a massive consumer of water. Seawater is typically only 0.1 percent magnesium ions and 0.04 percent calcium ions.Jay Withgott and Scott Brennan, Environment: The Science Behind the Stories, 3rd ed. (San Francisco: Pearson Benjamin Cummings, 2008), 445. Hence if Calera could extract those ions with perfect efficiency, it could create about 240 tons of calcium and magnesium daily, enough to make just under 590 tons of Calera cement daily. At continuous operation, Calera could produce only about 215,000 tons of cement annually. Calera’s Moss Landing plant could therefore sequester just over 100,000 tons of CO2 per year at full operation with its current water permit.These values assume that Calera’s cement is composed of calcium and magnesium carbonates. Calcium carbonate has a molecular weight of 100 grams per mole; magnesium carbonate has a molecular weight of 84 grams per mole. CO2 thus represents almost exactly half of the weight of each ton of Calera cement produced from standard seawater. This CO2 proportion, however, would not include emissions from energy needed to operate the plant. ## Disruption: Opponents and Competitors Calera, however, had the promise to be more than a cement plant. Because it could sequester CO2, sulfur dioxide, and mercury into carbonates, Calera offered a multipollutant control and remediation technology that might prove to be cheaper than existing methods and generate additional income from the sale of its by-products, cement and demineralized water. The promise of the multiple benefits of Calera’s process attracted attention from many quarters. California’s Department of Transportation was interested, since California uses more concrete than any other state and has its own GHG cap-and-trade program. Egyptian, Moroccan, and Saudi Arabian researchers and builders had expressed interest in the process because of its desalination aspect, and the zero-emissions showcase Masdar City in the United Arab Emirates had considered using Calera cement.Ben Block, “Capturing Carbon Emissions…in Cement?” Worldwatch Institute, January 26, 2009, accessed May 25, 2009, http://www.worldwatch.org/node/5996. Power plants and cement kilns were seeking ways to lower their emissions of all pollutants. Early in 2010, Calera was awarded a grant from the Australian government to build a demonstration plant to capture carbon from a coal-fired plant, which like most in Australia burned particularly dirty brown coal. Constantz by January 2010 had “a backlog of 70 people” representing “100 projects.” He noted that “selecting the right one is a proprietary, large process,” which includes consideration of local feedstocks, regulations, buyers and suppliers, incentives, and other factors.Andrea Larson and Mark Meier, Calera: Entrepreneurship, Innovation, and Sustainability, UVA-ENT-0160 (Charlottesville: Darden Business Publishing, University of Virginia, September 21, 2010). In addition to considering his suitors, material resources, and business opportunities, Constantz also had to consider his competition. Other companies were trying to make cement in innovative ways to reduce GHG emissions. In 1979, German-born architect Wolf Hilbertz had published a way to produce calcium carbonate from seawater via electrolysis.Wolf Hilbertz, “Electrodeposition of Minerals in Sea Water: Experiments and Applications,” IEEE Journal on Oceanic Engineering 4, no. 3 (1979): 94–113, accessed January 10, 2011, http://www.globalcoral.org/IEEE_JOUR_1979small.pdf. That method had been commercialized as Biorock, also the name of the company, and used to help restore coral reefs by plating calcium carbonate onto rebar. The company Biorock, however, did not seem interested in pursuing terrestrial applications. In contrast, Novacem in England planned to use magnesium oxide and other additives to lower processing temperatures and obviate GHG emissions from cement kilns. Other companies were also attempting to sequester CO2 in cement. Carbon Sciences of Santa Barbara planned to use mine slime (water plus magnesium and calcium residues left in mines) and flue gas to make cement, and Carbon Sense Solutions in Nova Scotia planned to use flue gases to cure cement, thereby absorbing CO2. Nonetheless, Calera so far had kept ahead of these possible competitors and worked on ensuring that its products met familiar engineering performance standards to speed adoption. Building performance aside, climate scientist Ken Caldeira at the Carnegie Institution’s Department of Global Ecology had publicly doubted that the Calera process would reduce net carbon emissions, as it currently used magnesium or sodium hydroxides, which would have to be produced somehow and did not seem included in life-cycle analyses of carbon emissions. Caldeira had also said that Calera basically took dissolved limestone and converted it back into limestone, and there were active online discussions on this issue.The debate seems to occur mainly over e-mail and groups, for instance, Climate Intervention, “Calera—Fooling Schoolchildren?” accessed January 10, 2011, http://groups.google.com/group/climateintervention/browse_thread/thread/7b5ff4ee64ce759d?pli=1. Calera simply waited for its patents to be published rather than directly refute the charge. Portland cement was the industrial standard and had been since its invention in 1824. Any change was likely to encounter resistance from producers and consumers, and the standards-setting bodies were necessarily conservative and cautious. An array of organizations, from the American National Standards Institute’s American Standards for Testing and Materials (ASTM) to the Portland Cement Association and American Concrete Institute, in addition to individual companies, conducted their own rigorous quality tests and set many standards. Ironically, rather than seeing himself as an opponent of the Portland cement industry, Constantz considered himself an ally: “I think we’re going to save their entire industry. As soon as there’s carbon legislation, the asphalt industry is going to eat their lunch. The Portland cement industry is really in trouble without us and they know that. That’s why they’re calling us up.”Andrea Larson and Mark Meier, Calera: Entrepreneurship, Innovation, and Sustainability, UVA-ENT-0160 (Charlottesville: Darden Business Publishing, University of Virginia, September 21, 2010). After all, the industry had tried to reduce emissions by increasing efficiency but could only do so much. Calera’s process appeared to be the breakthrough the industry needed. Moreover, the infrastructure already existed to link cement plants with power plants because the latter often have to dispose of fly ash. Likewise, power plants also consume lots of water, meaning the infrastructure existed to supply the Calera process, presuming the water contained sufficient salts. Constantz felt Calera could disrupt the carbon sequestration industry, primarily oil and gas exploration companies that had been advocating enhanced recovery through injecting CO2 underground as a form of geological carbon sequestration: injecting compressed CO2 underground forced more oil and gas to the surface. Khosla agreed but was uncertain about the breadth of applicability of the Calera process. An attractive business and a few plants were definitely possible, but Calera had yet to prove it was anything more than a solution for some special cases. To do so, Calera hoped to outperform all other CCS options, especially retrofits of existing plants. Even if the technical and environmental problems could be solved for widespread CCS, it would be costly, especially in a world without a price on carbon. In April 2010, the US Interagency Task Force on Carbon Capture and Storage estimated the cost of building typical CCS into new coal-fired plants (greenfield development) to be$60 to $114 per metric ton of CO2 avoided, and$103/ton for retrofitting existing plants. That translated into increased capital costs of 25–80 percent. Such plants were also expected to consume 35–90 percent more water than similar plants without CCS.Interagency Task Force on Carbon Capture and Storage, Report of the Interagency Task Force on Carbon Capture and Storage (Washington DC: US Environmental Protection Agency/US Department of Energy, 2010), 27, 33–35, accessed January 10, 2011, http://www.epa.gov/climatechange/downloads/CCS-Task-Force-Report-2010.pdf. The report did not consider a model like Calera’s to be CCS; instead, it defined CCS only as geological sequestration.

