Mass Transformation: From Coal Mining to a Model for Sustainability
As governments and the general public become
increasingly sensitive to the ill effects of climate change, the private sector
has responded with new technology and business practices. Netherlands-based
Royal DSM, a former coal company that now makes its business in life sciences
and materials, puts an internal price on carbon in its capital projects and
ties executive pay to sustainability goals.
Hugh Welsh, the North American president of
DSM, says climate change should be an issue in the current U.S. presidential
election campaigns. But he hopes for public pressure to force the changes
needed to combat climate change, especially from the millennial generation that
he sees as focusing on such issues more intuitively than its predecessor
baby-boomer generation.
Setting a price on carbon is a must to ensure
that those adding to the greenhouse gases that result in climate change pay for
the consequences rather than having the costs passed on to future generations,
says Welsh. He discussed these issues on the Knowledge@Wharton show.
Below is an edited transcript of the
interview.
Knowledge@Wharton: Let’s
get into what DSM is doing to try and change the path of your company [in
connection with climate change]. More and more corporations are jumping onto
the understanding that change must be made here in the years to come.
Hugh Welsh: DSM,
which stands for Dutch State Mines, started out as a coal mining company in
1904 in the Netherlands. Today we’re in every business there is except coal
mining, having transformed our portfolio over the years. We continue to try to
find new and unique ways to address the issue of climate change, and more or
less future-proof our business against the consequences of climate change going
forward.
Knowledge@Wharton: That
term which you just used does speak to forward thinking. Corporations
forward-think all the time, but they don’t necessarily forward-think about the
environment. It does make you think about what the path of a corporation needs
to be going forward.
Welsh: Yes, and it’s one
that resonates across our entire operations and our strategy — all the way to
the work we do with investor relations. We’re a large publicly traded company,
[and] when we sit down with investors, the story we want to tell is not just
[about] the financial results of the next quarter, but the transformation of
the organization and the execution of our strategy over the course of the next
five, 10, 20 years such that we look like a much more palatable investment for
the long-term shareholders we’re trying to attract.
Knowledge@Wharton: As
you mentioned, DSM was involved many years ago in a business that has been
struggling right now. What is the pushback you get from coal companies these
days? They are seemingly still blocking the path … of opportunity to [address
climate change].
Welsh: All I can offer
them and other fossil fuel companies is to serve up DSM as an example. We were
a coal mining company. We dug coal out of the ground. We delivered it to
people’s homes so that they could illuminate them and they can heat them. And
over the years we evolved. We moved out of those businesses into new
businesses, what we think are much more sustainable businesses. We try to
encourage the coal companies today who are struggling mightily in their
existing business case to make a similar transformation.
Knowledge@Wharton: Here
in the U.S., ExxonMobil is making statements about energy going forward and
carbon pricing, and jumping on board to a conversation that needs to be had.
Welsh: Yes, it is
encouraging to hear that rhetoric. But we would also like to see maybe a move
away from just rhetoric to dealing with remedies and in some respects,
remuneration. It’s encouraging to see companies like Royal Dutch Shell [and
other] large fossil fuel companies begin to tie some of these incentives for
their executives [to] not just the financial results, but the sustainability
results. That’s a real indicator of a genuine intent to begin that
transformation process.
Knowledge@Wharton: That’s
something DSM does in terms of tying compensation to sustainability goals and
actually getting things done, correct?
Welsh: Correct. We started
with tying our executives’ bonuses — 50% of their annual bonuses and 50% of
their stock options — to sustainability goals in 2010. We made that decision
because we realized that we needed to move beyond just rhetoric and by tying
the reaching of these goals to executives’ money, we knew we would get
immediate behavioral change, and that would cascade down through the
organization.
We’ve seen that [change] over the past five years. We’ve been
very successful in meeting our sustainability targets and coming up with new
and innovative ways to do business that offer solutions, not just of course to
DSM, but [also] to our customers.
Knowledge@Wharton: A
lot of the push has come from the general public in the last 10 to 15 years. It
has to be a great experience to be able to see that initiative run by so many
people in past years now having unity — something that’s in sync between the
public and companies like yours.
Welsh: It’s extremely
encouraging. We have a long way to go, but if I look back just five years,
we’ve moved a tremendous amount, culminating in some respects in the [United
Nations’] Paris climate agreement last year. But we shouldn’t rest on our
laurels; we have a lot more to do — and a lot more to do in the private sector.
