In my work with companies around the world, one of my key messages is that business strategy needs to be based on science. The logic is simple. Whereas most future planning involves an array of complicated and interrelated uncertainties – like technology shifts, political moods, consumer behaviour, competitor actions – science is delightfully predictable. That’s the thing about physics and biology, the rules were written long ago.
Furthermore, climate science is deeply relevant and material to most businesses and to all economies. Therefore this week’s report (see here for BBC summary) that the Pine Island Glacier in Antarctica was melting 4 times faster than it was just 10 years ago, and is now dropping at 16 metres per year, should strike fear into the hearts of oil company executives and bring delight to the CFOs of electric car companies like Better Place (yes, such is the perverse logic of climate science in the business community).
Why is it so significant?
Despite the extraordinary increase in political focus and public attention on climate change, the real financial impact to date on the business community is marginal in most sectors. There is a lot of talk about emerging public expectations, furious lobbying on new government policy and certainly plenty of earnest commentary about corporate commitment, but nothing that really engages the CFO yet. Pine Island Glacier and similar developments could change all that.
As I argue in my Great Disruption writing and talks (see here for relevant links), human history shows we rarely respond to major threats until we declare it a crisis. This doesn’t have to be an actual physical crisis, it can easily just be a shift in perception – where, apparently suddenly, something on the edges of the mainstream leaps on to centre stage.
This is what will happen on climate change. The great weight of evidence that climate change is accelerating will break through the public consciousness and political leaders will suddenly have to deal with high expectations of action.
So that brings us back to Pine Island, one of the world’s largest glaciers. Just ten years ago, the best science said the Pine Island Glacier would melt in around 600 years, now they think it’s about 100 years. (What will be the forecast in 5 years time?) It’s not that this particular glacier is a key tipping point, though its melting could alone trigger sea level rise of 25-30 cm. The problem is that it’s just the latest in countless stories about glaciers and other ice stores melting much faster than expected. (See here for a well referenced overview of this from New Scientist “Sea level rise: It’s worse than we thought” and here for a recent article “Why it’s even worse than we feared” by Newsweek’s science editor, on the increasingly desperate warnings by leading scientists.)
So how will governments respond when the public suddenly comes to accept that we now face the potential for 1 – 2 metres of sea level rise this century? And what does this mean for business strategy?
Governments will do two things. Firstly they will panic about the global economic impact of a huge amount of residential, commercial and industrial infrastructure facing medium term damage or total loss and short-term collapse in value. Imagine for example if all affected housing, airports, ports, power stations and tourist developments were suddenly devalued by 25% for the risk of sea level rise.
Secondly governments will actually take action to cut emissions to reduce this economic risk. This is where it will get really interesting. Let’s take just one example, the auto and oil industries. They face a perfect storm of risk and transformational change when the inevitable sudden shift occurs in the political landscape.
This perfect economic storm already has a number of winds gathering speed. Firstly of course is the heavy government action to protect and boost the global auto industry with tax breaks, direct investment and loans. Secondly, electric cars, long sidelined as a marginal technology strategy are emerging as a serious global contender, driven by the success of petrol electric hybrids and responses like GM’s Volt. Thirdly is the acceptance of high oil prices being the norm, with peak oil a matter of when not whether. Fourthly and most significantly is the reluctant acceptance by the global auto industry of climate change as a game changer. The new assumption is that zero CO2 personal transport is inevitable, just a matter of when and with what technology.
So what would be a simple, politically popular, economically beneficial and environmentally significant action that governments could take if they were suddenly under pressure to act? How about using their leverage over the auto industry, taxes, standards and good old-fashioned political leadership to drive the auto industry towards an electric future, driven only by renewable power. Such a policy position, in the context of a global crisis on a scale commensurate to a war footing, would virtually overnight (i.e. a decade or so) transform the oil and auto industries. The politics and economics stack up very well, with massive job creation and new infrastructure needs along with powerful national and consumer economic benefits. (One of the leading disruptive contenders in the space, Better Place, claims per km running costs for electric cars are up to 70% cheaper, even allowing for amortised battery costs.)
The numbers at stake are staggering. Global oil trade in 2008 was around $3 trillion. The US alone sent $440 billion off shore for its oil, much to the delight of Middle Eastern oil exporters. Even little Australia spends about A$20 billion per year on retail petrol sales. Imagine the consequences of these numbers dropping by 25% or 50% with a focused government effort. Imagine the economic consequences of disruptive electric car companies like Better Place or China’s BYD taking this market away from the oil giants!
Seem far-fetched? Think again. Change at this scale is absolutely possible, in fact I believe an inevitable consequence of the science. In fact the good news for society and the bad news for any business not thinking this way, is that we’ve done it before. To quote Lester Brown from his excellent book Plan B 3.0 where he compares our current challenge to the real world experience in WWII. “The shift from producing cars to planes, tanks, and guns was accomplished within a matter of months. One of the keys to this extraordinarily rapid restructuring was a ban on the sale of cars, a ban that lasted nearly three years.”
So if your company isn’t monitoring the Pine Island Glacier very closely, I suggest your business strategy and your company may soon be under water. The Great Disruption is well underway.