Available CCS required much energy to operate, the so-called parasitic load it placed on power plants whose emissions it sequestered. This parasitic load represented a very high cost and penalty for the power plant as it was essentially lost electricity, translating directly into lost revenue. To cover the electricity needed to operate any system that trapped CO2 emissions from the flue and still supply its other customers, the power plant would have to consume more coal and operate longer for the same income.

Constantz noted that geologic CCS typically had parasitic loads around 30 percent. To solve this issue, Calera’s business model was to buy power at wholesale price, becoming the power plant’s electricity customer. The plant could increase its capacity factor to cover this additional power demand or reduce its power sales to the grid without much of a revenue loss. From the plant’s perspective, then, Calera did not alter revenue, unlike other options. Constantz believed Calera’s energy consumption could be much lower than that of CCS assuming the right local mineral and brine inputs could be exploited. In addition, to optimize its power use and price, Calera was designing a process that could take advantage of off-peak power. However, it remained uncertain how many locations met mineral input requirements to make the Calera process economically attractive.

Calera could disrupt other conventional pollution control industries. Existing technologies to control sulfur oxides (SOx), mercury, and other emissions could be supplanted by Calera’s technology. Such pollutants are currently subject to either cap-and-trade programs or Best Available Control Technology, which means companies have to install whatever available pollution control technology achieves the best results. The cost to power plants could be as high as $500 to$700 per kWh to remove these pollutants from their flue gas.Joseph B. Lassiter, Thomas J. Steenburgh, and Lauren Barley, Calera Corporation, case 9-810-030 (Boston: Harvard Business Publishing, 2009), 7, accessed January 10, 2011, http://www.ecch.com/casesearch/product_details.cfm?id=91925. Early experiments suggested that Calera’s process could trap these pollutants with over 90 percent efficiency in a single system, though nitrous oxides (NOx) would still need to be dealt with.

Conceivably, utilities could balk at the prospect of selling a large portion of their electricity to Calera, even if Calera set up shop where carbon was capped, such as the European Union, or approached companies wanting to reduce their emissions voluntarily. Utilities could switch to natural gas or find other ways to cut emissions. Calera, however, saw enough value in its own process and the coal-fired infrastructure that it had considered buying power plants outright and operating them itself.

Finally, Calera considered the possibility of providing a form of energy storage. Power plants could operate more at night, typically when demand was lower, to supply energy for Calera’s electrochemistry process, effectively storing energy in the form of other chemicals. During the day, there would be no increased energy demand from Calera, thereby increasing a power plant’s total energy output. In the same manner, Calera could also store energy from wind farms or other renewable sources.

## Managing Growth

The company also protected itself from liability by creating special-purpose entities (SPEs) to operate individual projects. According to Constantz, “We’re a corporation licensing its technology and intellectual property to other separate companies [SPEs] we’ve set up.”Andrea Larson and Mark Meier, Calera: Entrepreneurship, Innovation, and Sustainability, UVA-ENT-0160 (Charlottesville: Darden Business Publishing, University of Virginia, September 21, 2010). For example, the Moss Landing facility was owned and operated by the Moss Landing Cement Company, which, in turn, Calera owned. This division allowed Calera to reduce the threat of litigation and insurance costs at its office headquarters in nearby Los Gatos in Silicon Valley because cement production and associated construction were heavy industries in which equipment scale and complexity could involve expensive mistakes and working conditions posed many hazards. Everyone at the Moss Landing site was required to wear hard hats and safety glasses, and the sodium hydroxide produced by electrochemistry on-site was a toxic product.

The company also had grown to absorb more areas of technical expertise. Aurelia Setton came to Calera in mid-2008 as senior manager of corporate development after completing her MBA at Stanford Business School. She became director of strategic planning in the summer of 2009. Young and committed to sustainable business thinking, Setton had seen the company realize the implications of different technology applications and then move to recruit experts in those areas. First it was how to produce cement with less energy and then how to boost its ability to sequester CO2. Then it was water purification. Then it was electrochemistry, the process of extracting chemicals through splitting them in solution. “If we see enough value in it, we bring it in-house,” Setton said.Andrea Larson and Mark Meier, Calera: Entrepreneurship, Innovation, and Sustainability, UVA-ENT-0160 (Charlottesville: Darden Business Publishing, University of Virginia, September 21, 2010).

