The climate is changing. Can we?

By Kathleen Garrigan

A strategic management and public policy professor in GW’s School of Business, Jorge Rivera studies how factors such as natural disasters and climate change affect corporate environmental management strategies. He has examined “green” certification programs in the United States, Costa Rica, and other countries, and how those programs are associated with business competitiveness and environmental performance.

GW Research talked with Rivera in June on what his research says about how companies and humans respond to disasters and what is needed for companies to adopt more sustainable practices.

GWR: When are companies, governments, and individuals most likely to prepare for, or respond to, natural disasters?

Rivera: Most of the response to disasters happens when the negative effects are moderate. The threat is not too low, so people can’t ignore it, and it’s not so high that people are fatigued or simply not able to respond anymore to the physical limits imposed by nature. These patterns that I describe here are the result of 15 years of research. We’ve done studies in all kinds of industries, involving tens of thousands of observations of multinational corporations across the globe, and the pattern repeats itself.

Do any companies act when the threat level is lower?

The best companies do what you describe, but those are rare situations. Whether it’s a multinational corporation or a small company, the majority don’t prepare. There are multiple reasons for it. Preparedness takes a lot of resources. It takes time. You have to put a lot of money into things you probably won’t use, sometimes for years. Preparedness efforts become valuable only when the disaster is happening, but the rest of the time, they may look like a waste of valuable resources.

And you see the same pattern with governments, too?

Think about when [Donald] Trump became president. The Obama administration had a unit inside the National Security Council that dealt with pandemic preparedness. But in the U.S. we tend to see pandemics as always affecting other places, whether it’s Ebola in Africa or SARS in China or the swine flu in Mexico. The new administration comes in and they ask, ‘Why do we have a pandemic task force here in the NSC? We should be worried about dealing with terrorists.’ Their view was that pandemics are things that happen to other countries, particularly poor countries. The last time we had a real pandemic was in 1918, so why spend billions of dollars on something that hasn’t happened in almost a century? A similar challenge is confronted by business managers. Imagine you are the executive in a company pushing for being prepared for the next pandemic, and you’re trying to make this argument while you’re competing with others for a limited budget. Because a pandemic or a natural disaster doesn’t happen very frequently, you tend to lose those budget battles.

Are there ways to incentivize companies to better prepare for disasters?

The two things that will push large companies to actually prepare are demands from insurance companies or banks, or government regulations. At the global level, outside of industrialized countries, in the developing and emerging markets where multinationals do a lot of big business now, it’s the insurance companies, not the governments [that require companies to have preparedness plans]. To obtain affordable insurance policies and/or bank loans for multinational subsidiaries operating in a developing country, corporations need to prepare disaster response plans and dedicate resources to them.

The other mechanism that is more typical of a place like the U.S. or Europe is that the government will require disaster preparedness plans. Here in the U.S., insurance companies don’t pay as much attention because they assume the government, whether local or federal, will require these plans—though they are beginning to pay more attention to it because disasters are becoming more frequent and more severe. In the U.S., if I’m the insurance manager of a big company, I don’t have to pay as much attention because I know the government will require it in the U.S. But if I’m the same manager, and I’m insuring a mining company or a hotel in Peru, then I have to pay attention because I know the Peruvian government isn’t going to be as good as the U.S. government in imposing those requirements.

You have examined “green” certification as a mechanism for businesses to adopt more sustainable practices. Are these programs effective?

Green certification programs are a very popular mechanism because supposedly you don’t need to have regulations to promote environmental protection. What happens, though, is that green certifications come in many forms. For a green certification to be effective and attractive to corporations, you have to have a couple of basic conditions. You have to have third-party certification and independent auditors that assess companies on a regular basis, sometimes every six months, sometimes once a year. You have to have specific environmental performance-based standards. These two combined—the independent auditors and the performance-based standards—allow you to distinguish the greenest companies from the poor performers so there’s an incentive to improve. The third condition is you have to have a significant number of green consumers, people that are willing to pay for the enhanced environmental qualities that are being certified.

