Issue Focus: Business and the Environment

On a June day in Manhattan with temperatures heading into the 90s, a straphanger named Mike is taking his customary subway ride to work. People are grumbling about the heat, but hey, it’s summer, it’s supposed to be hot, and besides, “Whaddya gonna do?” New Yorkers have their opinions: mention the heat index, or the greenhouse effect, or global warming, and you’ll likely get an earful. But Mike is a little different. From his vantage point in what’s been called the second-toughest job in America, he really knows about those issues, and he knows there are things that can be done about them. For not only is he the mayor of New York City, Michael Bloomberg (MBA 1966) is also the chairman of the C40, a group of fellow mayors from the world’s 40 largest cities who have banded together to fight climate change. Bloomberg has recently returned from a C40 meeting in São Paulo, Brazil, only to hear the International Energy Agency’s chief economist announce that 2010 saw the largest annual rise in carbon emissions in history. So just how hot is it? Climate change, Bloomberg says, is “the greatest challenge that humanity has ever created for itself.”

Named chairman last year of the C40 (founded in 2005 as the C40 Cities Climate Leadership Group), Bloomberg sees cities as focal points in the struggle against global warming and climate change. Urban areas are now home to half the world’s population, consume half the world’s energy, and, according to some measures, account for as much as 70 percent of global CO2 emissions. They also remain the hubs and engines for the world’s economic, political, cultural, and social development. Fortunately, because of their legislative power to regulate buildings, density, energy use, and transportation, cities and their mayors can be pacesetters in climate change mitigation. And because cities are discovering that the greener they are, the better their quality of life and the greater their competitive advantage, they have by necessity become innovative, reality-based drivers of environmental policy and action. Cities are where humanity presses up against the future, but with needs that clamor for solutions right now. The leaders of cities feel the heat, literally and figuratively: “Mayors can’t just talk about goals for the year 2050,” Bloomberg says, citing a date often used for environmental targets and projections. “Cities are where you deliver services.”

At HBS, cities and the environment are also a focus of a number of faculty members, especially those affiliated with the newly launched Business and Environment Initiative (BEI). Established to increase understanding about the interplay between business and the environment, the BEI (see sidebar, next page) also underscores the opportunities for business and investors in a newly climate-conscious world. Efficiency has become a bottom-line imperative and sustainability an organizing principle that companies can use to reinvent themselves in operations, branding, risk management, and shareholder value. While it may be argued that in the past, cities and business have contributed to today’s environmental predicaments, it can also be said that, going forward, environmental remediation is not possible without them.

Cities, broadly defined, are thought to have originally formed as protective, secure locations that could enable trade and the distinctive human need for social and cultural interaction. Ancient Rome, with 1 million residents at its height, and 9th-century Baghdad vie for the title of the world’s largest city prior to 19th-century London. Today, one useful way to think about cities is to divide them into three fluid (and sometime overlapping) categories: global hubs of wealth and talent (e.g., New York, London, Tokyo, Hong Kong); megacities and population magnets (e.g., São Paulo, Lagos, Mumbai, Jakarta); and “up-and-comers,” cities of 150,000 to 10 million people, aspiring to international stature (e.g., Cape Town, Dubai, Kuala Lumpur). Much of the world’s population growth in the coming decades will be in this last group.

Amid the challenges of protecting the environment and halting its decline in urban areas and elsewhere, there is a consensus that sustainability will drive business during the coming years and that the transition to a low-carbon economy will bring significant investment opportunities. Cities, the C40 says, offer three principal areas for such investment activity: increasing infrastructure energy efficiency, namely in buildings, lighting, and transportation systems; using resources more effectively, for example, through advanced waste management; and producing clean energy at the district level as well as sourcing clean energy from large-scale suppliers. For cities and businesses, millions of dollars saved is equal to millions of dollars earned, and that can readily be achieved through greater efficiencies. While clean tech and green tech — glamorous alternative energy sources and state-of-the-art systems, machinery, and products — often come to mind, the most dramatic inroads may be made in much more prosaic ways, especially in the urban setting. “Nontechnical solutions — such as making cities denser and more vertical, with efficient, extensive mass transit and more effective use of heat, water, and energy — would significantly reduce carbon emissions,” says HBS senior lecturer John Macomber, whose real-world background is in real estate, construction, services, and technology. “The core infrastructure of cities — power, water, transit, waste — is at the center of both environmental quality and economic competitiveness. Cities that can harness public and private capital and competency to build out efficient infrastructure will be far more competitive than their less prescient peers in a rapidly urbanizing 21st century.”

Driven by his business and entrepreneurial skills, Mayor Bloomberg, like his counterparts in other cities, has drawn up a plan to make his city greener. With his PlaNYC, supported by extensive tracking software designed to ensure and monitor efficiencies, Bloomberg intends by 2030 to reduce New York City’s greenhouse gas emissions by more than 30 percent; create housing for an expected 1 million new residents; expand and improve public transportation; cut solid waste in landfills by 75 percent; and achieve the cleanest air quality of any large US city (in part by adopting congestion pricing to reduce motor vehicle traffic). New energy-efficiency laws focus on buildings, which produce about 75 percent of the city’s carbon emissions.

From his vantage point as VP for sustainability consulting at Groom Energy Solutions in Salem, Massachusetts, Paul Baier (MBA 1994) says, “We’re seeing an increase in the number of cities that are holistically improving their energy use to reduce their emissions and save money. Often these solutions involve submetering individualized utility measuring of city buildings, which allows for a closer monitoring of energy use and misuse; tighter control and energy-management processes generally, to more closely track and, when necessary, adjust energy expenditures; and educating citizens that if they want to reduce carbon emissions, they must reduce their energy use.”