Nonetheless, Calera had to recognize limits. For instance, Setton knew “we are not a manufacturing company. Those partnerships are very complicated. People are very interested in getting into our IP [intellectual property], and we need their help, but there’s only one Calera and several of them.” Hence Calera felt it could dictate its terms.

To facilitate deployment, Calera entered a worldwide strategic alliance with Bechtel in December 2009. Bechtel is a global engineering, procurement, and construction (EPC) firm with forty-nine thousand employees. Based in San Francisco, Bechtel operates in about fifty countries and generated $31.4 billion in revenues in 2008. Its past projects included the Channel Tunnel connecting England and France; the San Francisco–area metro system, Bay Area Rapid Transit (BART); and military bases, oil refineries, airports and seaports, nuclear and fossil-fuel-fired power plants, and railroad infrastructure. Calera worked closely with the Renewables and New Technology division in Bechtel’s Power Business Unit. That division had experience with CCS and government grant applications and contracts, which could help Calera. Bechtel also offered a massive network of suppliers. “We didn’t want to go out to a lot of EPC firms,” Constantz explained. “We opted to just go to one firm and let them see what we’re doing.”Andrea Larson and Mark Meier, Calera: Entrepreneurship, Innovation, and Sustainability, UVA-ENT-0160 (Charlottesville: Darden Business Publishing, University of Virginia, September 21, 2010). Bechtel advised Calera on the construction of its demonstration plant and played a pivotal role in worldwide deployment. Calera pursued other possible collaborators. One was Schlumberger, the oil field and drilling firm with seventy-seven thousand employees and$27 billion in revenues in 2008. Calera sought Schlumberger’s expertise in extracting subsurface brines, which were needed to replace seawater for Calera’s process for inland locations. In early 2010, Calera was also in the midst of signing a deal with a big supplier for its electrochemistry operations. Finally, for power plants, Constantz considered Calera “just another industrial user. We can fight over who keeps carbon credits and all that, but the only time we have a relationship is if they invest in a plant, and we don’t need them to invest.”Andrea Larson and Mark Meier, Calera: Entrepreneurship, Innovation, and Sustainability, UVA-ENT-0160 (Charlottesville: Darden Business Publishing, University of Virginia, September 21, 2010). Nonetheless, Setton believed Calera had leverage in negotiating the terms with a power plant for electricity and CO2.

## Quantifying Economic Opportunities

By mid-2010, Setton conceived of Calera’s possible services as spanning four major categories: clean power, material efficiency, carbon management, and environmental sustainability (Figure 5.20 "Calera Revenue Opportunities"). These opportunities were often interconnected, complex, and affected by changing regulations and markets, so to make money, the company had to manage this complexity and educate multiple audiences. It seemed a daunting, though exciting, balancing act for Setton. It was one she had a chance to hone when the Australian government and TRUEnergy wanted to see what Calera could do.

Figure 5.20 Calera Revenue Opportunities

The Latrobe Valley, site of TRUEnergy’s Yallourn Power Station in the state of Victoria, Australia, contains about 20 percent of the world’s and over 90 percent of Australia’s known reserves of lignite, or brown coal, an especially dirty and consequently cheap coal. In 2006–2007, Australia produced 65.6 million metric tons of brown coal valued at A$820 million, or about US$10/ton.Ron Sait, “Brown Coal,” Australian Atlas of Minerals Resources, Mines, and Processing Centers, accessed January 10, 2011, http://www.australianminesatlas.gov.au/aimr/commodity/brown_coal_10.jsp. Australia accounted for about 8 percent of the world’s coal exports, and its lignite accounted for about 85 percent of electricity generation in Victoria. The Labor Government had proposed carbon trading in 2009, but that plan had been faltering through 2010. The coal industry nonetheless had invested in various demonstration projects to make brown coal a cleaner source of electricity. Bringing a Calera demonstration plant to the Yallourn Power Station was another such endeavor. The Calera project would eventually be increased to a scale of 200 MW.

