During the past decade, a significant number of multinational companies have taken steps to put environmental policies in place. From BP's efforts to reduce greenhouse gases to Home Depot's decision to phase out old-growth timber, some corporations have made substantial progress. In his new book, "The Market for Virtue," author David Vogel explains some of the forces driving these companies to change, including pressure from shareholders and environmental groups. Vogel, a professor at the University of California Berkeley's Haas School of Business, also describes how some corporate environmental efforts have gone awry, and why firms need to make more progress in developing nations.
Brian Stempeck: Hello and welcome to OnPoint. I'm Brian Stempeck. Joining me today as our guest is David Vogel, professor of the business school at UC Berkeley. Mr. Vogel thanks a lot for being here.
David Vogel: Glad to be here.
Brian Stempeck: You're the author of a new book it's called "The Market for Virtue" and basically in this book you look at a lot of the claims that major corporations make about what they're doing in the environment. Now these are things we hear in Washington all the time, grandiose claims about what Ford is going to do, about what BP is going to do. What did you find as you took a closer look at some of what these companies are doing?
David Vogel: I found a very mixed picture. On one hand, in a lot of areas, companies have made enormous progress in improving environmental quality, reducing pollution, energy use, etc. But that overall, the overall impact of voluntary efforts to improve environmental performance, I think, are much more modest on balance than many companies and many activists would like to believe.
Brian Stempeck: Let's take a look at one of the big success stories you look at in the book, which is talking about how environmental groups have pressured companies like Staples and Home Depot to use wood and paper products that are from more sustainable regions, trying to get away from paper from the rain forests. Give us a sense on how that whole movement came about.
David Vogel: A lot of activists began to focus on particular companies which were brands, highly visible firms. They embarrassed them, they did picketing and pressures, etc. and I think companies felt that the cost of changing their policies were fairly modest and it was worth it to change their policies to get the activists off their backs. So the result is some very serious changes, including most notably at Home Depot, which is the largest purchaser of wood in the world.
Brian Stempeck: What exactly were the changes at Home Depot?
David Vogel: They began to not purchase from old growth forests in the U.S. and most importantly they began to look at their purchasing of wood from overseas; working with Chile in terms of purchasing from more sustainable forests and also avoiding purchasing from tropical endangered forests in Indonesia and South Asia.
Brian Stempeck: Now in the book you go into how much impact this has really had and what you say is that the majority of the forests that are being saved here, the old growth, is actually in the United States.
David Vogel: Right.
Brian Stempeck: That it doesn't have quite as much an affect abroad. Why is that?
David Vogel: What's happened is that the market for tropical wood has shifted, so basically Americans and Europeans now consume relatively little tropical wood, wood from endangered tropical forests. But Asians consume much more, so basically you have a two-tier market for wood from developing countries. And the result in that balance is that the rate of tropical deforestation and destruction continues a pace and has not diminished at all.
Brian Stempeck: Well, is that just because countries like Japan are still getting their wood from these forests?
David Vogel: It's because, yeah, it's a global market and there's a significant number of consumers, unlike American and European consumers, who remain indifferent to the impact of their purchasing on forest destruction.
Brian Stempeck: Now how much, as we look at sustainable forestry, how much do you think of that is being driven by consumers or is it being driven by the environmental groups and kind of a PR effort? I mean some of the other things you look at in the book are where it actually makes business sense for companies to make some of these changes.
David Vogel: I think it's a very complex combination of motives. I think in some cases it reduces costs, in some cases there is a little consumer pressure, in some cases there's pressure from environmental groups. I was actually quite struck by the extent to which companies did discover, as a result of pressure from the public and from NGOs, that they had many opportunities to reduce their environmental impact. Many of which were relatively cost effective, some of which were even profitable, which they were not aware of before. Which they just had fallen off their radar screen and many companies have taken advantage of that. And I think on balance these voluntary efforts have had an impact on improving corporate performance, much more actually than I think people would have thought 10 of 15 years ago.
Brian Stempeck: One of the other stories you look at in the book is the efforts of Greenpeace and basically talking about an oil rig that Shell wanted to dispose of back in the mid '90s. Tell us about that story and kind of give us basically a different side of a coin when it comes to environmental groups working on this.
