Climate Change: First Mover Advantage and Sustainability
Out of the swirling discussion, debates and controversy surrounding climate change, two things are clear. First, climate change directly affects the business sector, our communities and our life-giving ecosystems. Second, governments will attempt to mitigate and adapt to the effects through persuasion and regulations.
That presents a huge challenge for us all, particularly the business sector. As a major contributor of carbon emissions that affect the climate, the business sector will need to be deeply involved if climate mitigation and adaptation are to succeed. Not least because of our national commitments on global climate change agreements.
Our International Climate Change Commitment
In December 2016, the Indonesia’s national commitment (Nationally Determined Contribution) - to reduce the greenhouse gas emission by 29% by 2030 was delivered by President Joko Widodo at the 22nd Conference of Parties (COP22) UNFCCC at Marrakech. If we combine our national efforts with international co-operation, we have committed to reduce greenhouse gas emissions up to 41%. This commitment is a respond from Indonesian Government to the Paris Agreement, which the only one (albeit one of the more important ones) of many international conferences that have pushed governments of both developed and developing countries to act on the environment.
In order to fulfil those commitments, the government will need to persuade or regulate companies to undertake meaningful sustainable management. However, companies can and should take the initiative to gain first mover and competitive advantage through internally driven climate action strategies. As Michael Porter, the business guru on strategy, noted, “Climate change is now a fact of political life and is playing a growing role in business competition…While individual managers can disagree about how immediate and significant the impact of climate change will be, companies need to take action now”.
Climate Change and Business Strategy
It may come as a surprise to business people that Michael Porter is regarded a pioneer in the area of sustainability. Widely known for such strategy concepts as the “Five Forces” framework, value chains, and national competitive advantage, he also introduced the “Creating Shared Value” (CSV) framework when he was consulting for Nestlé S.A. during the mid-2000s. The essence of the framework is that companies should deal with social and environment issues as strategic opportunities, rather than as costs, to create value for society that in turn creates competitive advantages for businesses.
Creating Value and First Mover Advantage
Not surprisingly, Nestlé S.A. is the company most identified with the CSV framework, formalized in 2005 in collaboration with Porter. Since then, Nestlé’s business model has incorporated the CSV framework globally (including in Indonesia) in such areas as climate change, nutrition, rural development, responsible sourcing, human rights and water. A 2015 study undertaken by a leading consulting firm confirmed that a measure of commercial success did come from linkages between sustainability issues and key business factors such as sales volumes, security of supplies, and value chain integrity.
In a developing country context, Masisa, a large forestry and wood-manufacturing company in Chile, used a similar framework to create a competitive advantage over its competitors. The company systematically identified and managed its social and environmental impacts and risks. Displaying results through a scorecard that integrates the financial, social and environmental areas of the business kept Masisa staff motivated and engaged. The result was a competitive advantage in such areas as brand differentiation, cost efficiency, and attracting and retaining talent.
Creating Shared Value and First Mover Advantage: A PROPER Indonesian Success
The value of reputation was a key ingredient in the success of a pioneering Indonesian government national environment program called PROPER (Program for Pollution Control, Evaluation and Rating) that began in the mid-1990s. Meant to encourage companies to be more sustainable aware, Sarwono Kusumaatmadja, then State Minister of Environment and now Chairman of the Advisory Council of Climate Change, Republic of Indonesia and Chairman of the Board of Advisor of The Nature Conservancy Indonesia Program, first publicly introduced the program in his keynote address when accepting the United Nations University Zero Emissions Leadership Award in 1996.
As the Minister explained it, a 1993 review showed that companies had faltered in their commitment to follow environmental standards set in the Clean River (PRO-KASIH) program that had begun in 1989. He said, “And so we thought that there was no way to do it except to be transparent about compliance and performance…We classified them according to the nature of their waste streams and we came up with a list of possible candidates and the number was 190. We then made an announcement to the public that we would be rating private companies in the future.”
Initially focusing on measuring a company’s waste stream into rivers, PROPER has evolved into stringent evaluation of other measures, such as environmental management systems, energy efficiency, hazardous and non-hazardous waste management, natural resource conservation, and a company’s social responsibility for its surrounding community. The program then classifies companies into color-coded ratings starting from Black as the worse environmental performer, to Red, Green, Blue and finally Gold as the highest category. The colors make it easier for the public and the media to identify companies and their environmental performances.
