![]()
Part I
PRESSURES ON THE FIRM
![]()
1
THE ENVIRONMENT AND NATURAL CAPITAL
Coca-Cola Watches over Troubled Waters
Water is a unique issue because of its local nature, immediate and obvious impact, and direct tie to human health and development. This makes any action toward water-challenge solutions much more compelling. Of course, water is also critical for countless organizations. For example, beverage businesses rely on water for agriculture, manufacturing, and the safety and taste profile of their products; therefore, they must ensure a consistent supply of this critical resource.1
When Greg Koch, Coca-Cola’s Director of Global Water Stewardship, Environment & Water Resources, joined Coca-Cola in 1996, the company had already developed a strong focus on water efficiency within manufacturing and had launched wastewater management programs. However, as Coca-Cola and the world began to see growing water challenges, the company sought to expand its understanding of, and actions regarding, water issues (e.g., pollution, improper management, uneven distribution, and non-universal access). Koch’s team, located at Coca-Cola’s corporate headquarters in Atlanta set the company’s global strategic direction on water, established policy and requirements, formed and managed key partnerships (with such organizations as the World Wildlife Fund and the U.S. Agency for International Development), and played a governance role related to these efforts throughout the company.
As of end of 2014, Coca-Cola and its bottling partners were operating in 206 countries and had about 1,000 production facilities.2 Operating on a global scale, they have experienced a diverse array of water challenges, which would only be exacerbated by further global population growth and climate change.3 In 2003, they were among the first corporations to disclose to shareholders that regional water quality and quantity posed a material risk to its business. The degree of risk was perhaps like that of no other business, given Coca-Cola’s well-recognized brands, corporate size, geographic scope, non-diversification, and perhaps most critically, its local business model.
Coca-Cola distributes its products within close proximity to its plants in almost all of its manufacturing locations. It is not an export business (i.e., it does not make products in one location and ship them vast distances or even across borders). Therefore, Coca-Cola is interested not only in water quality and quantity, but also in the health and sustainability of the ecosystems and people comprising their markets and employee bases. Koch stated, “Our business can only be as sustainable (in every facet of that term) as the sustainability of communities where we exist.”4
Coca-Cola conducted a qualitative, and then a quantitative, risk assessment of its global business that led to the formation of Koch’s role. This assessment report led to the creation of a global water stewardship strategy5 that included plant-level performance objectives, watershed protection, community engagement, and a drive to increase global awareness of the need for action and collaboration on water resource sustainability. Koch commented,
The most important thing I’ve learned through my work on water at Coca-Cola is that our business requires three licenses to use water, everywhere we do business: the physical license (sustainable quantity and quality of water resources), the regulatory license, and the social license encompassing the social and political acceptance of our use of water.6
Chapter Overview
The purpose of this chapter is to introduce the environmental challenges facing companies; the broader discussion will include information on ecosystems, climate, and natural resources. This chapter also contains the core definition of sustainability and explores how this definition can guide company action. At the end of this chapter, you should be able to:
1 define, in your own words, sustainability and its core assumptions;
2 define natural capital and demonstrate how it adds value to organizations;
3 model the core challenges for water, energy, and climate change;
4 state at least two impacts of each challenge on firm strategy.
Figure 1.1 shows the overall model for this book and highlights some of the pressures firms are facing. These pressures are compounded by environmental uncertainty (e.g., unusual weather events), and the increasing challenge of ensuring supplies of critical resources (e.g., water).
The Value of Natural Capital
Analysis of how the natural environment impacts a firm’s strategy can be a highly effective way to understand its means of creating value. This analysis may call for new ideas and concepts. For example, consider six types of capital:7
1 human (in the form of labor, intelligence, culture, and organization);
2 financial (consisting of cash, investments, and monetary instruments);
3 manufactured (including infrastructure, machines, tools, and factories);
4 social (in the form of social networks and relationships);
5 intellectual (intellectual property rights, patents, and codified knowledge);
6 natural (resources, living systems, and ecosystem services).8
Natural capital is “all the familiar resources used by humankind (e.g., water, minerals, oil, trees, fish, soil and air). But it also encompasses living systems (e.g., grasslands, savannas, wetlands, estuaries, oceans, coral reefs, riparian corridors, tundra, and rainforests).”9 Ecosystems are dynamic entities composed of the biological community and abiotic environment.10 An abiotic environment is characterized by the absence of life or living organisms, and the abiotic and biotic composition and structure of an ecosystem are determined by the state of a number of interrelated environmental factors. Changes in any of these factors (e.g., nutrient availability, light intensity, temperature, species population density, and grazing intensity) will result in dynamic changes to the nature of these systems. For example, a fire in a temperate deciduous forest could kill large trees and most of the mosses, herbs, and shrubs occupying the forest floor. As a result, nutrients stored in the biomass would be released into the soil, atmosphere, and hydrologic system, resulting in destruction of the forest.11 However, after a short recovery time, the ecosystem would then become a system of grasses, herbaceous species, and tree seedlings. Therefore, the resources offered by this system would change, affecting how a firm uses inputs from the ecosystem or where it makes investments.
Ecosystems, which provide the resources necessary to our existence, are critical to our survival. Yet, they are often overlooked when organizations consider the risks and strategies of their operations. Nevertheless, the value of ecosystems becomes evident when considering available scientific evidence:12
1 Ecosystem services such as providing food, soil formation and recreation, are provided by natural ecosystems and essential to civilization.13
2 Ecosystem services operate on such large scales and in such intricate and little-known ways that most cannot be replicated by technology.
3 Many of the human activities modifying or destroying natural ecosystems may cause deterioration of ecological services; the value of those services, in the long term, usually dwarfs any short-term economic benefits.
4 Considered globally, large numbers of species and populations are required to sustain ecosystem services.
5 Human activities are already impairing the flow of ecosystem services on a large scale.
6 If current trends continue, humanity will dramatically alter nearly all of the planet’s remai...
