Environmental Decision Making

CGS
Center for Global Studies
CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING

A CASE STUDIES AND WORKSHOP REPORT
MARILU HASTINGS, EDITOR SEPTEMBER1999 CENTER FOR GLOBAL STUDIES HOUSTON ADVANCED RESEARCH CENTER 4800 RESEARCH FOREST DRIVE THE WOODLANDS, TEXAS 77381
Corporate Incentives and Environmental Decision Making, Copyright 1999, Houston Advanced Research Center, The Woodlands, Texas. This report may not be resold, reprinted, or redistributed for compensation of any kind without prior written permission from the Houston Advanced Research Center. This report can also be found on the World Wide Web at: http://www.harc.edu/cgs.html
EXECUTIVE SUMMARY
emographers expect world population to increase from 6 billion people today to between 9 and 12 billion people over the next several decades, and then begin to decline. This doubled population will have the same fundamental needs as the current population. Yet, many of the basic needs of even todays population go unmet. Productivity and economic activity must increase to supply the food, clothing, housing, jobs and energy required by 12 billion people. This growth in consumption and the world economy that must occur to meet the needs of this vastly increased population provides both challenges and opportunities to the private sector. Corporate challenges include increasing natural resource constraints, public pressure to address the negative environmental and social impacts of corporate operations, the competitiveness of the global economy, and regulatory burdens. Some corporations anticipate the emergence of new competitive opportunities by behaving proactively in response to these challenges and in respect to the environmental and social impacts of company operations. Why are some corporations concerned with these impacts or the social needs of 12 billion people? What internal and external incentives drive multinational companies to adopt transformational strategies that address these issues? The Houston Advanced Research Center (HARC) works in consultation with the National Research Councils Board on Sustainable Development to explore these issues. The objective of this project, Private Sector Initiatives, is to engage the corporate community in discussions about how to resolve sustainability issues and find ways to make progress in motivating companies to adopt strategies for sustainability, to transform corporate behavior, and to take action toward sustainability in their own selfinterest. The first phase of this project involved the formula-
tion of insights concerning the internal and external drivers of corporate sustainability. To begin this inquiry, HARC developed five case studies of corporations that have begun to pursue transformational sustainability strategies and convened a workshop to discuss the cases and develop generalizations about corporate incentives. The case study companies are Alcoa, Enron, Ford, Formosa Plastics-Texas, and Royal Dutch/Shell. This report is a product of this yearlong effort. During the workshop, the case studies were presented and a conceptual framework was provided to guide the afternoon discussions. Participants were divided into break-out groups and asked to identify the incentives for sustainability they observed in the five case studies and to draw generalizations about these incentives. In the subsequent plenary discussion session, the break-out groups presented the results of their discussions. The incentives identified by the groups included corporate culture, external stakeholder pressure, corporate leadership, competitive advantage, market opportunities, and others. The constraints of the small number of companies examined and of a one-day workshop limited the opportunity for workshop participants to develop general conclusions about the incentives that drive corporations to pursue sustainability strategies. However, it was worthwhile to consider ex post a number of themes and observations that emerged through the case studies and at the workshop. A cursory analysis of the incentives revealed a gap in the number of times each incentive was mentioned by the groups. This bifurcation may indicate that the workshop attendees found that the first group of incentives explains more about what drives corporate sustainability than the second group. This simple analysis resulted in an intriguing but very preliminary outcome that provides directions for followup research and outreach opportunities. The next research effort will be undertaken immediately.
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THE WORKSHOP AND THIS REPORT