David Vogel: Yeah, Shell, Greenpeace waged a big campaign against Shell which was going to dispose of the Brent Spar, an offshore platform which was no longer being used, a storage platform in the North Sea. They made a big fuss. They had a big media presence. They embarrassed Shell. There were boycotts and violence in Shell stations in Germany and continental Europe and Shell ultimately caved and announced that it would dispose of the Brent Spar on land. It was sent to Norway. And that future oil platforms would be disposed of on land rather than within the ocean. And I think the scientific evidence is that there's no negative impact from deep sea disposal. And that, in fact, there's actually more environmental risks from land disposal, in terms of workers and local communities. And in fact the overall costs of land disposal are very substantial. So I think on balance, from a cost/benefit basis, this was probably a decision which was not an appropriate one, but made in response to NGO pressures that Shell felt it had no choice but to respond to.
Brian Stempeck: Do you think that's an abuse of power by environmental groups? I mean typically when they go after a company it seems that they have a good reason, but in this case you seem to be saying that the science backed up Shell's original conviction that they wanted to bury them underwater.
David Vogel: I think given their values and concerns they weren't interested in the science. Their concerns were we have a principal, we don't want to use the deep sea as a garbage disposal and given those values I think their decisions made an enormous sense. But I think the pressures that NGOs put on companies are no better or worse than those of any other pressures on firms. Sometimes they make sense and sometimes their preferences may not make sense.
Brian Stempeck: How much of this has to do with consumers? You get to this in the book as well. You talk about, you have a quote from the CEO of Star-Kist, the tuna company, that says that people in the grocery store, when they see two cans of tuna, they're not even willing to pay a penny more for the can that's dolphin safe. How much is the consumer's fault?
David Vogel: I think a lot of it is the consumer's fault. If you look at forest certified council wood, which is a very major global eco-labeling initiative, all the stores, including Home Depot are very aware of the fact that consumers will not pay a premium for certified wood. Some builders may, but consumers won't pay. I think there are some products which consumers are willing to pay more, largely energy saving products, detergents which they feel they get some benefit from, in terms of say organic food, like that. But when you have a pure public good in which the consumers are being asked to pay more for a product, which they don't get any benefits, they all go to the environment, relatively few consumers, I think, are really willing to pay more for more environmentally safe products that don't benefit them. And I think that's a real constraint on the willingness of companies to devote resources to environmental protection, because they can't capture a premium in the marketplace with them.
Brian Stempeck: Do you think that's changing at all? I mean as you go to a grocery store you do see more organic produce on the shelf, things like that. Do you think there's been an overall shift towards consumers being more environmentally aware?
David Vogel: It's ... some are aware. I think organic food is somewhat different because consumers also feel they benefit, that it's safer food. So there's a combination of private benefit and public benefit. But when you look at things like forest certified wood, which, forest-certified council wood, which the consumer's getting the same wood, so there's no personal benefit. It's just a public benefit. Then I think it's much harder to get consumers to be sensitive to these broader public issues. I don't see a, if you look at something like fair-traded coffee, which also has some positive environmental impact, there's been a growth in consumption of it, but it still remains very, very modest.
Brian Stempeck: One of the things you note in the book as well is that consumers seem to care about other issues a lot more than they do about environmental issues. You take a look about some labor concerns. When there are protests about Nike having a sweatshop or Kathie Lee using child labor, those things make headlines, but not necessarily the case for environmental issues. Why do you think that's the case?
David Vogel: I think the issue of child labor, particularly, has an emotional resonance that captures people's attention in a very dramatic way, more than issues of environmental abuse, particularly in developing countries. I think there's something about that issue that has really caught the public's imagination. And also the companies that make those kinds of goods, sports goods, clothing goods, are highly visible brands. Most of the companies that make, companies that have environmental impacts are general companies. People aren't very aware. They don't think about this oil company versus that oil company. So I think the brand visibility of those consumer products is greater and therefore the public is more able to associate a particular brand with something positive or negative about the social/ethical issues.
Brian Stempeck: It kind of leads us into the idea of the supply chain. You talk about with Nike people can trace it down to these factories in Indonesia and say there's child labor going on here, but they're maybe not as willing to do that for other products. Do you think that's something that needs to happen with environmental concerns? That people need to say, oh, well this factory with the child labor in Indonesia is also causing a huge amount of air pollution?
David Vogel: I think it's very hard to ask consumers to absorb that much information. I mean if you think about it, the multiplicity of products and services we buy, they all have a complex range of social and environmental impacts. To expect the typical consumer to actually be aware of all those dimensions and then to make decisions based on them is, I think, very unrealistic.
Brian Stempeck: Basically you're saying is that what's happening in other countries tends to be out of the public eye, but is that changing? I mean right now the CEO of Newmont Mining Company is on trial in Indonesia for some major mercury pollution concerns there. Do you think this is going to happen more? We're going to see American multinationals were the CEOs are actually brought to trial?