The entire Yallourn Power Station had a capacity of 1,480 MW and voracious demand for resources. The plant needed thousands of tons of water per hour at full capacity. Some of that water would need to be sent to treatment afterward. The plant also had the low energy-conversion efficiency typical of coal-fired plants. Compounding that, the plant’s brown coal had a low energy density, about 8.6 gigajoules per ton. In addition, combusting brown coal creates more SOx and NOx than other fuels,The exact NOx and SOx emissions, before pollution control, depend on the design of the combustion unit, but for a variety of designs the US Environmental Protection Agency estimated SOx emissions to be 5 to 15 kg per ton of lignite burned and NOx emissions to be 1.8–7.5 kg per ton of lignite burned. See US Environmental Protection Agency, “Chapter 1: External Combustion Sources,” in AP 42, Compilation of Air Pollutant Emission Factors, Volume 1: Stationary Point and Area Sources, 5th ed. (Research Triangle Park, NC: US Environmental Protection Agency, 1998), 7–8, accessed January 10, 2011, http://www.epa.gov/ttn/chief/ap42/ch01/index.html. Although it is difficult to put an exact price on the cost of controlling emissions in Australia, trading programs in the United States give some insight. The United States runs a cap-and-trade program for NOx and SOx for power plants on the east coast, and from January 2008 to July 2010, permits to emit one ton of SOx decreased from approximately $500 to$50 per ton, while NOx allowances started around $800 before peaking near$1,400 and decreasing to 50 per ton. See the Federal Energy Regulatory Commission, Emissions Market: Emission Allowance Prices (Washington, DC: Federal Energy Regulatory Commission, 2010), accessed January 10, 2011, http://www.ferc.gov/market-oversight/othr-mkts/emiss-allow/2010/07-2010-othr-emns-no-so-pr.pdf. Since the price of an allowance ideally represents the marginal cost to abate an additional ton of emissions, it reflects the cost of control technology. Calera claimed its process, as noted earlier, could achieve up to 90 percent CO2 reduction and do so at a lower price if local resources could provide valuable feedstock. and both pollutants were regulated in Australia. Calera planned to look for local brines to provide alkalinity for its process. If they were unavailable, Calera would produce alkalinity with its proprietary electrochemistry process, which would increase the cost of cement production. The economics of the project would depend primarily on the price it could get for its cement. Calera had the potential to use wastewaters to provide calcium (Figure 5.21 "Case Study of Yallourn Demonstration Plant"): about one hundred miles from the TRUEnergy plant, a large-scale desalination project was under construction, providing a potential feedstock for the Calera process. Utilizing such wastewater streams also offered potential revenue: as an example, in Europe, a desalination plant had to pay up to €200 per ton to dispose of its brine. Although prices would be different for Australia, Calera could be paid to take such waste brine for its process. Calera also considered using fly ash, a coal-combustion waste, for additional alkaline material. Figure 5.21 Case Study of Yallourn Demonstration Plant With many variables and several unknowns, it was critical to determine the cost of each part of the process to determine the viability of the entire project. Nonetheless, the models depended on various assumptions, and those assumptions changed constantly as the project configuration and other factors changed. Nobody had ever built a Calera system in the field. That left much uncertainty in actual numbers. It also left uncertainty in broader strategies. Under many scenarios, Calera’s energy demand would remain far less than the parasitic load of other CCS options. On the other hand, in some scenarios, Calera would need to have closer to 50 percent electrochemistry ions, which would represent a high energy requirement. How many sites could compete with CCS in terms of this energy requirement? How should that impact the business model and expansion plan of Calera? TRUEnergy, for sure, could greatly benefit from Calera, beyond the CO2 capture potential. TRUEnergy was a wholly owned subsidiary of the CLP Holdings Group, an electricity generation, distribution, and transmission investor based in Hong Kong with assets in India, China, Southeast Asia, and Australia. Lessons CLP learned now could pay dividends later, and the company had committed to lowering its carbon intensity.CLP Holdings, “Climate Vision,” accessed January 10, 2011, https://www.clpgroup.com/ourvalues/environmental/climatevision/Pages/climatevision.aspx. The Yallourn Power Station, which could have an operating life of forty or more years, could attempt to gain a strategic advantage and improved public image by reducing its carbon emissions in anticipation of eventual regulation. The plant could also potentially use Calera’s processes to lower SOx emissions. Calera’s cement could directly trap these particulates. Indirectly, if Calera purchased power at night, the plant could decrease SOx emissions at times when they were most destructive—typically hot, sunny afternoons—and SOx controls typically most expensive. This load shifting could save money on pollution controls or new generation capacity. ## Next Steps Setton sat in her office, adjoining Constantz’s in the building that Calera shared with the Los Gatos Public Library. Outside her door, a dozen employees worked at cubicles whose low, translucent partitions made them more side-by-side desks than cubicles. A light flashed in a bubble containing a toy-sized display in the foyer to represent CO2 moving from a power plant to a Calera cement plant and then to a concrete mixer truck. Bits of chalky stones, like the ones in vials on Constantz’s desk, represented Calera’s product. The company had grown rapidly and showed enormous promise, but it had yet to build full-scale, commercial plants to fulfill that promise. Setton summarized the situation: “To innovate means you have to protect yourself, have to convince people, have to prove quickly, and have to deploy widely. Two strategic questions are important: one, what are the partnerships that will help us convince the world and bring it to reality, and second, how fast can we deploy. That means resources and allocation. How much do we keep in house, how much do we outsource without losing our protection. Those are key questions as we grow fast.”Andrea Larson and Mark Meier, Calera: Entrepreneurship, Innovation, and Sustainability, UVA-ENT-0160 (Charlottesville: Darden Business Publishing, University of Virginia, September 21, 2010). The Calera case offers an example of an entrepreneur taking a process performed naturally, but at a small scale in coral reef formation, and applying the inherent principles to cement production on a large scale. This imitation of natural system chemistry and function represents a growing inspirational focus and concrete product design approach for innovation. The following discussion introduces students to the notion of biomimicry in business. ## Biomimicry What better models could there be?