by Marilu Hastings Houston Advanced Research Center Center for Global Studies
n 1998, the Houston Advanced Research Cen ter (HARC) commenced a project to examine the drivers both internal and external that lead some corporations to pursue transformational business practices that contribute to sustainability. As a result of these practices, a corporation may undergo fundamental redefinitions concerning its mission, approach to operations, or even the nature of its industry or sector. HARCs objectives in conducting this project are: compile cases of companies that begin to pursue transformational change; identify the drivers of transformational corporate change and sustainability; and distribute the case studies and conclusions to members of the private sector as examples of corporate incentives to pursue sustainability. This project is part of a larger HARC effort begun in 1995, the Private Sector Initiatives for Sustainability (PSI). The objective of the PSI project is to engage the corporate community in discussions about how to resolve sustainability issues and find ways to make progress in motivating companies to adopt strategies for the sustainability transition, change behavior, and take action toward sustainability in their own self-interest. HARC works in consultation with the National Research Councils Board on Sustainable Development (BSD) to develop the overall focus of the private sector effort. The BSDs work also provides the particular context that encompasses this project. This context is a world in which global population will reach 9 to 12 billion a possible doubling of current global population over the next several decades before slowly leveling off at the end of the next century. A world economy five times greater than its current size
will be required to meet fundamental needs of food, shelter, clothing, education, and employment. Yet, to meet these basic requirements while protecting natural resource supplies, reducing income disparities between rich and poor countries, and managing waste generation within the limits of the planets absorption capacity, production systems and consumer expectations must fundamentally shift. The short time horizon within which these adjustments must be made requires transformational rather than incremental changes in many segments of society, including the private sector. The Private Sector Initiatives project examines the role that corporate resources and leadership play in the creation of innovative solutions to complex challenges. Some firms recognize that competitive opportunities may exist in the long-term if they act now to develop and implement programs, products, and protocols that will address the needs of up to 12 billion potential customers and shareholders over the next several decades. Representatives of these innovative firms state that, to still be in business 100 years from now, they must adjust their current strategies and operations to begin capturing these markets and opportunities. For example, Richard Sykes from Royal Dutch/ Shell expressed this view during a presentation at a March 1999 Health, Safety and Environment conference for Shell USA production staff. Likewise, Patrick Atkins from Alcoa voiced this opinion at the HARC workshop discussed here. Why these companies are beginning this process is the subject of HARCs focus on the private sector, incentives, and sustainability. To examine this issue, HARC developed five case studies of firms that have differentiated themselves in their industries by beginning to pursue sustainability strategies. The five companies that were selected to study are Alcoa, Enron, Ford Motor Company, Formosa Plastics-Texas, and Royal Dutch/Shell.
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HARC convened a workshop on January 14, 1999, chaired by Stuart Hart from the Kenan-Flagler Business School at the University of North Carolina, to discuss the case studies with company executives, case study authors, BSD representatives, and other interested individuals. This report is the product of this initial step. The report seeks to describe the case studies and to present the preliminary results that emerged at the workshop about the drivers of corporate sustainability. The document is organized into three parts. Part Two describes the company selection and case study development methodology. Brief introductions to each case are also provided. Part Three includes the full case studies themselves. Finally, Part One provides a discussion of the highlights and common themes that emerged from the case studies and workshop interactions. While HARC recognizes the important contributions made by the workshop participants and BSD members, the content of this report is solely the responsibility of HARC and the case study authors. HARC acknowledges the case study authors for their effort in developing and sharing information about, and insights into, their respective company cases. We would especially like to thank the companies and their representatives for allowing us to begin learning about how and why they make their strategic decisions to begin pursuing sustainability. Kathleen Hesp provided expert editorial support despite logistical challenges. We appreciate our HARC colleagues, Tina Davies, who generously volunteered to be the workshop rapporteur and David Hitchcock, who designed this report. The generous support for this effort provided by The Turner Foundation, the National Academy of Sciences, Shell Oil Foundation, The Haney Foundation, and George P. Mitchell is greatly appreciated.
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TABLE OF CONTENTS
PART ONE: PART TWO: WORKSHOP THEMES AND COMMENTS ...............................................................1 CASE STUDY SELECTION AND DEVELOPMENT .......................................................5
PART THREE: CORPORATE CASE STUDIES ..............................................................................9 ALCOA ........................................................................................................................ 11 ENRON CORPORATION ....................................................................................................23 FORD MOTOR COMPANY ................................................................................................35 FORMOSA PLASTICS CORPORATION (TEXAS) ..........................................................................53 ROYAL DUTCH/SHELL .....................................................................................................79 APPENDICES APPENDIX A: APPENDIX B: APPENDIX C: APPENDIX D: WORKSHOP DISCUSSION HIGHLIGHTS ........................................................... 119 WORKSHOP AGENDA .................................................................................125 WORKSHOP PARTICIPANTS ...........................................................................127 BIOGRAPHICAL DATA .................................................................................129
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PART ONE:
WORKSHOP THEMES AND COMMENTS

n January 14, 1999, a one-day, invitation-only workshop was convened at HARC in The Woodlands, Texas. The goal of the workshop was to discuss the five case studies and begin formulating insights concerning the internal and external drivers of corporate sustainability. The forty workshop participants included representatives from four of the five case study companies1 as well as other companies; the case study authors; representatives of the BSD; interested colleagues; and HARC project staff. A complete participant list is found in the Appendix. The workshop consisted of case study presentations, a break-out session, and plenary discussions. A workshop program is also found in the Appendix. During the morning session, case study authors presented the highlights of each case study. Brief question and answer periods followed each presentation. In general, the questions were for clarification and did not focus on specific incentives or company decision making. Following the case study summaries, Stuart Hart set the framework for the afternoon discussions with his presentation Beyond Greening: Sustainability as a Driver for Business Strategy. The workshop participants were then divided into five pre-assigned breakout groups. The groups included one case study company representative. The other industry and academic participants as well as project staff were divided evenly between the groups. The groups were asked to develop answers to three questions: 1. What incentives drive corporations to adopt proactive environmental and social (sustainability) strategies?
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2. Are some more effective than others? Why? 3. Can generalizations be drawn between or within industries, or are the incentives idiosyncratic? To aid the groups with this assignment, Hart provided a two-by-two matrix as shown below.
CASE STUDY MATRIX

