World is Green

Businesses make decisions based on costs and revenues. This fundamental fact is important to understand in the work towards a better environment.

A Grant Thornton International Business Report (IBR) explains that “raw material and energy costs increasing pressure on global business and businesses to lose competitiveness if no action is taken to combat environmental issues”.

The The International Business Report covered the opinions of 7,200 privately held businesses in 32 countries, representing 81% of global GDP.

The report concludes that raw material and energy costs are major cost pressures for many companies around the world.

Energy costs appear to be affecting Europe more than the rest of the world with five of the region’s top ten countries citing energy as having a major impact on cost pressures: Germany (58%), Ireland (47%) and France, Luxembourg and Italy (all 44%). Globally, companies in the Philippines (68%) are due to be most impacted by energy cost pressures, followed by Botswana (65%). Companies in Australia (18%) are least likely to be impacted by the cost of energy.

However, this is not true for all the countries. For example, Australian companies are least impacted by the cost of energy. Due to this they energy conservation and efficiency is not a major issue say compared to something like the Philippines where a large number of companies have energy cost pressure.

The Border Mail reports that Australian businesses are not “green enough” and that “Companies in the Philippines led the world with 410 points, followed by Brazil with 360 and mainland China with 341.”

But why is this so?

A briefing paper from the Australian Uranium Association suggests that “Australia is heavily dependent on coal for electricity, more so than any other developed country except Denmark and Greece. About 80% is derived from coal [and] Australia’s electricity is low-cost by world standards.”

The Manila Times reports that “THE Philippines has one of the highest electricity rates in Southeast Asia, having posted a national average of P6.80 per kilowatt hour (kWh) at the end of last year…Data from the Department of Energy show that the Philippines has the highest electricity rates in the 10-member Association of Southeast Asian Nations after Cambodia. Throughout Asia it has the highest electricity rates after Cambodia and Japan.”

Using data from the NSW Dept. for State and Regional Development I created this graph using Swivel.

As the above relative graph clearly shows, Australia’s energy costs are less than half of Japan. Philippines has a higher cost than other countries in the list.

The same can be said about raw material costs.

In comparison, raw material costs are due to have a greater impact on global businesses with companies from every continent appearing at the top of the table. Businesses in Spain (61%) are due to be most impacted by the cost of raw materials, followed by Botswana and Singapore (both 60%), and Thailand and France (both 56%). Raw material costs are due to affect businesses least in the Netherlands (29%), followed by the US, UK and Sweden (all at 31%).

In the book, Natural Capitalism, the authors provide “radical resource productivity” as one of the four strategies of natural capitalism. They believe that “nearly all environmental and social harm is an artifact of the uneconomically wasteful use of human and natural resources, but radical resource productivity strategies can nearly halt the degradation of the biosphere, make it profitable to employ people, and thus safe-guard against the loss of living systems and social cohesion”.

Alex MacBeath global leader of privately held business services for Grant Thornton International, provides their findings:

“There is a simple clear message from our findings. Unless environmental factors such as energy and raw material costs become issues that significantly affect a company’s profitability there is no incentive for it to take action, and reduce its impact on the environment. There must be motivation to take action on raw material and energy costs or companies will continue to focus on other cost pressures such as salaries and wages.

“There is also a role for national Governments to look at the long-term competitiveness of their economies and factor energy and raw material costs into that equation. Unless they take action to actively encourage businesses to invest for the future and reduce their impact on the environment, they will ultimately damage their economies.”

Unless governments provide avenues to incorporate the external costs of power generation into the cost of electricity through mechanisms like carbon trading or carbon tax, the cost of electricity will not be enough to make the change possible.

Even though radical resource productivity could be a great strategy to implement, unless the right price signal is provided it may not be implemented.

Absolute costs are not everything. Relative costs matter too. If energy costs are lower than say property and human resource costs, then businesses would tackle the higher costs first before moving towards the lower ones.

However, this report from Grant Thornton is further evidence of the fact that even though environmental issues are important to address, business will not work towards it unless it effects their bottom line. The price of raw materials and energy need to incorporate their full cost to create innovation and change.