When the green business movement gained traction in the 1980s, Ben Cohen liked to boast that his favorite flavor of social responsibility would save the Amazon rainforest. "The success of our Rainforest Crunch ice cream," the Ben & Jerry's founder told me, "shows that harvesting Brazil nuts can protect lands otherwise ravaged to create grazing areas or for mining."
His impulse was heartfelt, but as with many business initiatives in the green shoot era, unintended consequences emerged and the environment took a hit. The popular ice cream sparked a run on Brazil nuts. Farming cartels cornered the nut market, sending prices crashing. With revenue plummeting, desperate tribes sold off pristine land to developers. Every Rainforest Crunch cone eaten by an idealistic consumer contributed to an ecological disaster--a classic case of good intentions gone awry.
The fiasco underscored the central contradiction of the early green business movement: hope inflated by an excess of hype. Greenwashing--the business practice of spinning products and policies as environmentally friendly--was everywhere. The airwaves were filled with lyrical ads featuring sage grouses co-existing with pipeline projects and fish swarming playfully around sunken oilrigs. Unless environmentalism could help cut costs or generate revenues, in the Darwinian world of international capitalism it seemed destined to remain little more than a reputation-burnishing tool.
Two factors changed that equation. Environmental activists grew weary of shouting outside closed boardroom doors; they wanted inside. And the world was rocked by unprecedented economic turmoil.
Forward-thinking environmental groups awakened to the fact that big corporations could be harnessed as a positive force for change. "Even a tiny, 1 percent improvement in the environmental standards of a DuPont or a Monsanto will have a more meaningful impact than creating a hundred new Patagonias," said corporate ethics guru Paul Hawken, a founder of the Natural Capitalism movement.
The Environmental Defense Fund became an early proselytizer of the " let's work with corporations, not just demonize them" perspective. It worked with McDonald's to switch from Styrofoam packaging to paper and has since partnered with dozens of other multinational firms.
Corporations began embracing environmentalism, but more for social marketing than environmental engineering. The movement got an unexpected boost in 2005, when the world's largest retailer, Wal-Mart, began partnering with environmentalists. Then considered the evil empire, criticized for its inefficient big box stores and alleged stingy wage and benefit packages, Wal-Mart has emerged as something of a jolly green giant. Former CEO Lee Scott embraced sustainability with a religious fervor, defying the skepticism of green activists.
Why did he do it? Turning around Wal-Mart's reputation surely was a motivation but, in the end, it came down to economics. Wal-Mart's environmental initiatives have saved the company billions of dollars over the past five years by addressing fleet efficiency, solid waste disposal, packaging, greenhouse gas emissions, and store design, including open lighting--and then requiring its suppliers to match the initiatives.
Wal-Mart became the largest company in the world to issue a regular sustainability report to supplement its annual report. It follows an international framework known as the Global Reporting Initiative, which is now used by more than 1500 organizations in 60 countries to report on their ecological footprint. Demonstrating environmental bona fides, once considered "greenwashing," is now all but required for corporations looking for investments by pension funds.
The recession spurred corporate environmentalism to the next level.
Private equity firms account for 10 percent of America's gross domestic product. Their profits plummeted in 2008--just as concerns over climate change and energy prices ratcheted upward. Public pension funds, such as the $206 billion California Public Employees Retirement Fund (CalPERS), began pressuring private equity firms to adopt social and environmental screens, which help identify the best-managed businesses and reduce risk. With leverage suddenly stripped out of the system, these firms have had to look to operations to squeeze more value out of their businesses.
"Companies that barely got a return from environmental reforms just a few years ago suddenly found the world had changed," says Efrain Torres, CEO of The Payne Firm, an international engineering consultancy that analyzes risks for private equity firms. "Today, faced with the prospect of a carbon-constrained world where electricity and fuel prices are almost certain to rise over time, environmental mitigation and other projects that would have been overlooked are now not only feasible but prudent."
Responding in part to pressure from CalPERS and other state and local pension funds, Kohlberg, Kravis, Roberts, the $60 billion global asset management firm, partnered with the Environmental Defense Fund in 2008 to address energy and waste issues. They created an environmental auditing program that saved more than $16 million in its first year.
"We're making ESG (environmental, social and governance reform) part of our DNA." said Ken Mehlman, who has championed the effort as head of public affairs. Kohlberg, Kravis, Roberts recently expanded the screening to 20 percent of its global portfolio.
"Our goal is not just to change things at KKR, but also to create a model to demonstrate business benefits in the sector," added Gwen Ruta, director of EDF's corporate partnerships.
Rival private equity firm Carlyle Group announced last month it was pioneering with EDF on a new analytic tool, developed in partnership with Payne, to identify environmental risks even before making an acquisition. The new tool focuses on greenhouse gas emissions, waste management, water use, priority chemicals and forest products.
"If you provide incentives for people to manage environmental risk in their day-to-day processes, it ultimately improves the bottom line," said Carlyle principal Andrew Marino. Considering Carlyle's reach--its $80 billion portfolio includes more than 260 companies--the ripple effect of such an aggressive embrace of environmental metrics will be felt worldwide. EDF is also in talks with two other private equity firms, General Atlantic and TPG, about potential collaborations.
The embrace of environmental metrics by private equity firms, the alpha males of capitalism, underscores how far the corporate environmental movement has come in just a generation.
"Innovative solutions are not the exclusive province of so-called progressive companies," noted Hawken, of the Natural Capitalism movement. "We have to keep an open mind andlook for solutions wherever they may be."
Jon Entine is a visiting fellow at AEI.