Internal Drivers External Drivers
Push
Pull
Although the Shell representative was unable to attend in the end, Shells partner in the Camisea project in Peru, Mobil, was represented.
Each group was asked to complete the matrix, designate a spokesperson, and return to the plenary session prepared to present the completed matrix and discuss results.2 The constraints of a small number of case studies and a one-day workshop did not allow participants to develop general conclusions about the incentives that drive some corporations to pursue sustainability. Nonetheless, it is worthwhile to consider ex post a number of themes and observations that emerged through the case studies and at the workshop. A preliminary analysis by project staff of the results of the incentive matrices was undertaken after the workshop event. This initial effort involved a simple ranking of incentives based on the number of times an incentive was mentioned in the break-out groups
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Details of these discussions are provided in Appendix A.
PART ONE: WORKSHOP THEMES AND COMMENTS

sents the drivers of transformational change in a corporation. The second group may represent incentives that drive incremental steps taken by companies that have adopted a defensive strategy toward the environment or that may just be beginning to pursue sustainability strategies. Development of a methodology for future exploration of this question could provide important insights about the characteristics of firms and the degree to which they pursue environmental and sustainability strategies. Yet another important area for further examination involves conducting a comparative analysis of the behavior of small versus large companies, or companies in developed versus developing countries and the incentives that drive them to pursue sustainability. During the workshop discussion, an individual mentioned that small companies may be more sensitive to internal drivers than external incentives, while large firms react more readily to the external incentives. Likewise, companies operating in developing countries may experience different incentives and in various intensities than firms operating in developed countries. The influence of makret structure on corporate behavior and the incentives that influence it may also be fruitful. For example, firms within industries in which there are many competitors may behave differently in response to incentives than firms operating in industries with a few, large members. Understanding the nuances of corporate behavior in respect to sustainability based on firm size or locale could lead to further insights about the particular incentives that operate most effectively in certain situations. Perhaps the most interesting follow-on work would be a comparative case analysis drawing from such areas as strategic management, industrial organization, and organizational theory of how the incentives interact with and influence one another within these five corporations. This examination could determine whether proactive firms share certain characteristics that provide them with the organizational flexibility to respond to the first group of incentives, differentiating them from more defensive firms. For example, a firms corporate culture may foster innovation and enable it to identify market opportunities or areas of competitive advantage through sustainability. Strong leadership may provide the support that managers need to effectively address
Table 1. Ranking of Incentives for Sustainability

Incentive
Group 1 Corporate Culture External stakeholder pressure Leadership Competitive advantage/improved performance Market opportunities Group 2 Competitor pressure Regulations Company image Industry standards ( e.g., ISO 14001) Defensive strategy Technology Location Consumer willingness to pay Improved access to project financing Natural resource depletion Lack of infrastructure in developing countries
Number of Mentions in Matrices

9 9 8 8 7
3 3 2 2 2 1 1 1 1 1 1
matrices. With some aggregation for duplicates and synonymous incentives, Table 1 presents the results of this ranking.3 Table 1 reveals a large, unexpected gap in the number of times each incentive was mentioned in the break-out groups matrices, thus separating the list of incentives into two groups. This bifurcation may indicate that the workshop attendees, based on the five case studies, found that the first group of incentives explains more about what drives corporations to pursue sustainability than the second group. While this cursory analysis should be viewed with caution, it nonetheless raises a number of interesting questions and areas for further research. A fundamental question involves whether a scientific analysis of the incentives would yield a bifurcation similar to that in Table 1. If so, perhaps the first group repre-
Aggregation is problematic due to the subjective process involved. For example, company image could be combined with competitive advantage. The editor erred on the side of conservative interpretation in regards to aggregation.
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external stakeholder pressure. The relationship between the internal drivers of corporate culture and leadership and the external incentives of stakeholder pressure, competitive advantage, and market opportunities may provide important insights into the dynamics of firm behavior in respect to sustainability strategies. Another question that would follow from this understanding would involve corporate learning. What are the learning processes that lead firms from a defensive mode to a more innovative one in respect to the environment? Is it possible for companies to learn a new corporate culture? Ultimately, understanding these issues could lead to the improved capability to use the sustainability lessons learned by proactive companies to influence the behavior and decision making of more defensive competitors. If the theories of corporate change and organizational learning were applied to study these innovative companies so that generalizations could be drawn about how corporate change occurs in respect to the environment, then these lessons could be used to influence a change in behavior of more defensive firms so that they may move to adopt a sustainable approach to corporate operations. This list of questions is by no means comprehensive, but it does map out a few the interesting research possibilities that a comprehensive study of corporate incentives for sustainability could provide. This follow-up research will be the next focus of the second componenet of the Private Sector Initiatives.
PART ONE: WORKSHOP THEMES AND COMMENTS
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PART TWO:
CASE STUDY SELECTION AND DEVELOPMENT

O
F
f the various analytical methods available to conduct this type of research, as described in Robert K. Yins Case Study Research: Design and Methods (1994), case studies were chosen because they are the preferred strategy when how and why questions are being posed, when the investigator has little control over events, and when the focus is on a contemporary phenomenon within some real-life context. Yin also explains that case studies are more effective communication devices than most others forms of research for HARCs target audience. Although the case studies included here were not developed with the rigor that Yin prescribes, they do fit within his definition of a descriptive case study. These cases attempt to trace a sequence of corporate decisions over time, describe the context within
Royal Dutch/Shell Group
he Royal Dutch/Shell Group of companies learned valuable lessons from its experiences in Nigeria and Brent Spar. Following these events and with concern about financial performance, the Shell Group was prompted to review societys expectations of the Group in 1996. As a result of this review, the Group revised its Statement of General Business Principles, a document that governs how Shell conducts its affairs, to reflect greater emphasis on environmental and social issues. Sustainable development concepts were integrated into the Statement. The Shell Groups particular programs involve several initiatives, including balancing the triple bottom line; addressing global climate change; and integrating social capital and sustainable development features into company performance.
Ford Motor Company