David Vogel: I think that's very promising and I do, I conclude the book by saying that the most effective way of improving corporate environmental performance is not through these voluntary initiatives or consumer/NGO pressure. It's through regulation and I think the extent to which developing countries have stronger regulation and better enforcement, that's extremely promising. I think if you look at the United States, if you look at say automobile emissions over the last 40 years, in which we made enormous progress in reducing pollution, that is entirely due not to consumer changes and consumer preferences, willingness to pay, that's due to effective regulation which has required the companies to make cars which are less polluting. And I think that's the appropriate model, which hopefully more developing countries, such as China for example, will begin to adopt. And multinational firms will be forced to obey Chinese laws just as foreign firms, multinational firms, are forced to obey American laws if they sell in our country.
Brian Stempeck: I mean can't the market respond to these concerns though? I mean as we talk right now gasoline prices are going over $3 a gallon. It seems pretty natural to think that SUV sales are going to decline. Isn't the market going to respond on its own to things like this?
David Vogel: I think in the case of energy prices if prices stay high long enough and the public believes they'll stay long enough, I think there'll be some response. But even on the SUVs, you look at the SUV hybrids, their fuel efficiency is not all that much greater. If you look at the overall performance of the U.S. fleet of course, the fuel emissions keeps, has been declining dramatically. I think that tighter federal standards could make a difference and would make a difference. It remains to be seen though how much consumer preferences will actually change. I'm not optimistic. It may happen, but I think there's really no substitute for energy taxes and for better fuel economy standards to capture the fuel and efficiencies of light trucks and SUVs.
Brian Stempeck: Let's talk about BP right now. That's another company you spent a great deal of time on in the book, discussing what they did. They're basically considered one of the more progressive companies when it comes to global warming.
David Vogel: Right.
Brian Stempeck: But again, you say it's kind of a mixed bag in terms of how the results came out. Tell us what you mean.
David Vogel: Well, on one hand I think BP engaged in a set of voluntary initiatives. It set targets to reduce its own carbon emissions and they were very effective and they turned out to be cost effective and they actually were able to accomplish them much more rapidly and less expensively than they had thought. So that's sort of the good news. On the other hand BP's impact on global climate change is a small, a very small portion of it is their own production. It's mostly due to the energy which they, fossil fuels which they market for cars and fuel, etc. And there of course, BP with all its green logo and beyond petroleum, remains overwhelmingly, if you look at where their investments go, they remain an oil company, a fossil fuel company. And that, I think, makes sense. I mean that is to say as long as people want fossil fuels BP has no choice but to supply them. So I think that in a sense, I argue in the book, the key limit to the market for virtue is the market. And as long as people want fossil fuels BP will remain a fossil fuel company and that's a real constraint. So within the constraints of the market I think BP has made enormous progress and done a lot of very commendable things. But we also need to recognize that there are also real constraints on what they can do. And indeed, recently in the papers the CEO of BP said that if we're going to move into alternative energy we're going to need government support because the market simply won't encourage us to do that. It's still not cost effective.
Brian Stempeck: At the same time, shouldn't a company like BP be congratulated or be lauded for taking these steps? I mean compared to what other oil companies are doing this is leaps and bounds beyond that.
David Vogel: The most important thing I laud BP for, and I think this is very important, is not simply what they've done voluntarily, because a lot of other companies have made similar cutbacks in their own carbon emissions. The real thing that BP needs to be applauded for is its political stance in supporting government regulation, Kyoto, the Kyoto agreement on global climate change which requires mandatory reductions in pollution by a number of companies and countries. And that I think is very commendable. The main thing I criticize U.S. firms, oil companies, for is again, though they have again made their own voluntary initiatives, those initiatives, I think the positive impact is overwhelmingly outweighed by the fact that those companies continue to oppose government regulation of carbon. And the fact is that if you look at the numbers, voluntary initiatives only can take us so far. And there's simply, in the long run, no substitute for effective government controls. So I think that BP really deserves to be applauded for their willingness to support government controls. Recognizing that there are limits to what they can accomplish without a requirement that everyone, all their competitors, be forced to behave in the same way.
Brian Stempeck: All right. We are out of time David. We're going to go ahead and stop there. I'd like to thank our guest today. That was David Vogel, professor at the UC Berkeley Haas School of Business and author of the new book "The Market for Virtue." I'm Brian Stempeck. This is OnPoint. Thanks for watching.
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