Are businesses waking up to the threat that climate change poses?

It varies by country. European companies are a lot more aware, more proactive and willing to engage in efforts to deal with climate change. In the U.S., due to strong animosity to regulating carbon emissions by oil and gas and other heavy manufacturing industries, there’s still a great deal of resistance. The reason why European companies are more proactive and more willing to engage in this comes from a couple of factors. One is the higher level of green consumers and a higher proportion of voters that support enhanced environmental protection. Thus,  European governments are more willing to impose regulations to put a price on carbon emissions. In the U.S., you have the opposite. You don’t have as many green voters and consumers as Europe, although they are growing here.  

Going back to the original question, factors that push companies to pay more attention to climate change threats involve the higher frequency and severity of weather-related natural disasters like hurricanes, floods, wildfires and droughts. Additionally, you need other pressures that go together with the higher number of severe disasters. You need government action and regulations. You need voter and consumer support for limiting carbon emissions. In the U.S., we don’t have many federal government efforts to deal with climate change threats. We tend to have it more at the local level by some city and state governments, but climate change is a macro problem. It requires national and global solutions. If we don’t have national or global policies, it doesn’t make much sense for companies to engage in reducing their carbon emissions. It’s costly and you’re not actually fixing the problem, so why would you do it?

In addition to the increase in wildfires, hurricanes, rising sea levels, et cetera, what other risks does the United States face by ignoring climate change?

We cannot wish climate change’s negative effects away. We can ignore them, but they won’t diminish without global concerted action. If the U.S. continues to ignore it, a lot of the innovations that are needed to respond to climate change—from technological innovations to political innovations and carbon market innovations—are going to be created in other parts of the world, like Europe and China. For example, technology breakthroughs have made wind power cheaper than burning coal to produce electricity. Yet, most of the wind power generation is occurring in China and Europe and not in the U.S. It’s kind of ironic because we actually developed some of the original technology that makes wind power energy cost competitive, but we are not taking advantage of it.

You do large-scale analyses of natural disasters, including pandemics, and examine the response of multinational corporations to those disasters. How have these corporations responded in the past to something like what’s happening today?

Most companies, unfortunately, implement reactive responses to disasters. For example, they do remediation and recovery once they are affected. Alternatively, the few most successful firms prepare proactively for disasters by learning from previous experience confronting disasters, developing preparedness plans for future disasters and working cooperatively with other companies, NGOs and local government to exchange information and resources for disaster preparedness. The vast majority of companies do not change their ways, though. Once the immediate aftermath of the disaster passes, most top managers forget or tend to become too confident about their ability to respond to disasters. This is even the case for purchasing insurance—most companies won’t do it unless it is required by regulation. You can see it even now, even in the middle of the COVID-19 pandemic, the attitude is to want to move on and behave as if it is no longer a problem.

Are there any silver linings to come out of the current pandemic for businesses?

The effects of this pandemic have been so dramatic, so severe and so universal, hopefully it will get enough attention so we aren’t caught flat-footed again. Maybe this crisis generates enough political will and capital, not just at the national level but inside corporations where the managers who had to prepare for natural disasters typically face intense uphill budget battles. Usually, to overcome the entrenched  resistance to invest in natural disaster preparation, it requires a catastrophic external shock like the COVID-19 pandemic. But it’s still a question.

How is GW preparing business leaders with environmental management training?

GW has been very proactive in this space probably because of its location in Washington, D.C. Every year, we are ranked in the top 10 globally for environmental and social responsibility training for business students, among all the business schools around the world. We have a high concentration of professors in this area. Consider, too, the greening of the university itself. If you think about universities, they are big organizations. They have budgets that are in the billions of dollars, and so GW plays a big leadership role. GW is one of the greenest campuses in the U.S. Some of the business school alumni who are now high-level executives have been pioneers in leading the greening of industry in the U.S at companies such as Walmart, UPS, Dow Chemical, etc.

GW has a positive effect on changing the world, though sometimes it’s not that obvious because these students leave and you don’t see what they do.