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Global Warming: Perception Is Reality

(originally published by Booz & Company)

There are still skeptics, including many executives in corporate America, who roll their eyes with each fresh bit of news about global warming. But what they should be thinking is, “perception is reality.”

In tracking the public debate over global warming, we’ve discovered a clear trend: Mainstream media coverage globally is both increasing and becoming more cataclysmic in its tone. Consider these recent high-profile stories: In March, MSNBC used dire language to describe the sudden collapse of two huge ice shelves in Antarctica (“Staggering End to Antarctic Ice Shelf”); in June, the BBC declared the severe African dry spell of the early 1990s a consequence of global warming (“West’s Pollution ‘Led to African Droughts’”); and in July, Reuters warned that if the Northern Hemisphere’s glaciers continued to thaw, serious flooding could occur in cities like Miami (“Melting Alaskan Glaciers Raise Sea Level”). Still other accounts have said that because of global warming, an endemic dry spell may be in the offing, which could force the U.S. to import food. A skin cancer epidemic is another possibility.

Whether science ultimately produces hard evidence to support these stories is irrelevant. What should be of paramount concern to corporate executives is the power of this news to heighten public fears that the planet is heating up and that there will be frightening and unpredictable consequences.

If (or more likely when) these worries begin to have a decisive effect on public opinion, then people will likely begin to demand that companies take immediate steps to diminish global warming. Although there are no quick fixes to this problem, the economic impact on corporations could be swift and lasting.

Some companies are already preparing for this shift in public attitudes. Ford Motor Company will commercially launch a less polluting and more fuel-efficient version of its popular Escape SUV with a hybrid electric/gasoline engine by 2003. The Mitsubishi Motors Corporation recently purchased carbon dioxide credits from the Royal Dutch/Shell Group of Companies, a strong signal that Mitsubishi, like other corporations, is betting that the Kyoto Protocol requirements for reducing emissions will have to be taken seriously by businesses worldwide.

Many other organizations, however, will be caught flat-footed if global warming suddenly became a hot button. Most corporate and government planners assume that opinions will evolve slowly and their companies will have ample time to react and adjust. To see how shortsighted this notion is, corporate executives need only look back to the accident at Pennsylvania’s Three Mile Island nuclear plant (TMI) in 1979, which had the nation on edge for weeks and effectively scuttled nuclear energy’s rise as a dominant form of power generation. Most scientists concluded that the TMI incident had minimal short- and long-term environmental impact, and that U.S. nuclear plants had a better public safety record than any other sector of the energy business. But after the accident, nuclear power was viewed as unsafe — even though it wasn’t. The nuclear industry has paid the price ever since.

Energy companies, part of a multitrillion-dollar industry that touches almost every aspect of the economy, would be the most vulnerable if global warming were suddenly on the front burner, primarily because carbon dioxide from fossil fuel (oil, gas, and coal) combustion is the chief source of human-caused greenhouse gases. If global warming were considered a clear and present danger, the public would demand alternative energy sources.

How significant would this be? Consider that a 30 percent drop in oil demand would make development of reserves outside the Middle East — that is, practically all the reserves held by public companies — uneconomical. Or that a 10 percent decline in U.S. gasoline demand would significantly reduce refining margins. The value of coal and coal-fired electricity generators — the largest source of carbon dioxide emissions — would fall even more abruptly.

But not every energy company would be hurt. BP, for example, could benefit because it is the world’s largest manufacturer of solar-power devices and its portfolio is heavily weighted toward natural gas, which has the lowest greenhouse gas content among fossil fuels.

Corporate executives have a critical role to play in planning now for growing public concern about global warming. CEOs in every industry need to evaluate the impact that strict global warming regulations would have on their business performance, and should make plans to minimize the damage, or even to profit from the winds of public opinion. But before companies can have the confidence to make strategic bets on cleaner energy, governments must act. Even basic regulatory building blocks, like common definitions for carbon credits or clean electricity certificates, are not yet in place, let alone the financing or long-term incentives that companies need to ensure that environmentally friendly business investments achieve an acceptable return.

The widely broadcast dramatic satellite photos of Antarctica’s Larsen B ice shelf disappearing into the sea should be a wake-up call that an economic shock due to global warming is not fantasy. It doesn’t matter whether it’s getting hotter on Earth; CEOs need to plan as if it is.

Robert Lukefahr,
Robert Lukefahr is a vice president with Booz Allen Hamilton in Houston. He has extensive experience in helping clients in energy and other industries with corporate growth strategies and long-term strategic plans.

Tim Donohue,
Tim Donohue is a principal with Booz Allen Hamilton in Houston. He focuses on corporate and business unit strategies for energy companies.
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