ord Motor Company has embarked on several initiatives to integrate environmental priorities into its vehicle lines, operations, and corporate culture. In 1997, Fords Board of Directors formed a committee to review company strategies on environmental and public policy issues, including global climate change, fuel economy, alternative fuels and electric vehicles, vehicle recyclability, and the environmental impacts of the companys facilities. Ford has spent considerable resources to develop cleaner cars and trucks. The company dominates the alternative-fueled vehicle market in the United States. It has taken a lead in using recycled material in its cars, as well as recycling the cars themselves. Fords research agenda includes alternative fuels, emission reduction, and fuel efficiency. Ford is adopting and implementing the ISO 14001 environmental management standards at its facilities worldwide. Fords goal is to achieve continuous environmental improvement at its facilities.
which these decisions were made, and discover the key phenomena that led to the decisions. In consultation with the BSD, HARC developed a list of corporations about which to develop case studies to explore internal and external incentives that drive some firms to begin integrating sustainability policies and practices into their operations and strategic planning. Two sets of criteria were developed to facilitate the selection of corporate candidates. These criteria were designed to capture those companies that have made initial efforts to pursue sustainability. These criteria do not attempt to define sustainability, nor to characterize what a sustainable corporation would look like. They should not be construed as indicators of sustainability. It should also be noted that the case study selection did not imply any type of award or recognition to the involved corporations. None of the selected companies met all of the established criteria. The emphasis was on selecting companies that had
PART TWO: CASE STUDY SELECTION AND DEVELOPMENT

begun to devise sustainability strategies, often in an abrupt shift away from previous behavior or traditional industry protocol. Case study selection does not imply that any of the firms have achieved sustainability; rather, they have taken what may be the first step in the long process of becoming sustainable while remaining competitive. The first set of criteria evaluated the strategic approach used by firms to adopt sustainability policies. 1. The transformational criterion determined whether a firm was developing new sustainable products and services rather than rationalizing its existing product range. It also considered the degree to which top management was redefining the firms mission or capabilities to include elements of sustainability. 2. The proactive criterion determined whether a firm was positioning itself to earn competitive benefits by making a strategic choice for sustainability rather than only responding to regulatory or public relations pressures. 3. The innovative criterion determined the level to which a firm was devoting resources to devise new technologies, products, processes, and approaches to include sustainability considerations while maintaining or improving market position.
Formosa Plastics-Texas
ormosa Plastics Corporation is the largest polyvinyl chloride maker in the world. Formosa Plastics Corp. U.S.A. (FPC-USA) is a privately held company with corporate headquarters in Livingston, New Jersey and chemical manufacturing subsidiaries in Delaware, Louisiana, and Texas. This case study highlights the sustainability efforts conducted at the Formosa Plastics Corp., Texas (FPC-TX) facility. Against a backdrop of concern regarding environmental impacts and compliance at the FPC-TX facility, FPC-USA sought to expand the Texas facility in the late 1980s. To address local resident and stakeholder concerns, company officials have worked with local representatives since 1992 to negotiate an agreement that satisfies the company and the community. As a result, FPC-USA signed an agreement that allows extensive stakeholder involvement in the operation of the Texas facility and one that addresses concerns about wastewater discharges. A Sustainable Development Agreement was jointly signed by local representatives and company officials in 1997. This agreement will help operationalize sustainability.
4. The replicable criterion determined the extent to which a firms strategies and approaches can be duplicated within and outside the firm, its units, and its industry. The second set of criteria evaluated the environmental and social focus of firm strategies. 1. The stakeholder criterion determined whether a firm implemented measures to involve stakeholders and local communities in operational or design decisions that impact these groups. 2. The technology criterion identified the extent to which a firm used R&D, product design, and industrial ecology practices to mitigate the environmental impacts of products, services and manufacturing processes. 3. The global environment criterion determined if a firm had a policy to address and mitigate the potential impacts of global climate change. 4. The pollution prevention criterion determined if a company made efforts to limit more traditional
Alcoa
lcoa is the worlds largest producer of aluminum and alumina, participating in all major segments of the industry: mining, refining, smelting, fabricating and recycling. Alcoas Environment, Health, and Safety policy states that the firm will not compromise EHS values for profit or production. The issue of global climate change is particularly important for the aluminum industry because of its energy intensive nature and the relationship between hydrocarbon sources of energy and greenhouse gas emissions. Alcoa is taking initiatives to both reduce these emissions and to support impartial analysis of the global climate change issue. Alcoa is heavily involved in various aspects of industrial ecology, from reducing waste to process redesign. The company also has implemented policies that require environmental impact studies to be completed before new bauxite mines are established overseas.
Enron
nron is the largest wholesaler of electricity, the top producer of solar cells and wind turbines, the biggest marketer of natural gas and one of the leading gas exploration and transmission companies in the United States. Despite its reliance on fossil fuels as its major product, Enron has demonstrated an appreciation for the global climate change debate. Its efforts in developing alternative energy sources are an indication that the firm is well aware of the potential market opportunities available through the transformation of the energy sector. The firm invests aggressively in developing renewable energy sources and the infrastructure to use them, especially wind and solar. Enron articulates the environmental benefits of using natural gas as a bridge fuel toward long-term sustainable energy supplies. HARCs project staff developed the case study outline in consultation with the case study authors. Outside advisors reviewed the outline. Monthly conference calls with the authors and project staff were conducted. First drafts of the case studies were received for distribution at the January workshop. The authors had the opportunity to revise their respective cases in response to workshop discussion. Company representatives reviewed the factual accuracy of their respective case. Revised drafts were then edited and are included in Part Two.
environmental impacts such as emissions, hazardous waste streams, and accidents or spills. HARC also avoided duplicating the efforts of NGOs and consulting firms that also develop case studies about corporate sustainability. The companies selected may have been examined by one or more of the many groups that study corporate sustainability issues. However, the PSI focus on the sustainability transition and drivers is a unique approach to examining each of these corporations and provides a different perspective to the case studies. In addition, some consideration was given to how accessible a corporation was and where HARC and its advisors had contacts with senior management. Information regarding case study candidates was obtained from various sources, including discussions with knowledgeable individuals in academia, NGOs, and corporations; public data regarding changes in corporate environmental compliance over time; corporate public information; library research; and research conducted by other groups and individuals. This information was evaluated against the criteria
above by HARC staff. A short list of corporate candidates was developed and circulated among a subcommittee of BSD members and external advisors to the PSI project. The final list was then reduced to five corporations. Limitations of time and financial and staff resources dictated that the number of case studies be limited to no more than five. These five companies were approached regarding participation in the case study project. One of the original five declined to participate for internal reasons. One firm did not respond to initial or followup inquiries. These firms were replaced with two alternate companies who subsequently agreed to participate. As the companies were selected, HARC approached several individuals and organizations to participate in the project as case study authors. These authors were selected on the basis of their knowledge of a particular company or industry. Two of the authors were HARC staff. All case study authors were in direct contact with their respective company representatives and each traveled to company headquarters or plant locations. In all cases, the senior executive responsible for environmental affairs was interviewed at length. In one instance, the CEO was also interviewed.
PART TWO: CASE STUDY SELECTION AND DEVELOPMENT
PART THREE:
CORPORATE CASE STUDIES