Without sweeping incentives and forceful government mandates, however, retrofitting (e.g., insulating and weatherizing an existing building’s exterior “skin” and upgrading its lighting and heating, ventilation, and air-conditioning, or HVAC, systems) can only go so far. Updating infrastructure and retrofitting in older cities especially can be logistically difficult work and not immediately cost-effective when energy is relatively cheap — or mispriced, critics would say, as happens when the deleterious environmental and other costs of energy are excluded. Macomber estimates that in the developed world, at any one time, only 1 percent of an established city’s building stock is being rehabbed (and only a small percent more is being built brand new). Moreover, the world’s dominant habitation pattern still consists of poor people in emerging nations flocking to urban areas to seek work. Typically, these migrants end up in illegal and untitled rudimentary dwellings in ever-expanding slums that offer no services.

Macomber has spent time doing research in such an environment, the sprawling Mumbai slum of Dharavi, where scenes from the movie Slumdog Millionaire were filmed. As described in an HBS case he cowrote, the $3 billion public-private Dharavi Redevelopment Project (DRP) is offering services and free vertical housing (apartment buildings) in Dharavi to its longtime residents. In exchange, the DRP will develop the freed-up land with commercial and residential real estate, all desirable and valuable for its convenient proximity to Mumbai’s city center. Financial, cultural, legal, and social hurdles must all be overcome. But it’s the kind of model that India and other emerging nations are designing to accommodate their exploding and impoverished urban populations. Says Macomber, “As opposed to developing Dharavi over time in piecemeal fashion, this approach is capital and resource efficient, and the fastest way to develop decent housing for its residents.”

In addition to innovative approaches to upgrading urban slums, brand-new, environmentally sound cities will emerge “from scratch” in sparsely populated areas of China, India, and elsewhere. These instant cities — by some estimates $500 billion will be invested in them in the next decade alone — will be designed, located, and built to be more livable and more competitive. That means densely populated, vertical, highly energy-efficient urban centers, featuring excellent intra- and intercity mass transportation. Macomber estimates that China may build possibly dozens of such cities, each housing 10 million people, by 2050.

HBS professors Robert Eccles and Amy Edmondson (once Buckminster Fuller’s chief engineer) are researching from-scratch cities, which they group into three areas: projects driven by individual governments (Abu Dhabi’s Masdar City); dual-government ventures (Sino-Singapore Tianjin Eco-City, near Beijing); and company-led projects (PlanIT Valley, developed in Portugal by a high-tech company as an R&D center for sustainable urban development technologies). One of the most dramatic of these futuristic cities is New Songdo City in South Korea, which some say will be the cleanest and greenest city in the world, set for completion in 2015. With first-class schools, hospitals, and other amenities, the South Korean government has invested billions in what is estimated to be a mostly privately financed $20–$40 billion project.

Built by American developers to accommodate some 300,000 people on 1,500 acres reclaimed from the Yellow Sea, New Songdo is strategically located within 3.5 hours by jet to 700 million people. Economic incentives, enterprise zone benefits, low taxes, and lifestyle features are designed to attract foreign companies. (As of 2009, some 60,000 residents and 418 companies or research centers were in New Songdo, or pledged to be there.) Forty percent of the city, constructed around a Central Park–like oasis, is designated as green, with all buildings LEED certified; it features an extensive public-transport network, a fleet of electric water taxis on its Venice-like canals, high-speed rail to Seoul, and minimal accommodation to automobiles.

Cleaner energy sources (such as wind, solar, and hydroelectric) can of course reduce the carbon emissions of cities, as will laws, incentives, and less demand. But in the near term, clean-energy solutions can’t be scaled up to the point where they can replace fossil fuels. Absent that radical transformation of the world’s energy model, changes in attitudes are needed, especially with the world’s population headed for 9 billion by 2050. Technology fixes and enlightened city planning alone cannot do it: one McKinsey study says that meeting the Intergovernmental Panel on Climate Change’s 2050 carbon-emission goals will require a larger increase in productivity (efficiency) than occurred with the Industrial Revolution. In America, where energy is not fully costed and is therefore deceptively cheap, consumers have little economic incentive to change their behavior. And human beings have proved to be habitually less likely to spend money in the present to gain long-term savings down the road — precisely what much of environmental retrofitting requires. Notes Macomber: “Just getting people to change thermostats in buildings and homes so they’re warmer in summer and cooler in winter has more impact than a lot of technology fixes for those same buildings.”

Attitude adjustment can be driven by financial forces. Says Rebecca Henderson, the Senator John Heinz Professor of Environmental Management at HBS, “We need to have a price for carbon, a tax or some kind of cap-and-trade regime. The lovely thing about a price for low-carbon energy is that it’s technologically neutral. It tells innovators what we want and lets them explore the many different ways to get there. The lack of a price for carbon is a big reason we’ve hardly started to invest in energy innovation. There’s a lot to be hopeful about, and we know what to do: establish a price for carbon, invest in R&D, manage the money well, and we’ll see enormous change very quickly.”

John D. Black Professor Forest Reinhardt concurs. “We need some kind of mechanism to make it clear that the atmosphere is a scarce resource, and we have to treat it that way,” he says. “That change would go a long way to creating incentives for the kinds of cities we ought to aspire to live in. Governments building from-scratch cities are acknowledging that resources need to be treated as scarce; that’s why those cities are configured the way they are.”

In his 1961 classic, The City in History, Lewis Mumford penned words amid fears of impending nuclear holocaust that invoke the present era’s own nightmare scenario: environmental catastrophe.

“We need a new image of order, which shall include the organic and personal, and eventually embrace all the offices and functions of man,” wrote Mumford. “Only if we can project that image shall we be able to find a new form for the city.”

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