No industry is as visible and active in the climate change debate as the energy industry. Almost every day, managers are addressing the short-term and long-term implications of their policies for dealing with this issue. The authors of this article interviewed over 50 managers in 8 firms in the oil and gas industry and found that companies that address the short-term and long-term threats and opportunities of climate change can gain a significant competitive advantage.
The trouble with mitigating climate change is that the benefits are uncertain and distant.1
The timing and timeframes of climate-change initiatives may be critical to business success. For example, there are opportunities to balance financial and environmental goals in the short-term — such as improving energy efficiency — which can often create an immediate win-win for firms. Yet some of the most rewarding initiatives may be those in which the payback occurs over a longer period of time. However, these long-term initiatives have benefits that are difficult to quantify, making the business case challenging.
In this article, we show how firms balance the short-term demands with the long-term opportunities of climate change. Our findings are based on a study that we conducted in Alberta’s oil sands, from November 2008 to October 2009. We interviewed over 50 managers in nine different companies, as well as representatives of NGOs, think tanks, and consultancies. We asked them how they thought about climate change, and what they were doing about it.
Some of the firms in our study successfully balanced the short with the long term, and realized both tangible and intangible benefits. In doing so, they were able to maintain their financial health, while addressing the significant challenges posed by climate change. These firms developed a thoughtful strategy towards climate change. They did not view climate change merely as an issue related to energy efficiency. They also recognized the political, environmental, and social dimensions. One executive explained: “There’s a number of pieces that I think all need to fit together. I don’t think there is a single solution.” These firms recognized that there is no silver bullet – firms need a range of actions, well beyond achieving energy efficiency.
Balancing short- and long-term goals
Firms that could manage the short term while keeping a steady eye on the long term were also able to manage the contradictory yet interrelated issues related to climate change. They did not isolate or compartmentalize the issues. Instead, they used the contradictions to stimulate new, creative, and innovative solutions. For example, rather than silo the short-term, financial demands of climate change in one part of the organization and the long-term risks or opportunities created by climate change in another, these firms combined the two in the same parts of the organization. The corporate strategy group of one company addressed both the short-term costs of climate change, while also building scenarios around the implications of climate change in the long term. In doing so, these firms confronted the challenges posed by climate change head on and sought multiple solutions, rather than avoiding the complex problems arising from the tension between short-term and long-term goals. This contrasts with the approach of companies that relegated climate change issues to, for example, the regulatory affairs department of their organization, and omitted the issues related to long range planning.
Although our study focused on climate change, the lessons learned can be applied to a number of business problems that require achieving the delicate balance between short and long- term goals. These problems include all types of social and environmental issues, as well as investments in research and development. Below, we offer eight best practices that illustrate how companies successfully balanced the short and the long term challenges imposed by climate change.
We identified eight best practices that leading organizations use to balance their short-term and long-term goals when they make decisions relating to climate change.
- Use climate change as an opportunity to learn
- Pay attention to the long-term benefits in addition to the short-term costs
- Develop a strong vision to shape the future
- Embrace uncertainty
- Think beyond the metrics
- Explore the future using scenarios
- Take the time to understand the issues and avoid quick fixes
- Build a sustainability culture
1. Learn from climate change
Although the discussion of climate change is a difficult one within the oil and gas industry, it does represent an opportunity to learn how to manage nebulous, long-term issues. And, while many managers prefer to focus on tangible solutions to greenhouse gas emissions, such as energy efficiency measures, concentrating on these measures alone is often not enough to satisfy stakeholders, who are concerned about longer-term solutions. For example, some NGOs have a mandate to protect the long-term interests of communities, such as building infrastructure, or, in the case of climate change, reducing environmental impacts that may affect future generations.
Some firms in the study were particularly skilled at leveraging the learning from stakeholder engagement and memberships in multi-stakeholder groups. By incorporating feedback from others, even harsh criticisms of the oil and gas industry, these firms were better prepared to manage some of the issues that might arise both in the short and long term. Furthermore, these firms tended to be aware of the diverse concerns that exist regarding climate change, and were more flexible in responding to a variety of stakeholders. Senior managers of leading firms made the following observations:
Ever since I joined and even before , I guess, the company approach has been to look out over the horizon, you know, as to what’s coming in terms of issues that eventually will evolve into regulatory directives and, you know, be there, learn along the way. And, so, you’re better prepared when it’s compulsory.
We have a level of corporate knowledge that I think some other companies haven’t acquired yet and that probably does help us understand what the options are.
Stakeholder input represents an opportunity to learn, and it can seed new, innovative ideas. Such input offers opportunities for businesses to brainstorm new approaches to complex issues. Whereas the narrow focus on financial metrics elevates the importance of tangible solutions such as energy efficiency, stakeholder input can generate new insights that push the organization’s thinking to options that are more creative – that deal with financial and social concerns simultaneously.
2. Stay the course
We have become accustomed to instant gratification, and nowhere is this more evident than in organizations that expect short-term financial results. Investors expect improvements each quarter, but addressing climate change requires investments that do not usually result in quarterly paybacks.