Alcoa Enron Ford Motor Company Formosa Plastics-Texas Royal Dutch/Shell
Disclaimer: At the time of the writing of these case studies and workshop, the facts of these cases were current and accurate. Since the business community is highly dynamic, some situations with particular companies have changed since the drafting of this report. These changes are not reflected within these cases at this time, as one of the purposes of this report is to provide a factual account of the workshop and its discussions based on the cases as developed at that time.
ALCOA
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Alcoa
by Jurgen Schmandt and Sunil Tankha Houston Advanced Research Center Center for Global Studies
ost of the major industries of todays global economy depend to some degree upon exploiting natural resources, as inputs into products or as sinks that absorb wastes and by-products. Despite the emergence of what some term the knowledge economy, traditional industries are still the basic force driving the global economy. Of the dollar value paid for goods, a larger percentage goes towards purchasing the intelligence inside the product, but this has in no way diminished the value of the physical material contained within most products that people continue to use on a daily basis. As more countries like Brazil, China, and India realize their development goals, more of these physical products will be produced, consumed, and discarded. Since the environmental impacts of current levels of production and consumption, especially of energy, are already causing concern, this growth must be carefully managed. In the face of increasing pressure for sustainable development, traditional industries face dilemma - they can either increase their lobbying expenses to predict dire economic consequences if regulations and other controls on their industry or their products are instituted, or they can invest in new strategies and technologies to reduce environmental impacts. This case study profiles one corporation that has made a strategic decision to invest in people and technologies to make its operations compatible with environmental and social sustainability. The company made this choice based on the belief that it will have a brighter economic future by using less energy, reducing pollution, increasing the safety
of its workers and contributing to the well-being of the communities where it operates. The company is Aluminum Company of America (Alcoa), the worlds largest producer of aluminum and alumina and is a strong participant in all segments of the industry mining, refining, smelting, fabrication and recycling. Major applications of its products are in the packaging, automotive, aerospace and construction markets. In recent years, aluminum demand has increased at an annual rate of 2 percent, with stable demand for aluminum cans and steady increases in the automotive sector.
Alcoa: A Brief History