…This time, we come not to learn about nature so that we might circumvent or control her, but to learn from nature, so that we might fit in, at last and for good, on the Earth from which we sprang.Janine M. Benyus, Biomimicry: Innovation Inspired by Nature (New York: William Morrow, 1997), 2, 9. Janine Benyus Humans have always imitated nature. Therefore, biomimicry is probably as old as humanity. Biomimicry as a formal concept is much newer, however. As a design philosophy, biomimicry draws upon nature to inspire and evaluate human-made products and strategies for growth. Biomimetic designers and engineers first examine how plants, animals, and ecosystems solve practical problems and then mimic those solutions or use them to spur innovation. Plants and animals have evolved in relation to each other and the physical world over billions of years. That evolution has yielded successful strategies for adaptation and survival that can, in turn, inform business products, practices, and strategic choices. Nature’s sustainability strategies—a systems perspective, resource efficiency, and nontoxicity—form the core of biomimicry and offer a model on which to base sustainable innovations in commerce. ## Key Concepts Janine Benyus, a forester by training, is the central figure in articulating and advocating the principles of biomimicry. In her 1997 book Biomimicry: Innovation Inspired by Nature, she coined the term biomimicryA term coined by Janine Benyus to describe “the conscious emulation of life’s genius” to solve human problems in design and industry. and defined it as “the conscious emulation of life’s genius” to solve human problems in design and industry.Janine M. Benyus, Biomimicry: Innovation Inspired by Nature (New York: William Morrow, 1997), 2. Benyus has called it “innovation inspired by nature. It’s a method, a way of asking nature for advice whenever you’re designing something.”Michael Cervieri, “Float Like a Butterfly—With Janine Benyus,” ScribeMedia, October 22, 2008, accessed April 12, 2010, http://www.scribemedia.org/2008/10/22/float-like-a-butterfly-with-janine-benyus. Benyus also founded the Biomimicry Guild, a consultancy that helps companies apply biomimetic principles, and the Biomimicry Institute, a nonprofit organization that aspires to educate a broad audience.To view a twenty-three-minute video of Janine Benyus talking about biomimicry at the 2005 Technology, Entertainment, Design conference, see Janine Benyus, “Janine Benyus Shares Nature’s Designs,” filmed February 2005, TED video, 23:16, from a speech at the 2005 Technology, Entertainment, and Design conference, posted April 2007, accessed April 12, 2010, http://www.ted.com/talks/janine_benyus _shares_nature_s_designs.html. Benyus was frustrated that her academic training focused on analyzing discrete pieces of life because it prevented her and others from seeing principles that emerge from analyzing entire systems. Nature is one such system, and Benyus calls for designers and businesses to consider nature as model, mentor, and measure. As she points out, four billion years of natural selection and evolution have yielded sophisticated, sustainable, diverse, and efficient answers to problems such as energy use and population growth. Humans now have the technology to understand many of nature’s solutions and to apply similar ideas in our societies whether at the materials level, such as mimicking spider silk or deriving pharmaceuticals from plants, or at the level of ecosystems and the biosphere, such as improving agriculture by learning from prairies and forests or reducing our GHG emissions by shifting toward solar energy. As the final step, if we assess our own products and practices by comparing them with natural ones, we will have a good sense of how sustainable they ultimately are. Indeed, Benyus identified a list of principles that make nature sustainable and could do the same for human economic activity: • Runs on sunlight • Uses only the energy it needs • Fits form to function • Recycles everything • Rewards cooperation • Banks on diversity • Demands local expertise • Curbs excesses from within • Taps the power of limitsJanine M. Benyus, Biomimicry: Innovation Inspired by Nature (New York: William Morrow, 1997), 7. Such biomimetic principles could be, and have been, exploited to make innovative products in conventional industries. For instance, an Italian ice-axe manufacturer modified its product design after studying woodpeckers. The new design proved more effective and generated higher sales.Kate Rockwood, “Biomimicry: Nature-Inspired Products,” Fast Company, October 1, 2008. Biomimicry notions can be extrapolated further and urge us to assume a sustainable place within nature by recognizing ourselves as inextricably part of nature. Biomimicry focuses “not on what we can extract from the natural world, but on what we can learn from it.”Janine M. Benyus, Biomimicry: Innovation Inspired by Nature (New York: William Morrow, 1997). It also lends urgency to protecting ecosystems and cataloging their species and interdependencies so that we may continue to be inspired, aided, and instructed by nature’s ingenuity. In its broader, systems-conscious sense, biomimicry resembles industrial ecology and nature’s services but clearly shares traits with William McDonough’s concept of cradle-to-cradle design, Karl-Henrik Robèrt’s Natural Step guidelines, and other sustainability strategies and theories.Each of these concepts relates to sustainable business and each has its own heritage. Hence the concepts are summarized here with a suggestion for further reading. Industrial ecology refers to the industry practice of collocation, which uses wastes from one process as input for another, such as using gypsum recovered from scrubbing smokestack emissions to make drywall. See Thomas E. Graedel and Braden R. Allenby, Industrial Ecology, 2nd ed. (Upper Saddle River, NJ: Prentice Hall, 2003). Nature’s services refer to the ways natural processes, such as photosynthesis and filtration in wetlands, provide goods and benefits to humans, such as clean air and clean water. See Gretchen Daily, ed., Nature’s Services: Societal Dependence on Natural Ecosystems (Washington, DC: Island Press, 1997). Cradle-to-cradle design emphasizes that products should be made to be safely disassembled and reused, not discarded, at the end of their lives to become feedstocks for new products or nutrients for nature. See William McDonough and Michael Braungart, Cradle to Cradle: Remaking the Way We Make Things (New York: North Point Press, 2002). The Natural Step is a strategic framework that considers human economic activity within the broader material and energy balances of the earth; it holds that because we cannot exhaust resources or produce products that nature is unable to safely replenish or degrade, we must switch to renewable and nontoxic materials. See Karl-Henrik Robèrt, The Natural Step Story: Seeding a Quiet Revolution (Gabriola Island, Canada: New Society Publishers, 2008); Natural Step, “Home,” accessed April 12, 2010, http://www.naturalstep.org; and Natural Step USA, “Home,” accessed April 12, 2010, http://www.naturalstep.org/usa. Benyus has even explicitly aligned biomimicry with industrial ecology to enumerate ten principles of an economy that mimics nature.Janine M. Benyus, Biomimicry: Innovation Inspired by Nature (New York: William Morrow, 1997), 252–77. 