Focusing on the long-term is not easy. It requires persistence and significant commitment from senior management. This commitment draws admiration from employees and even from other firms. For instance, one manager spoke admiringly of one of his company’s peers:
This means that leading firms look for a number of short-term steps that move them incrementally in the right direction. These firms keep their eye on long-term goals and invest in short-term steps that have measureable and visible outcomes that motivate people and satisfy investors. This puts them in a position where all stakeholders, including their employees, are ready for long-term investments. One executive explained:
3. Create a vision that speaks of endurance
Companies that are pushing the envelope when it comes to responding to climate change have a strong vision that inspires employees to shape the future. This vision usually comes from the company’s leadership and includes a statement about values and objectives relating to a long-term view of the future. For example, one manager emphasized the importance of vision in the following way:
Long-term goals inspire employees to act in ways that will help the organization shape its future. One manager explained how his company’s vision had inspired him:
4. Embrace uncertainty
Uncertainty is something the oil and gas industry knows well. Yet the uncertainty posed by climate change is unique and multi-faceted; there is uncertainty regarding climate change impacts, including uncertainty about the type, magnitude, and timing of the physical impact; uncertainty about the best technological options; and uncertainty surrounding the future regulatory environment.
Most people like certainty, and managers often try to reduce uncertainty by using metrics or other tools. Uncertainty is uncomfortable and, in some cases, it even paralyzes, as managers wait for more information around regulations before taking decisive action. Yet, as companies wait, public opinion about the climate change issue continues to evolve and negative media attention can catch companies off-guard.
Leading firms are not willing to wait for more certainty. They accept a certain amount of discomfort, and even view it as a positive. One manager expressed:
Another leading firm had a similar approach to managing uncertainty:
5. Think beyond the metrics
We know that “you can’t manage what you don’t measure.” However, some performance indicators, such as the quality of stakeholder relationships, are difficult to measure but need to be managed. Most companies, therefore, focus on data that can be quantified, such as GHG emissions, but that may be missing other important information. Our research showed that the firms able to think long term often looked beyond the data. One senior manager explained:
Firms that successfully balance the short term and the long term are skilled at capturing and measuring many aspects of climate change. On the other, hand, they do not rely solely on metrics to make decisions. They also rely on their values. As one interviewee described it:
These firms not only focus on costs, but also evaluate intangible benefits, such as reputational benefits. One executive went so far as to say:
Rather than trying to quantify the benefits of sustainability, this company talked about it qualitatively, linking sustainability to its ability to attract and retain human talent.
Therefore, when it comes to long-term issues such as climate change, firms are best served by using a combination of qualitative and quantitative data. Projects based on metrics such as hurdle rates alone are difficult to justify. Qualitative information goes a long way in helping to align decisions with the organization’s values.
6. Complement economic modeling with scenario analysis
Scenario analysis facilitates long-term thinking. The firms that used scenarios as an opportunity to expand thinking through dialogue rather simply as an economic tool were better prepared for future contingencies. These firms imagined several likely futures and then figured out what they had to do to create and realize their preferred future. Their perspective was anchored in the future. One manager expressed this in the following way:
In contrast, other firms were focused on the present and extended their current views into the future. But, the further out they looked, the more uncertain it seemed, so their horizons remained short. Furthermore, they were not as well prepared for future developments relating to climate change.
Economic modeling complements scenario analysis, but each serves very different purposes. Scenario analysis fosters creativity, as managers can imagine the future and understand the factors that will make the future a reality. Economic modeling, however, is rooted in what we can measure and model. Not only does this stifle creativity, it emphasizes the short term. Successful firms used both approaches.
7. Take the time to understand the issues
Some companies were able to balance speed and quality. They were capable of making quick decisions, yet they also spent the time necessary to understand issues when it was important to do so. Climate change was one such issue that was deemed to require careful thought by successful firms. As such, stakeholder engagement was seen as critical to understanding the issues, even though it is often a slow process for many firms:
Leading firms were willing to take the time to understand the many complexities inherent in the climate change issue and avoid quick fixes. As one manager noted about her company, “there’s not a lot of appetite in the company for inaccuracy or lack of thorough thought.” Although this company took the time to think through complex issues, this did not make the company less competitive or any less agile. The company was able to make decisions quickly when it was necessary, but it viewed the climate change issue as complex and requiring a thorough understanding of the long-term implications of the decisions it made.
8. Build a sustainability culture through systems, structure, and people
One of the more interesting lessons learned in this study is that when companies nurture a sustainability culture, their managers tend to focus on the long term. Firms with a sustainability culture were those that did not silo sustainability in one part of the organization; rather, they embedded it throughout. The people that they hired, their training, their compensation, their reporting systems, their monitoring and control systems all contained elements of sustainability and were distributed throughout the organization. These elements allowed everyone to consider the wider and longer-term impact of their firm’s actions.
Building a sustainability culture, however, is not easy. It must go beyond rhetoric, and be backed by corporate actions. And, these are not actions imposed by a few select people; they are actions that are distributed from the top of the organization to the bottom.
One manager explained how a sustainability culture places a special emphasis on the long term:
An authentic sustainability culture builds employee loyalty and commitment. Many managers expressed pride in their company and their commitment to the company’s vision. They mentioned how the company’s values align with their own values:
These employees will inevitably be with the company for the long haul, as long-term companies attract long-term employees.
Climate change has emerged as one of the most important business (and political) challenges of our time. Some firms are ignoring the issue, whereas others are problem-solving creatively. To successfully manage this complex issue, managers are addressing both its short-term and long-term implications. Firms that address the short-term and long-term threats and opportunities of climate change can gain an advantage over their competitors, who may be blind to this powerful force that will continue to reshape the business world into the future.
- The Economist, December 5, 2009, p.6: Is it worth it? A special report on the carbon economy