The company was founded in 1888 as the Pittsburgh Reduction Company, following Charles Martin Halls discovery, in 1886, of a cheap process for producing aluminum. Aluminum is the most abundant metallic element in the earths crust, but because it is always found locked in combination with other elements such as oxygen and sulfur, it was also very difficult to extract. Prior to Halls discovery, the extraction of aluminum was very expensive and, as such, it was considered to be a semi-precious metal. Despite the fact that only 125 lbs of aluminum had been produced in America by that time, it had the potential to be a very useful material. Rapid growth in the aluminum market and the accompanying economies of scale led to a fall in the cost of aluminum from US$4.86 per lb in 1888 to US$0.78 per lb by 1893. In 1907, the Pittsburgh Reduction Company which had grown rapidly and established mining and manufacturing sites all over the US and
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ALCOA
Canada - changed its name to the Aluminum Company of America. By 1937, the price of aluminum had fallen further, to US$0.20 per lb. Military demand during World War II resulted in a large increase in production capacity and rapidly expanded aluminum markets. This trend was sustained after the war through peacetime as well as Cold War applications. The aluminum industry grew rapidly in the 1950s and 1960s and Alcoa began an aggressive program to sell aluminum on the international market. The globalization of the 1970s and 1980s challenged the company as substitute products and international competition threatened traditional markets. Alcoas response was to become more innovative - it strengthened and widened its technological base and expanded the range of its products and markets. The company also diversified beyond its core business. However, this effort did not succeed, and has now been reversed. Instead, Alcoa is following the trend towards globalization by expanding its worldwide presence. Over the last few years, it has made numerous acquisitions, expansions and joint ventures. In 1996, Alcoa acquired Italys state-owned integrated aluminum producer, and in 1998, it bought Spains state-owned aluminum producer as well as Alumax (Northcross, Georgia), a world leader in aluminum, with assets of more than US$3.4 billion and 1997 revenues of more than US$2.9 billion. Today, Alcoa has over 100,000 employees in 20 business units located in 250 communities in 30 countries. More than half the workforce is located outside the US. In 1997, Alcoa had over US$13 billion in revenues and net earnings exceeded US$800 million. This positive trend continued in 1998. Despite a 14 percent drop in aluminum prices during the first nine months of the year, the company reported net income of US$217.7 million and net revenues of US$11.1 billion. Shareholder profits were 16.8 percent in 1997 and 17.1 percent in 1998.
Figure 1 Life Cycle of Aluminum

Primary Aluminum
Bauxite Mining
Alumina Refining
Aluminum Smelting
Recycled Aluminum
Ingot Casting
Fabrication
Disassembly
Product Assembly
Collection
Product Use
Consumer Disposal
Source: Alcoa, Aluminum in the Automobile: Life Cycle Considerations, Environmental Paper No. 4, December 1994.
Aluminum: The Wonder Metal

Aluminum is a very versatile metal. It is light, yet strong; resistant to corrosion; highly workable; an excellent reflector and conductor; and easy to recycle. Its properties of recyclability and lightness make aluminum an ideal material for sustainable production systems. In the case of automobiles, 85 percent of
post-consumer automotive aluminum is recovered today and 60- to 70 percent of the aluminum in new cars comes from recycled material. In the case of beverage cans, of the 99 billion cans produced in the US in 1997, over 62 billion were returned for recycling, with the aluminum beverage can containing over 50 percent recycled aluminum. The life cycle of aluminum is illustrated in Figure 1. The use of recycled aluminum eliminates mining, refining and smelting operations and therefore minimizes air pollution (in the form of fluoride emissions) that is associated with smelting and nitrous oxide and sulfur dioxide emissions. Aluminum recycling saves approximately 95 percent of the energy required to make new primary aluminum ingot and consequently reduces carbon dioxide emissions by approximately the same amount. Recycled aluminum also produces 80 percent less solid waste than primary aluminum -
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CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING Figure 2. A process energy-use diagram for the production of aluminum cans
Source: International Petroleum Indusry Environment Conservation Association, Climate Change and Energy Efficiency in Industry (1992) as produced in Graedel, T.E. and Allenby, B.R., Industrial Ecology, Prentice Hall, N.J, 1995.
3.9 kWh/kg Production of ingot
0.07 kWh/kg
Transport
63% recycled
Ore in the ground
Production of Aluminum 70.4 kWh/kg
Production of Sheet 7.3 kWh/kg
Transport
Production of Cans 16.6 kWh/kg
Cans
0.07 kWh/kg
especially bauxite residue which is a by-product of the alumina refining process - and spent potlining from used smelting furnaces. Figure 2 illustrates the process energy-use diagram for the production of aluminum cans. In addition to being recyclable, in the case of automobiles, the lighter weight of aluminum saves energy by making the vehicle lighter, which reduces fuel consumption. This, in turn, reduces emissions of carbon dioxide and other substances such as nitrous oxides and sulfur dioxide. For example, reducing the weight of a mid-sized car by 700 lbs reduces life-cycle vehicle emissions of carbon dioxide by 10,500 lbs and ultimately reduces a vehicles global warming potential by about 11 percent. However, the environmental impacts of aluminum production are also significant. These include: degradation of the physical and natural environment from mining ore; pollution of ambient air, as well as surface and groundwater; high energy consumption in the aluminum smelting process; impacts on regional air quality; contributions to global climate change; bauxite residue at mining operations; disposal of spent pot lining.
The remainder of this case study will review the philosophy, strategies and programs that Alcoa is employing to enhance corporate sustainability for the 21st century. The programs themselves can be classified into three categories: How Alcoa is reducing the environmental impact of its production activities. How Alcoa is reducing the negative impacts of aluminum use in collaboration with its customers. And how Alcoa is increasing its operational efficiencies and contributing to resource conservation.
Alcoas Philosophy, Strategy and Programs

