WHAT ROLE SHOULD ENVIRONMENTAL CONCERNS PLAY IN THE DUE DILIGENCE PROCESS?
The old school version of due diligence was to look for liability in environmental fines, or high cleanup costs, but I really don't think that kind of narrow focus works anymore. In the next five to ten years, we'll be seeing the impact of climate change on agricultural yields, in water supplies, in storm damage vulnerability, in sea level rise, in energy demand, in all kinds of other areas that affect business performance. As the price of carbon goes up around the world, due diligence must encompass not only the carbon footprint of the company's own operations, but the secondary impacts on its supply chain and on its customer base.
“The old school version of due diligence was to look for liability in environmental fines, or high cleanup costs, but I really don't think that kind of narrow focus works anymore.”
WHAT BENEFITS CAN BE DERIVED FROM THIS APPROACH?
I think that environmental performance rather than environmental compliance is really the important factor these days that's differentiating companies to their customers, to environmental groups like ours, and increasingly to investors. So driving for best in class environmental performance not only reduces risk but can carry financial and reputational benefits as well. I would like to see companies viewing environmental change not as an obstacle to be overcome, but as an opportunity to reduce costs and to increase competitiveness. For example, regulations that put a price on carbon, which are in place in the EU right now and likely will be soon in the US, will increase the demand for low carbon power sources like wind, biofuels, and landfill gas, which in turn can create opportunities for the engineering and construction firms that build those facilities. Other opportunities for energy efficiency gains – the kind of opportunities that go straight to the bottom line – are huge. Those are some of the areas that we're focusing on in our Green Portfolio project with Kohlberg Kravis Roberts.
HAVE MANY FIRMS ADOPTED THIS TYPE OF THINKING?
The momentum around corporate greening is huge. And more and more firms are starting to see that they need to understand the financial implications of a company's carbon footprint in the future. I think we have a ways to go on this, but companies are starting to think more broadly about the kinds of longer term impacts that I mentioned before. If you're investing in a company that's dependent on agriculture for its products – say it's a grocery chain for example – you're going to need to know what your supply chain is going to look like ten years from now. If you're focusing on local produce and the yields and growing seasons are moving – which they are – what's that going to look like for you? If your facilities are dependent on local water, the location and availability of water supplies is going to be changing drastically in the next ten to twenty years. What's that going to mean for your business model? Even energy sales: the demographics of energy demand are going to be changing, because of weather pattern changes. Say you're a hotel chain that has a focus on coastal tourism, you've got to be thinking about storm damage and sea level rise in a way you never have before.