Knowledge@Wharton: What
would you like to see happen here in the next couple of decades to try and
improve the lot for your company and for other companies where [sustainability]
is concerned?
Welsh: One thing we need,
and it’s fairly provocative here in the United States, is a price on carbon.
The use of fossil fuels [and] carbon-based materials to produce products has
had an impact on climate change. Rather than passing that liability onto our
children and grandchildren, it’s very important that this generation accepts
responsibility for that and bears the costs for that. That can come with a
price on carbon.
We’ll see acceleration away from climate change-inducing gases
and emissions if we put a price on carbon and we can move more to renewable
energy and make those renewable energy sources, like solar, like wind, like
biofuels more competitive.
Knowledge@Wharton: Is
that a good possibility in your mind in the years to come?
Welsh: Absolutely. We’re
already seeing some early work in California and in Quebec with the carbon
trading system. We’ve heard the Chinese already mention they’re going to have a
price on carbon. My boss, the CEO of DSM, is working diligently on the Carbon
Pricing Leadership Coalition as part of the World Bank to try to set some
policies on a global basis with respect to a price on carbon. So we will see that
in the not-too-distant future.
An indication of that is [many] companies like DSM are imposing
upon themselves today an internal price on carbon when they’re doing an
evaluation on capex projects with large-scale investment.
Knowledge@Wharton: Which
is what for your company?
Welsh: 50 euros a ton.
Knowledge@Wharton: What
does that [mean] in terms of an annual cost for DSM over the course of a year?
Welsh: It makes us look at
large-scale capital projects where we’re going to deploy a large amount of
capital, as in build a new plant to work on a new incentive. It imposes that
price there so that we’re not caught off guard, five, 10 [or] 15 years down the
road during the natural life of a plant with a plant that can’t compete in a
world with a price on carbon.
Knowledge@Wharton: This
is one of those topics that probably should be discussed more during the
presidential race…. Happy as you are to see that joining between the public and
private sector on trying to tackle this, is it a little disappointing that it’s
not more of an issue and brought up on a more consistent basis in the election
cycle and in Washington, D.C. in general?
Welsh: It is more than a
little disappointing. The recognition of climate change as a serious issue is
well received by both the general public as well as in the political class. But
when you look at some of the platforms for the major political parties, they’re
not including issues like a price on carbon or [other] work towards mitigating
climate change. I’d like to see more tangible results.
It can be a little frustrating, being in Washington, [D.C.] from
time to time and on Capitol Hill, running across folks from companies who have
the rhetoric of climate-change mitigation and are lobbying against every bill
that comes down that’s geared towards mitigating climate change.
Knowledge@Wharton: Is
the amount that is being talked about with carbon pricing at a high enough
level? Some articles said that maybe the pricing structure is not high enough.
Welsh: I agree that the
pricing structure ultimately adopted needs to be high enough to account for all
the external costs associated with the use of fossil fuels. Then you will have
a genuine incentive to move more rapidly — both governments and the private
sector — to renewable energy sources.
They don’t want to discuss this necessarily in political
campaigns, but [governments are] going to need to find a funding source to
mitigate the impacts of climate change. If you think about the infrastructure
impacts and the harbor impacts and the bridge impacts, funding for that [has]
to come from somewhere and we can’t continue to try to impose that liability on
our children and grandchildren.
Knowledge@Wharton: Outside
of carbon pricing, what are some of the other areas that you and DSM are
looking at as important areas that need to be focused on?
Welsh: We are working on
finding new and innovative products to mitigate climate change. I could give
you one example. We have a product called Clean Cow. It’s a feed additive that
we can feed dairy cows to reduce methane emissions. One of the largest sources
of greenhouse gas emissions in the United States is from the front end, and a
little bit out of the back end of a dairy cow. It might even be as high as the
second-highest source of greenhouse gas emissions here. We can reduce those
[by] up to 60% in some cases by introducing a clean cow feed additive.
Knowledge@Wharton: To
be able to get something like that moved forward, and use that as a product
that’s in the norm with cows, whether it be in the United States or anywhere
else, what is the hold-up?