Philosophy
Alcoas stated commitment to preservation of natural resources and environmental stewardship is based on two principles: first, that it is the responsible thing to do, and second, that it is a key factor in companys ability to create exceptional value for its shareholders as they move into the 21st century. To promote these commitments, Alcoa, prompted by chairman Paul ONeill and former president C. Fred Fetterolf, has spent millions of dollars and thousands of work hours training its workers, supervisors, and executives in six core principles known as Alcoa Values.1 Alcoa Values are meant to unite Alcoas global geographic presence, its cultural diversity, and its autonomous business units through adherence to this common ethical code. The Alcoa Values are:
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ALCOA
integrity safety and health quality and excellence people profitability accountability In 1989, Alcoa began disseminating the core values to its employees, following up with films, training seminars and departmental meetings. The company began to evaluate employees to see how well they applied these principles during daily operations. According to ONeill, We are systematically taking our vision and our values and trying to make them a reality in how we run the place. In 1994, Alcoa strengthened its environmental policy, originally adopted in 1975, by introducing nine environmental principles that clarify the requirements of the Environmental Policy and Implementation Plan. In this plan, Alcoa promises to: support sustainable development; practice responsible use of natural resources; use energy wisely; practice sound environmental management; provide training and information; audit our operations and report findings; sponsor activities to improve the science of environmental protection; develop and adhere to high standards; report on our activities. A new mission statement, based on these principles, was adopted - Alcoa will operate worldwide in a manner which protects the environment and the health of our employees and of the citizens of the communities where we have an impact. At a minimum, the company will comply with the environmental and health standards of each host country. But it will go beyond compliance by anticipating problems. Training of the workforce and auditing of operations are the principal means to this end. As part of the restructuring of Alcoa, a new office was created at the corporate level - Environment, Health and Safety (EHS). Under the leadership of a senior vice president, the office has integrated EHS issues into one discipline to promote information sharing and to remove organizational barriers to problem solving.
Strategy
The Aluminum Company of America does not regard regulation or public pressure as a primary driver of environmental performance. Alcoas commitment to environment, health and safety has put the company in front of regulatory reform. Not only has the firm pledged to comply worldwide with all environmental laws, regulations and permits, but it has also established stringent corporate standards that often exceed local requirements. For instance, after acquiring the Hungarian aluminum firm Kofem in 1993, Alcoa made substantial investments in environment, heath, and safety systems that surpassed Hungarian laws and social standards, even though these investments reduced Alcoa-Kofems profits during the initial years of its operations. Throughout the world Alcoa, insists upon bringing up the environment, health and safety standards of its acquisitions to approximately developed world standards. Alcoa Chairman Paul ONeill sums it up: Alcoa is right in not waiting to be told what to do by government when it comes to protecting the environment.
Leadership
Leadership has been an important ingredient in Alcoas journey towards becoming a sustainable firm, and Chairman Paul ONeill has been an able leader. Appointed in 1987, ONeill is the first outsider to run Alcoa. An economist by training, ONeill spent much of his career in the federal governments Office of Management and Budget. Upon joining Alcoa, he immediately began a massive overhaul of the organization. He closed high-cost plants, took a US$166 million write-off and re-focused Alcoa on its core aluminum business, putting an end to diversification into new materials such as composites. As part of Alcoas globalization strategy, ONeill set up joint ventures to increase Alcoas presence in the fast-growing European, Latin American and Asian markets. Longer term metals contracts are being negotiated to smooth out Alcoas earnings performance and an innovative variable rate dividend plan has been set up to reward investors who stay with the company during economic downturns. These moves are directed at transforming Alcoa from a volume-driven metals company into a world-
14

class industrial and consumer aluminum business. They have already translated into improved financial performance. Alcoas return on equity has averaged 15 percent since ONeill was appointed CEO, which is 50 percent above the average for the previous decade.
Addressing Climate Change

Currently, most industries oppose regulation in response to potential climate change. The production of primary aluminum is a very energy intensive process, as shown in Table 1. Compared to automotive steel, for instance, automotive aluminum consumes nine times as much energy for its primary production, on a mass basis, but it takes much less aluminum than steel to perform the same function due to the lighter weight of aluminum. The fossil fuel needs of primary aluminum account worldwide for about 230 million metric tons of CO2 per year, or about one percent of all CO 2 emissions of man-made origin. Alcoas strategy has been to address climate change on three fronts: production site changes such as increasing the energy efficiency of aluminum production and reducing emissions of other greenhouse gases; promoting fuel efficiency in products that use aluminum; and recycling. Over the years, Alcoa has made significant strides in reducing energy intensity in aluminum production. Over the last 20 years, energy requirements to produce primary aluminum have been reduced from 8.25 kWh per lb to 6.6 kWh, which represents a 20 percent decrease. In addition, because of the high energy consumption in the production process, the aluminum industry has invested substantially in acquiring access to cleaner and more efficient sources of energy. A significant number of aluminum smelters have been built in conjunction with hydroelectric power projects. Also, by building smelters close to power sources, the aluminum industry has been able to minimize transmission and other power losses. Alcoa and the aluminium industry are actively reducing polyfluorinated carbon (PFC) air emissions (a greenhouse gases emitted during smelting) to low levels through enhanced process control and prevention at source. Trace amounts of PFC gas emissions are generated during process upsets called anode effects in the smelting of aluminium, which occur when there is a low level of raw material alumina. During the last three years, Alcoa has made significant progress in preventing these anode effects and PFC emissions. These reductions have been achieved through enhanced process control and source reduction so that PFC generation is stopped before it occurs. In the US, the aluminum industry is voluntarily working with the Environmental Protection Agency
Reducing dependence on fossil fuels

