New Metrics
#SustyGoals 5:
The Hardcore Business Case for Setting Science-Based Goals – A Dialogue with Andrew Winston

One of the key messages in the upcoming book The Big Pivot: Radically Practical Strategies for a Hotter, Scarcer, More Open World is the “need to set goals in companies based on science, not on what we think we can do, not bottom-up,” says author Andrew Winston. In other words, companies need to set sustainability goals based on “how much we have to do to meet what the physics and math of climate change are telling us.” Unfortunately, most companies have yet to embrace this approach.

In the latest installment in the #SustyGoals series, #NewMetrics channel co-curator Bill Baue conducted the following dialogue with Winston, to find out more about why and how to set science-based goals.

Bill Baue: In writing your next book, The Big Pivot, your focus on reality-based corporate sustainability goals prompted you to research which companies had set science-based targets on carbon, water, waste, etc… First off, why set reality-based goals, from a sustainability perspective?

Andrew Winston: From a sustainability perspective, if we're not setting goals that put us on the path to actually tackling the biggest challenges, then we're not going to make it — by definition, we won't be sustainable. Of course, the important caveat is that setting goals is not the same as taking action, and that works both ways — meaning, even if we set science-based goals, we may not meet them; but on the other hand, it's possible that we will hit the reductions we need without specifically setting goals. But I wouldn't hold my breath on the latter path, since “what gets measured gets managed" is trite because it's true. So we need to set goals based on what's going on in the physical world, because that's the reality, as silly and tautological as that sounds.

The metaphor I use in The Big Pivot is of a lifeboat filling with water. You wouldn't ask everyone in the boat how much the think they can bail in the next hour and then perhaps give them a “stretch” target. No, you'd figure out how much water needs to be bailed and divide up the labor as equitably as possible.

Bill Baue: How about from a hard-core business perspective – what's the business case for setting reality-based goals?

Andrew Winston: This question is clearly more difficult to answer. If moving at the pace of science—what McKinsey, PwC and others suggest is about 6 percent improvement in carbon intensity per year (or 3 percent absolute reductions in emissions) — were clearly profitable in the simplest of ROI terms, we'd likely be doing it already (I say “likely” because we can't claim that business is always 100 percent rational, especially around “green” initiatives, and there are many reasons companies do not pick up the proverbial $100 bills sitting around, from organizational to cultural to psychological hurdles).

At the macro level, the business case is that business has to live within the means of the planet because it's a wholly owned subsidiary of the planet. It may not be satisfying to everyone to hear this, but as many have said, business can't succeed on a planet that fails. That's the big picture answer.

Bill Baue: How about on the ground — what's the more tactical answer?

Andrew Winston: The more tactical answer is that a good percentage of the reductions we need are flat-out profitable (a recent study from WWF, with McKinsey, calculates that moving at the required pace will save the economy hundreds of billions of dollars). Even if you think that's pie-in-the-sky, clearly we have major inefficiencies in our economy where we can cut energy use dramatically and thus carbon.

For the rest of the challenge, investments that may require a longer time horizon, part of the answer is in redefining how we think about and use the measurement tool of ROI. We currently don't value many aspects of “return” — consider the reduced risk from not relying on volatility-priced resources and knowing your energy costs (the zero variable cost of renewables), or the brand value of participating aggressively in the clean economy, or the resilience benefits of onsite energy that keeps your business up and running while others are down during a storm or grid outage. Calling those benefits 'zero' value is absurd, but it's basically what we do when we let a pure ROI calculation make the call on, say, investing in renewables.

So what I'm saying is there is a hard-core business logic, aside from the "wouldn't it be nice to ensure our survival and prosperity" point that encapsulates it all. I believe the companies that go down this path will build more resilient, profitable enterprises.

Bill Baue: You mention the absolute-based goal of about 3% reductions and the intensity-based goal of about 6 percent reductions. What are the differences between these two goal-setting approaches, and how do companies translate these goals into targets they can implement?

Andrew Winston: The absolute target is the simplest to understand and easiest to implement — either your carbon emissions are dropping at about 3% per year, regardless of what else happens in your business, or they're not. But that's a very blunt instrument. The reality is that the world needs to reduce emissions that fast, but not necessarily every company. Some sectors are providing solutions that help reduce emissions in the rest of the economy — from old-school technologies like insulation, to IT and big data tools that enable reductions in buildings, transportations systems, and much more. We very likely need more of those companies' products, and thus their emissions should grow with their increasing share of the global economic pie (we're assuming here that these problem-solving technologies are growing faster than the overall economy.)

It's that logic that leads to a carbon calculation based on a company's contribution to the economy. As you and Mark McElroy from the Center for Sustainable Organizations have been working on, the right metric is a company's value-added contribution to GDP. And this is where the 6 percent carbon intensity number comes in — the models that PwC and others have used already assume some aggressive growth in the world economy, especially in China, India, and elsewhere in the developing world. Given that growth and the need to cut emissions 80-90 percent by 2050, you get a 6 percent per year intensity improvement, which may sound like a low number but is very, very fast (about 9 times the pace of decarbonization the world is currently on).

So, all that said, companies need to consider this relative intensity goal, then calibrate that with their own growth expectations — honest growth goals, not world-domination hockey-stick projections. Then they can figure out an absolute target. I talk about this all in an appendix to The Big Pivot.

Bill Baue: In advance of the book publication, you launched the PivotGoals website, and as part of that process, you took a look at the current state of science-based goal-setting. What did you find?

Andrew Winston: My research team has been collecting the environmental and social goals of the world's largest public companies (all searchable at pivotgoals.com). Of the Fortune Global 200, more than 50 companies — including Nokia, Vodafone, Unilever, Mitsubishi Chemical, UBS, Volkswagen and Coca-Cola — have set goals on par with what we need to do (either in absolute or intensity terms). Another handful, among them Deutsche Bank, P&G, Noble Group and Walmart, have established carbon-neutral or 100 percent renewable energy goals, but without a specific date. Besides these longer-term thinkers, our corporate carbon goals are wholly inadequate to the task at hand.

Bill Baue: In The Big Pivot, you also note that the slow development of carbon regulation in the US has created an uneven playing field. What approach makes most sense for companies to take vis-a-vis regulation, and why?

Andrew Winston: This is another huge topic. Look, all the above discussion about cutting emissions at a certain pace aside, we need a playing field that encourages that change. Again, companies can go a long way on the low-carbon road with projects that are 'in the money' (using power purchasing agreements for solar, for example). But the pace of change may require doing some things that don't meet the normal two-year hurdle rate in companies. Clearly, a price on carbon can help make those calculations a lot more favorable to the clean investments we need.

I believe that companies need to get off the sidelines — or in many cases off the opposing team — and actually push for a price on carbon. We could debate the means, a cap and trade or a carbon fee/tax, but I'm partial to the latter. I think it's the cleanest option and we can shift taxes away from things we want more of, like income. But companies should also push for other policy shifts, such as public-private investments in the clean economy, higher cleantech/efficiency standards (like auto fuel efficiency), and an elimination of fossil fuel subsidies. We need to make the market work correctly by pricing the things that are not currently valued in the marketplace.