Welsh: We of course need
regulatory support to get it through approval processes, maybe more quickly
than ordinarily. We also need to try to generate a real business case for the
farmers who [will use] this product. We don’t expect them to bear the costs
solely of a product that [will] be a climate-change mitigator. They need to
find a way to pass that cost onto consumers, [and] be incentivized in a
different way, or couple it with other products that can improve the efficiency
of an animal … such that it can produce more meat or more milk.
Knowledge@Wharton: The
number that you laid out in terms of the amount of greenhouse gasses that are
emitted from cows is something that will catch more people off guard. It’s something
that I think needs to be publicized even more.
Welsh: I would agree. I
could imagine that it’s something that resonates with the children of all of
our employees when they get to go home and talk about what their parents do
every day.
Intuitive for Millennials
Knowledge@Wharton: You’re
also in a bit of a cultural shift where this idea resonates a lot more with
millennials than maybe it did with the [Baby] Boomer generation 20 or 30 years
ago. Now maybe it’s starting to [resonate] a little bit more with people across
generations, but having the millennials thinking about it and making it more of
an issue becomes very important.
Welsh: That’s absolutely
true. We can change the incentive structure for the executives in our company
[from] the older generation to try to get them to focus on these issues where
it might not be intuitive for them. It is intuitive for the millennials. You
will see more companies working in this space, [and] working on these issues,
if for no other reason than to enable them to attract the most talented folks
in the business. That’s the real long-term source of sustainable competitive
advantage.
Knowledge@Wharton: What
could be the rise of productivity from animals [from using feed additives]?
Welsh: We work every day
in the animal health space to increase the productivity of animals, be they
swine or poultry. We’re going to need to do that. The population of the planet
[will] move from seven billion to nine billion, [and it] grows richer every
year. Wealthier people want meat protein. We [will] need to find a way to
produce that, not just at a higher amount, but in a much more sustainable way.
Knowledge@Wharton: What
other green initiatives is DSM looking at?
Welsh: A whole host of
initiatives with respect to non-solvent-based floor coatings, or using some of
our high tensile strength fiber technology to produce more sustainable nets for
the aquaculture business, or high strength, high heat resistant plastics that
could be used in an automobile to reduce their weight and increase their fuel
efficiency.
Knowledge@Wharton: Why
would a coal company in this day and age continue to fight the fight of trying
to push forward the need for massive amounts of coal being pulled out of the
ground?
Welsh: I can only say that
it’s got to be a lack of imagination. It is not a sustainable business. I can’t
imagine that anybody in that business feels that it’s a sustainable business,
either from a climate perspective as well as a business perspective. You would
hope that they would begin to move as rapidly as possible to evolving away from
that and deploying their assets in a different way.
Again, we were a coal company, now we’re a food company. We were
a coal company, now we’re a clean energy company. We were a coal company, now
we’re a sustainable plastics company. The transformation is possible.
Knowledge@Wharton: Is
it your hope and expectation that whoever becomes president when we roll
through November here, that thinking about sustainability issues, carbon
pricing [and] green initiatives will be at the forefront on that person’s mind?
Welsh: I very much hope
so. We’d love to see more support from the executive branch today with respect
to things like the renewable fuel standard here in the U.S. and some other
policy initiatives.
But we’re hoping that a lot of the rhetoric and emotion and
energy that’s been created around sustainability and particularly around
renewable energy will be picked up by the next administration, be it Republican
or Democrat, and we get much more granular in trying to create not just a
solution to these big problems but genuine competitive advantage for the United
States of America.
Knowledge@Wharton: Without
the U.S. and China making the statements that they did for the Paris Accord,
would this get pushed forward as much as it has now?
Welsh: No, that would be
impossible. Without the two largest emitters committing to make material
changes, the rest would be nice, but it would not be actionable.
Knowledge@Wharton: How
quickly do you think a change in China can take place to see a significant
reduction of greenhouse gas [emissions]?
Welsh: I’m much encouraged
by what they’re trying to do already. We’ve had conversations with the Chinese
government around introducing cellulosic ethanol as a potential transportation
fuel with 90% less greenhouse gas emissions than gasoline. They still continue
to build coal-fired electrical plants, but at a lower rate. The changes in
China will come very quickly, not just as a consequence of things like the
Paris Accord, but from their own populations who live in cities like Beijing,
who will no longer tolerate not being able to breathe.
http://knowledge.wharton.upenn.edu/article/mass-transformation-coal-mining-model-sustainability/?utm_source=kw_newsletter&utm_medium=email&utm_campaign=2016-09-15
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