How Business Saw the Light

By Bryan Walsh / Tokyo

On a cloudless afternoon early last fall, Honda CEO Takeo Fukui stood by his company's test track outside Tokyo and watched a group of journalists take the company's environmental future for a spin. After test-driving Honda's multimillion-dollar hydrogen-fuel-cell concept car--very, very carefully--I sat down with Fukui to talk about his company's big bet on clean automobiles. As a young engineer in 1972, Fukui designed the first engine capable of meeting the 1970 Clean Air Act's emission standards without a costly catalytic converter, making Honda one of the first car companies to turn environmentalism into a competitive advantage. Today, with gas prices nearing 1970s levels and customers turning to fuel-efficient cars, it pays to be green once again. But Fukui was thinking beyond this year's balance sheets. If business continued with business as usual, he warned, "society will not let us exist."

Fukui is not alone. From Bentonville, Ark., where Wal-Mart has embarked on ambitious pro-environment policies, to Silicon Valley, where high-tech venture capitalists are pouring hundreds of millions into renewable energy, 2006 was the year corporations began acting as if their existence--like the rest of the planet's--was tied to the environment. While Washington dithers, Wall Street is acting, driven by rising fuel prices that punish inefficiency and by the growing realization that climate change could ruin corporate leaders who continue to deny it.

As Gordon Gekko might say today, green is good, and behemoths like GE and DuPont are carving profits out of a worldwide green-business market worth more than $600 billion. "This is a watershed moment in the business community," says Daniel Esty, director of the Center for Environmental Law and Policy at Yale University and co-author of the book Green to Gold. "The environment has become a strategic issue. It's something every company must do to stay competitive."

The best companies can use the environment to do more than just stay competitive: they can use it to crush the competition. Here in Japan, where I'm based, Toyota is poised to become the world's leading automobile manufacturer, thanks in part to its wildly popular Prius hybrid. But what matters more than one car model is the efficiency Toyota brings to all aspects of its business, the result of a corporate philosophy that strives to exterminate waste. Today Toyota can use a single production line to make multiple vehicle types, which has helped it reduce energy use in manufacturing 30% since 2000. CO2 emissions per car are down as well, and the company has set a goal of reducing emissions worldwide in 2010 by 20% from 2001 levels. Although no one would mistake Toyota's buttoned-up leaders for Ben and Jerry, the company's green policies make its flailing American competitors look like dinosaurs. "Toyota is just killing Detroit," says Andrew Winston, Esty's Yale colleague and co-author. "They have taken on the mantle of innovation, so they sell more of every car."

When an industry leader like Toyota succeeds by going green, its rivals take notice--as Ford's and General Motors' frenzied game of catch-up demonstrates. But the impact reaches beyond the fight for market share. The mega-retailer Wal-Mart has pushed a slew of high-profile environmental initiatives over the past year, including the construction of experimental green stores in Texas and Colorado and the launch of a campaign to sell ultraefficient compact fluorescent bulbs to 100 million homes. The real power of Wal-Mart to drive environmental change, however, rests in its sheer size, by which it can influence the behavior of the more than 60,000 companies, large and small, that stock its stores. The "Wal-Mart price"--the corporation's drive for the lowest possible cost, at all costs--ensured that only the leanest companies would survive to do business with it. By demanding energy efficiency and environmentally friendly practices from its partners--such as reducing packaging waste or selling only sustainable seafood--Wal-Mart could help start a green wave across the U.S. economy, especially among smaller companies that might be less eager or able to change on their own. "When Wal-Mart talks, everyone listens," says Andrew Savitz, an environmental business consultant and the author of The Triple Bottom Line.

What makes the transformation of companies like Wal-Mart so remarkable is that it has occurred despite the general passivity of the White House toward green issues. "I'd say 90% of the business community wants more action on the environment than the Bush Administration does," says Esty. So while the Federal Government dragged its feet on alternative energy, business moved into the vacuum, lured primarily by potential profits. In 2005 Goldman Sachs pledged to invest $1 billion in renewable energy, while Cleantech Venture Network estimates that $10 billion in venture capital will be directed to green technology from 2005 to 2009. Under CEO Jeff Immelt's Ecomagination initiative, GE has committed to spending $1.5 billion a year on renewable energy and other green research by 2010. That's already translating to sales today; the company reported revenues of $10.1 billion from environmental products in 2005, up from $6.2 billion in 2004. "What GE is doing is a bellwether," says Joseph Romm, founder of the Center for Energy and Climate Solutions. "There is some style here, but it also has a lot of substance."

Still, given the severity of climate change--and with rising consumerism in China and India set to complicate the crisis--it's hard not to wonder whether these initiatives are more than greenwashing. GE will sell wind turbines, but it will probably sell even more jet engines, contributing to the rising carbon emissions caused by air travel. Wal-Mart pledges to double the efficiency of its vehicle fleet over the next 10 years, but it's also eager to introduce hundreds of millions of Chinese to middle-class consumption, American-style. "I find it hard to look at a Wal-Mart and see anything like a truly sustainable company," says John Elkington, a co-founder of the green-business consultancy SustainAbility.

Even Toyota has seen the average fuel economy of its vehicles decline as it pursued the U.S. market with the fuel-hungry trucks and SUVs that Americans demand. Although public concern over climate change seemed to crystallize this past year, it hasn't been fully reflected in our buying decisions. We're green hypocrites, according to Joel Makower, executive editor of GreenBiz.com "Consumers remain depressingly ignorant about the environmental impact of what they do," he says. "They find no irony in getting into their SUVs to drive a few miles and buy recycled toilet paper." In other words, American consumers haven't really begun to change their habits. To avert the worst that global warming has in store for us, we may have to make decisions even more radical than the ones business leaders are making now.