Academic journal article The McKinsey Quarterly

The Real Green Issue

Academic journal article The McKinsey Quarterly

The Real Green Issue

Article excerpt

Debunking the myths of environmental management

Environment still misunderstood and mismanaged

Spending will not fall

Costs are not evenly distributed among your competitors

Caught between zealotry and blind compliance

Environmental management is rife with unreconciled extremes. On one side is a rousing rallying-cry that is almost entirely irrelevant to everyday business concerns; on the other, a reactive compliance devoid of vision or synthesis of any kind. In many companies, both sides are present simultaneously: vision is unhitched from practical decision making, and decision making is uninformed by any unifying vision. As a result, despite the massive amounts of management attention they receive, environmental issues are still misunderstood and mismanaged.

Current wisdom about the environment can be characterized as a set of beliefs with which most managers would probably agree:

* Environmental costs have rocketed, but the worst is almost over.

* Costs are uncontrollable and nondiscretionary.

* Regulations fall uniformly on all competitors in an industry.

* Just do the right thing, and the rest will follow.

These beliefs reflect a generation of hard-earned experience. They seem to be founded in reality and to work reasonably well in preventing costly disasters. They provide practical guidance in making difficult decisions. They give management a vision that has proved helpful in leading companies forward and guiding the public relations efforts that play such an integral role in dealing with environmental issues.

Yet these beliefs are really dangerous myths responsible for many companies' poor management of the environment. By acting on these myths, executives miss the opportunity to understand how environmental problems are related to other key business issues. By believing that they have no discretion, they lose what freedom they actually possess. By assuming that regulation affects all businesses equally, they fail to see how they might achieve a competitive edge through better environmental management.

Myth: Environmental costs have rocketed, but life worst is almost over Reality: Costs will continued to rise

For managers to believe that environmental spending will soon be on the decline is only natural. Even at the most savvy companies, it is common to see graphs of projected costs that look like a camel's hump, rising steeply, peaking, and then falling off just as sharply [ILLUSTRATION FOR EXHIBIT 1 OMITTED]. This is especially true given the anti-environment sentiments in the US Congress today. (Ironically, many of the legislative reforms suggested by congressional Republicans will cause total costs for business to rise, not fall.) Yet given current regulation, law, and public feeling, the odds of environmental costs declining any time soon in most industries are virtually nil.

It is important to understand why specious forecasts persist, and how they can destroy value. The facts are these. In recent years, US spending on environmental protection has risen from about 0.9 percent of GDP in 1972 to about 2.5 percent today. Over a shorter period, environmental spending by companies in environmentally-sensitive industries has grown at double-digit rates: Monsanto's overall environmental costs rose by 13 percent between 1988 and 1992, and Texaco's environmental capital expenditures increased by 20 percent between 1990 and 1993.

Environmental spending is rising in relation to other costs, too. In oil and gas companies, it grew more rapidly than any other category of expenditure between 1987 and 1990. The Chemical Manufacturers Association (CMA) reported forecasts that about one-sixth of future plant and equipment spending in the industry will be devoted to environmental protection, more than the sums spent on producing new products (almost 15 percent) and on efficiency improvements (about 14 percent). …

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