PROPER has therefore an incentive and disincentive aspect. By publicly disseminating the results of the ratings, good performers of Green, Blue and Gold gain public recognition and reputational value for their environment management and social responsibility. Black and Red performers not only get poor reputations but are also liable for sanctions for non-compliance of regulations or worse. The overall aim, though, is to encourage companies to obey environmental regulations and to achieve high environmental and social responsibility standards.
Companies are pro-actively using PROPER ratings to benchmark their performances against their peers for future improvements. The program also encourages the sharing of best practices and lessons learned, including in the areas of community responsibility and empowerment where PROPER’s social responsibility indicators encourage companies to go beyond mere charity campaigns. An interesting aspect of the program is the role of company managers eager to be rated in order to make their board members and shareholders more aware of sustainability issues.
While not perfect (critics have pointed out lack of local government involvement, for example, and some inconsistencies in ratings compared to actual performance experienced by communities), PROPER is considered a success. After a good start in its first two years, the government had to close the program during turmoil arising from the financial and political crisis in 1997. At the time of the crisis, PROPER had rated 324 companies but did not make them public.
After the crisis was over, the program resumed and 85 companies were rated in 2004. In the next year, the number of companies rated increased substantially to 251 companies. By 2010, PROPER was rating 690 companies. In 2015, the program gained more traction when the Governor of East Kalimantan publicly announced all the ratings from black to gold of the major corporations in the province. In 2016, PROPER rated 1930 companies from 111 different industries.
The success of PROPER has inspired similar programs internationally, such as Ecowatch in the Philippines, the Public Environment Performance Index (PEPI) in Mexico and most recently in 2017, the Maharashtra Star Rating Program in India. Yet despite the success of such programs, and others around the world, we still have a long way to go when facing the challenge of global climate change.
The High Stakes of Climate Change
The scientific consensus is that our planet is warming to dangerous levels. About 75 percent of annual CO2 emissions from human activities come from the burning of fossil fuel (oil, coal and natural gas). Another 20 percent is accounted for by deforestation—the cutting and burning of forests that trap and store carbon.
That, in a capsule, captures the dilemma of Indonesia. On one hand, we depend too much on our natural resources for our economic growth, thereby depleting our enormous natural capital. On the other hand, depleting our natural resources creates the carbon emissions that contribute to global warming. Moreover, just on the basis of our rate of deforestation, Indonesia is one of the highest contributors to global carbon emissions.
At the same time, most experts agree that Indonesia is one of the most vulnerable countries to the impact of climate change. Rising sea levels and changing rainfall patterns are affecting our agriculture, fishing and forestry industries and threatening food security and livelihoods. The government estimated that Indonesia could lose as many as 2,000 low-lying islands by 2030 if sea levels continue to rise. A one-meter sea-level rise could displace around 10 million people in Indonesia.
We can list many more potential major disruptions and disasters that climate change can bring about. But unfortunately, such listings, no matter how accurate, have very little actual impact in provoking action. Part of it comes from the knowledge that climate change events will likely happen in the future-near or far-and in other locations. Part of it is because we tend to look at climate change as a global problem, making it as “other” people’s problem. Not to mention that individual short-term self-interest and desires, more often than not, matter more than long-term needs.
The Way Forward
Yet the success of the PROPER program shows that Indonesia can devise its own solutions to meet the challenges of climate change. Further policies to create incentives and disincentives can go a long way towards climate change solutions. A clear example would be to link environmental risks into the credit risk process of banks. Very simply, a black or red rating would make it extremely difficult to obtain credit. A green or gold rating would make it commensurately easier. The same could apply to the level of interest rates of such loans. All of which go together with auditing guarantees certifying the integrity of the ratings.
We, of course, should and can do more to mainstream the conservation and sustainability strategies underlying the principles of PROPER into the Indonesian economy. These will inevitably involve a multi-stakeholder approach rooted in good governance and transparency (a PROPER and CSV hallmark). Such an approach has the potential to create economic growth through new markets, innovations and jobs. A new narrative of the role of business as stewards of the environment can then emerge that it is smart to be green. If this narrative becomes the “new normal”, there is hope for climate action for low carbon development in the future.