1. “Use waste as a resource,” whether at the scale of integrated business parks or the global economy. 2. “Diversify and cooperate to fully use the habitat.” Symbiosis and specialization within niches assures nothing is wasted and provides benefits to other companies or parts of industry. 3. “Gather and use energy efficiently.” Use fossil fuels more efficiently while shifting to renewable resources. 4. “Optimize rather than maximize.” Focus on quality over quantity. 5. “Use materials sparingly.” Dematerialize products and reduce packaging; reconceptualize business as providing services instead of selling goods. 6. “Don’t foul the nests.” Reduce toxins and decentralize production of goods and energy. 7. “Don’t draw down resources.” Shift to renewable feedstocks, but use them at a low enough rate that they can regenerate. Invest in ecological capital. 8. “Remain in balance with the biosphere.” Limit or eliminate pollution. 9. “Run on information.” Create feedback loops to improve processes and reward environmentally restorative behavior. 10. “Shop locally.” Use local resources for resiliency and to support regional populations, reduce transportation needs, build local economies, and let people see the impact of their consumption on the environment and local economic vitality. ## Examples of Biomimetic Products While biomimicry’s concepts can be applied at various scales, they are most often considered at the level of individual products or technologies. Velcro is perhaps the best-known example. In the 1940s, Swiss engineer George de Mestral noticed burrs stuck to his clothes and his dog’s fur after they went for a hike. He analyzed the burs and fabric under a microscope and saw how the hooks of the former tenaciously gripped the loops of the latter. He used this observation to invent Velcro, a name he derived from velours (French for velvet) and crochet (French for hook). Over the next several years, he switched from cotton to nylon to improve product durability and refined the process of making his microscopic arrays of hooks and loops (Figure 5.22 "Magnified Burdock Bur and Scanning Electron Microscope Image of Velcro"). He then began to file patents worldwide. Velcro now is used in countless ways—including space suits, wallets, doll clothes, and athletic shoes. Figure 5.22 Magnified Burdock Bur and Scanning Electron Microscope Image of Velcro Plants inspired another example of early design biomimicry.Many examples of biomimicry can be found at the Biomimicry Institute’s website, Ask Nature, “Home,” accessed April 12, 2010, http://www.asknature.org. The 2009 Biomimicry Conference in San Diego included an overview of biomimetic products; footage from that conference is available: “Biomimicry Conference 2009—San Diego,” YouTube video, 3:26, from the Zoological Society of San Diego’s Biomimicry Educational Conference on October 1–2, 2009, posted by MEMSDisplayGuy, November 9, 2009, accessed April 8, 2010, http://www.youtube.com/v/r-WUPr5LUR8. Joseph Paxton, a gardener, was charged with caring for an English duke’s giant Amazon water lily (Victoria amazonica), which British travelers had brought back from South America in the 1830s. The lily pads were so massive and buoyant that Paxton could put his young daughter on them and they would not sink. Intrigued, Paxton studied the underside of the water lily. He then used the rib-and-spine design that kept the water lilies afloat to build a greenhouse. A few years later, he applied the same principles to design the Crystal Palace for the 1851 Great Exhibition in London (Figure 5.23 "Interior of London’s Crystal Palace, the Construction of Which Was Inspired by the Leaf Structure of the Amazon Water Lily"). The building relied on cast iron ribs to support glass plates and was a forerunner of modular design and modern greenhouses.Lucy Richmond, “The Giant Water Lily That Inspired the Crystal Palace,” Telegraph (UK), May 7, 2009, accessed January 10, 2011, http://www.telegraph.co.uk/comment/letters/5285516/The-giant-water-lily-that-inspired-the-Crystal-Palace.html; “Leaves Given Structural Support: Giant Water-Lily,” Ask Nature, accessed April 8, 2010, http://asknature.org/strategy/902666afb8d8548320ae0afcd54d02ae. Figure 5.23 Interior of London’s Crystal Palace, the Construction of Which Was Inspired by the Leaf Structure of the Amazon Water Lily More recently, architects have learned how to regulate building temperatures by studying termite mounds. In 1995, architect Mick Pearce and engineers from Arup Associates obviated the need for an air-conditioning system for the Eastgate Centre in Harare, Zimbabwe, by using a series of air shafts and the thermal mass of the building. That alone saved3.5 million in construction costs. The shops and offices in the Eastgate Centre use 65 percent less energy than comparable buildings to maintain a comfortable temperature, reducing total energy needs by 10 percent and making rent 20 percent cheaper than comparable buildings. The design was inspired by termites (Macrotermes michaelsei) that built mounds ten to twenty feet tall while maintaining the structures’ internal temperature at 87°F, the ideal temperature to grow the fungi the termites eat, even when external temperatures dropped to 70°F. The termites use heat stored in the mud to help regulate temperature and open and close hatches in shafts that vent hot air and draw in cooler air.“Eastgate Centre Building: Passive Heating and Cooling Saves Energy,” Ask Nature, accessed November 16, 2009, http://www.asknature.org/product/373ec79cd6dba791 bc00ed32203706a1; “Ventilated Nests Remove Heat and Gas: Mound-Building Termites,” Ask Nature, accessed April 12, 2010, http://www.asknature.org/strategy/8a16bdffd27387cd2a3a995525ea08b3; Abigail Doan, “Green Building in Zimbabwe Modeled after Termite Mounds,” Inhabit, December 10, 2007, accessed January 10, 2011, http://inhabitat.com/building-modelled-on-termites-eastgate-centre-in-zimbabwe.

Interface Flooring Systems, a sustainability-minded carpet company, took another lesson from nature: leaves and twigs never look out of place on the forest floor, no matter how they are scattered or if they vary subtly in hue and shape. In 2000, the InterfaceFLOR division built this lesson into its Entropy line of carpet tiles, part of its platform of biomimetic products. Each carpet tile has a different random pattern within a basic design and color variations within an overall palette (Figure 5.24 "Fall Leaves, Which Inspired InterfaceFLOR’s Entropy Carpet Line"). This variation creates a harmonious whole and eliminates the need to match specific dyes or install tiles in a particular direction, which in turn saves money, material, and time for the initial installation and subsequent repairs. The company estimates installing Entropy carpet wastes only 1.5 percent of the carpet compared with the industry average of 14 percent for broadloom carpet.“i2™ Carpet and Flooring: As-Needed Tile Replacement Saves Resources,” Ask Nature, accessed January 10, 2011, http://www.asknature.org/product/a84a9167f21f1cc 690e0e673c4808833; InterfaceFLOR, “i2™ Modular Carpet—How Nature Would Design a Floor,” accessed April 12, 2010, http://www.interfaceflor.com/Default.aspx?Section=3&Sub=11.

Figure 5.24 Fall Leaves, Which Inspired InterfaceFLOR’s Entropy Carpet Line

Biomimicry can also aid sophisticated electronics. The communication technology company Qualcomm has applied the principle that makes butterflies and peacock feathers iridescent to full-color electronic displays, from cell phones to tablet computers. Its product, Mirasol, relies on what Qualcomm calls interferometric modulation within a microelectromechanical systems device. The display consists of pixels that contain two layers, a glass plate, and a reflective layer over a base substrate. Minute voltage differences change the distance between the plates in individual pixels, producing interference patterns that create different colors. The pixels do not need their own backlighting, unlike LCDs, and hence use very little energy and remain highly visible even in bright sunlight. The technology won several awards from 2008 to 2010, including the Wall Street Journal 2009 Technology Innovations Award in the semiconductor category and LAPTOP magazine’s 2010 Best Enabling Technology.Qualcomm, “Mobile Displays: Mirasol Display Technology,” accessed January 10, 2011, http://www.qualcomm.com/products_services/consumer_electronics/displays/mirasol; “Mirasol Display Hands-On High-Res,” YouTube video, 0:58, posted by engadget, January 8, 2010; accessed April 12, 2010, http://www.youtube.com/v/jmpBgaPGYKQ; Mirasol Displays, “How It Works,” accessed January 10, 2011, http://www.mirasoldisplays.com/how-it-works; and Mirasol Displays, “Press Center: Awards,” accessed January 10, 2011, http://www.mirasoldisplays.com/awards.

## Conclusion

Nature provides a rich source of ideas that can make human-designed products and corporate strategies more efficient and resilient, and less toxic—and therefore more sustainable. Nature’s ecosystems avoid waste: what is discarded by one species is often used by another as input or nutrition. Nature solves problems with the materials at hand, the very building blocks of life, rather than exotic and synthetic chemicals. Its systems are self-energizing; nature runs on sunlight, mediated by photosynthesis. When strategy executives or product designers operate from a biomimicry vantage point, considering its principles and the examples of plants and animals that apply, they can use nature’s models to create sustainable business innovations.

### Key Takeaways

• Biomimicry can offer new ideas for solving some of our seemingly intractable ecological and environmental health problems.
• Entrepreneurs emerge from a wide variety of backgrounds; it is more a question of “fit” among the entrepreneur, the product/technology, and the market need that creates the opportunity.
• Success is not just about having a unique or superior technology; it is, perhaps most important, about finding early customers and generating revenue streams that satisfy investors.

### Exercises

1. Describe each of the following for Calera:

1. entrepreneur
2. opportunity
3. product
4. concept
5. resources
6. market
7. entry
2. What are Calera’s major challenges now? What does the company have to get right in the short run to succeed? Prepare your analysis as a presentation with recommendations.
3. Name advantages or disadvantages in having the financial backing of Vinod Khosla.

# Chapter 6 Clean Products and Health

Businesses and consumers are increasingly seeking, even demanding, safer and nontoxic products. Forward-thinking entrepreneurial firms now incorporate sustainable design considerations to provide preferred design and product formulations. This chapter provides examples of companies that have adopted sustainability strategies and as a consequence designed better, healthier, and cleaner products. In these case examples we see companies applying systems and molecular thinking approaches, green chemistry concepts, cradle-to-cradle design ideas, and green supply-chain practices to meet the growing demand for “clean” products.

We introduce this chapter with a background discussion on green supply chains. This background material applies to all the cases, not just those in this chapter. It is important to understand that an individual company’s “clean” and “green” operations and strategy may be real and laudable, but sustainability is a systems concept that, at minimum, applies to the network of suppliers and buyers composing the value chain. Students should be sure to apply the green supply chain background information to all the cases discussed.

## 6.1 Green Supply Chains

### Learning Objectives

1. Learn the definition of a green supply chain.
2. Understand how integration of green and sustainability knowledge can improve the performance of supply chains.
3. Define reverse logistics, life cycle assessment, and design for environment in the context of supply chains.
4. Gain insight into the strategic value of greening your supply chain.

Regardless of how you might feel about Walmart, the effect of the company’s sustainability policies are being felt worldwide through its supply chains. On February 1, 2007, Walmart President and CEO Lee Scott announced his company’s “Sustainability 360” program would expand Walmart’s sustainability efforts from its operations and into its supply chains by “tak[ing] in,” as Scott said, “our entire company—our customer base, our supplier base, our associates, the products on our shelves, the communities we serve.”Walmart, “Wal-Mart CEO Lee Scott Unveils ‘Sustainability 360,’” news release, February 1, 2007, accessed January 10, 2011, http://walmartstores.com/pressroom/news/6237.aspx. Walmart customers could now track the company’s “Love, Earth” jewelry all the way back to the mine or buy fish certified by the Marine Stewardship Council. In 2010 the company announced the goal of a twenty-million-metric-ton greenhouse gas emission reduction from its global supply chain (encompassing over one hundred thousand suppliers).Walmart, “Sustainability Fact Sheet: Wal-Mart Takes the Lead on Environmental Sustainability,” news release, March 1, 2010, accessed January 30, 2011, http://walmartstores.com/download/2392.pdf. Furthermore, Walmart enlisted the nonprofit Carbon Disclosure Project, institutional investors with \$41 trillion in assets as of September 2007, to help Walmart’s suppliers of DVDs, toothpaste, soap, milk, beer, vacuum cleaners, and soda to assess and reduce their carbon footprints.Ylan Q. Mui, “Wal-Mart Aims to Enlist Suppliers in Green Mission,” Washington Post, September 25, 2007, accessed January 10, 2011, http://www.washingtonpost.com/wp-dyn/content/article/2007/09/24/AR2007092401435.html. Indeed, with roughly one hundred thousand suppliers, two million employees, and millions of customers per day,Walmart, “Sustainability Fact Sheet: Wal-Mart Takes the Lead on Environmental Sustainability,” news release, March 1, 2010, accessed January 30, 2011, http://walmartstores.com/download/2392.pdf. Walmart’s operations and those it encouraged, from product design and resource extraction through final consumption and disposal, could massively influence societies and the natural environment. As such impacts attracted attention, so did the benefits of and the need for greener supply networks.

Green supply chains (GSCs)Approaches to sourcing and production that consider sustainability for every participant at every step, from design to manufacture, transportation, storage, and use to eventual disposal or recycling. became Supply Chain Digest’s number one supply-chain trend of 2006 as more companies such as Walmart embraced them.Dan Gilmore, “Top Ten Supply Chain Trends of 2006,” Supply Chain Digest, January 4, 2006, accessed January 10, 2011, http://www.scdigest.com/assets/FirstThoughts/07-01-04.cfm?cid=871&ctype=content. Fully developed green supply chains consider sustainability for every participant at every step, from design to manufacture, transportation, storage, and use to eventual disposal or recycling. This attentiveness would reduce waste, mitigate legal and environmental risks, minimize and possibly eliminate adverse health impacts throughout the value-added process, improve the reputations of companies and their products (enhancing brands), and enable compliance with increasingly stringent regulations and societal expectations. Thus GSCs offer the opportunity to boost efficiency, value, and access to markets through improving a company’s environmental, social, and economic performance.

Figure 6.1 The Conventional Supply Chain

## Improving Conventional Supply Chains

In its simplest form, a conventional supply chain assumes that firms take raw materials at the beginning of the supply chain and transform them into a product at the end of the supply chain. Ultimately, the supply chain terminates at the point of the final buyer purchasing and using the product (see Figure 6.1 "The Conventional Supply Chain"). Vertical integration absorbs steps in the supply chain within a single corporation that conducts exchange through internal transfer pricing agreements. Disaggregation maintains ownership in discrete businesses that determine prices through market-based transactions.

A company that sells a final product must meet certain requirements and interact with suppliers, third-party logistics providers, and other stakeholder groups that can influence the entire process. Each institution tries to shape the supply chain to its own advantage. As the product moves from design to consumption (black arrows), waste and other problems (gray arrows) accrue. Whether those problems are unfair wages, deforestation, or air pollution, these costs are not necessarily reflected in the price of the finished product but are instead externalized to the public in some fashion or expected to be borne by intermediate links in the conventional chain.

While the term supply chain implies a one-way, linear relationship among participants (e.g., from concept, to resource extraction, to processing, to component manufacturing, to system integration, to final assembly, etc.), the chain is more accurately described as a network of individuals and organizations. Managing such networks can become quite complex, especially as they sprawl over more of the globe. Conventional supply-chain management plans, implements, and controls the operations of the supply chain as efficiently as possible—typically, however, from a limited vantage point that ignores and externalizes many costs.

In contrast, a green supply chain takes a broader, systems view that internalizes some of these costs and ultimately turns them into sources of value. Green supply chains thus modify conventional supply chains in two significant ways: they increase sustainability and efficiency in the existing forward supply chain and add an entirely new reverse supply chain (see Figure 6.2 "The Green Supply Chain").

Figure 6.2 The Green Supply Chain

## Improving Logistics

A company can select various ways to improve the sustainability of its logistics systems. The company may communicate sustainability standards backward to suppliers and require them to adopt environmental management systems or certifications, such as ISO 14001; survey and monitor suppliers’ current practices or products for their sustainability and offer training, technology, and incentives to improve those practices or products;According to the International Organization for Standardization, which established this qualification, ISO 14001 “gives the requirements for quality management systems [and] is now firmly established as the globally implemented standard for providing assurance about the ability to satisfy quality requirements and to enhance customer satisfaction in supplier–customer relationships.” International Organization for Standardization, “ISO 14001:2004,” accessed January 10, 2011, http://www.iso.org/iso/iso_catalogue/catalogue_tc/catalogue_detail.htm?csnumber=31807. require suppliers to avoid certain hazardous ingredients and label others; and/or ask suppliers and other supporting firms, such as transportation companies, to suggest ways to improve the efficiency and sustainability of the whole process. Hence companies “greening” their supply chains are likely to communicate and collaborate more with suppliers and subcontractors to innovate and find the best solutions. They might also reach out to nongovernmental organizations (NGOs) and government agencies