Upon his arrival at Alcoa, ONeill had found a business strategy that emphasized continuous improvements in the companys aluminum manufacturing process in order to improve efficiency and cut costs. Over the years, this strategy had reduced energy consumption dramatically - from 20 kWh per lb of primary aluminum ingot in 1910, to 6.6 kWh per lb in 1998. The best Alcoa plants had even reached 5.9 kWh per lb, bringing them close to the theoretical limit of 2.8 kWh. With 45 percent of Alcoas electrical energy needs coming from fossil fuels (primarily coal), reducing fossil fuel use remains a strong imperative for the company. Research and Development (R&D) to improve the efficiency of aluminum production is financed at the rate of several million dollars per year, focusing on the development of inert anodes and direct reduction. Pilot plants to test some of these improvements should be on line by 2001, but implementation of these complex technologies will take decades.
Table 1: Energy input (GJ/Mg) required for the primary production of various metals
Primary Production 31 91 270 61 39 430
Metal Steel Copper Aluminum Zinc Lead Titanium
Source: P F Chapman and F Roberts, Metals Resources and Energy, (Boston: Butterworths, 1983) as produced in T E Graedel and B R Allenby, Industrial Ecology , (Englewood Cliffs: Prentice Hall, 1995).
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ALCOA
to further reduce the frequency of anode effects and PFC releases under the Voluntary Aluminum Industrial Partnership (VAIP) program. Under this program, Alcoa agrees to a 70 percent reduction in average anode effects per pot day by 2000, compared to a 1990 base. Alcoa takes a life-cycle approach to the issue of energy intensity and other environmental concerns. Although the production of primary aluminum is significantly more energy- intensive than for comparable materials, over the life of products total energy consumption is often reduced through the use of aluminum. Recent studies, for example, indicate that material energies are only a small part of the life-cycle energy associated with a car or truck. A far greater percentage of a vehicles energy consumption is accounted for through its use. In fact, almost 25 percent of man-made global carbon output is caused by vehicle emissions. Therefore, by reducing the weight of vehicles, aluminum can increase their fuel efficiency to an extent that more than compensates for the higher energy requirements of the production of aluminum. A 1998 study demonstrated that the use of one kg of aluminum will result in net savings of 20 kg of CO2 over the life of the car, if it is driven 120,000 miles. Recycling has proved to be very effective in reducing emissions of CO2 and aluminum is now one of the most recycled materials. Recycling aluminum reduces emissions by 95 percent over the production of an equivalent amount of primary aluminum. For example, during the processing of one pound of recycled aluminum, less than one pound of CO2 is emitted. Extensive recycling in automotive and packaging applications has decreased net energy and CO2 emissions by 65 percent. Chairman ONeill has been a vocal spokesman for the entire aluminum industry in advocating a proactive stance on climate change policy. He advocated a stronger leadership position by the US, including clear guidance to industry on implementation of a greenhouse strategy. cal chain of command structure and gave field managers worldwide direct access to him. The re-organization eliminated top management layers, reduced headquarters staff from 1,000 to 450 and created 20 regional business units whose managers received more decision-making authority. Their spending authority was increased to US$5 million from one million or less. The business units were then moved to the center of the organization. Each business unit is managed as a responsive, stand-alone enterprise with its own financial, environmental and safety goals. The leaders of these units are accountable for setting performance goals, which are detailed in yearly operating plans. Underneath the business units are pooled corporate resources that service the needs of the business units. Within this framework, each of Alcoas 20 business units is held accountable for EHS goals, which are based on the units specific circumstances and processes. Alcoas chairman and members of the Executive Council review the operating plans and performance of each business unit. This annual review (see below) has become a central feature of headquartersunit relations. The review process includes a full annual evaluation, quarterly progress reports and reviews of special circumstances that were identified by the Environmental Audit Process. One of the quarterly reviews focuses entirely on EHS issues. EHS is organized as a central resource unit and operates under the leadership of the executive vice president (EHS) and general counsel who are members of the executive council. A formal strategic planning process guides the activities of the corporate group. An EHS Advisory Board of senior business managers meets twice a year to provide counsel and advice on issues related to policy and long term strategy and ensures that EHS corporate services are aligned with the needs of the business units. In 1995, a new structure - EHS Shared Services - was put into place to better focus the talents and skills of Alcoas corporate EHS resources. EHS issues were further integrated into the business process through the addition of a more specific EHS section into the operating plans of each business unit. To monitor progress, unit presidents review their units performance regularly - in most cases once a calendar quarter - with members of Alcoas senior management. EHS topics are given priority status as the principal
Decentralizing Alcoa
During the last decade, under ONeills leadership, the company has undergone massive change. Giving more responsibility to front-line managers was a key element of the new strategy. In several steps, beginning in 1991, ONeill abolished Alcoas old hierarchi-
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areas of focus for the first quarterly meeting of the new year. At subsequent reviews, EHS performance is a major item on the agenda. A balanced scorecard process has been established to measure he performance of the business units. EHS issues are included as a prominent part of the balanced scorecard, which also includes financial and human resources issues. land management, community service or environmental education and awareness. In 1995, the award and recognition system was expanded to include EHS programs. The Environmental Performance awards are presented each spring to recognize outstanding performance and progress by locations and business units. The Achievement awards are presented in the fall to recognize outstanding projects and programs that have been completed or established throughout the world. The awards are publicized widely to facilitate the rapid transfer of technology between the locations and business units. To allow employees to express concerns in confidence, report possible violations of state or federal laws and/or company policy including EHS matters, many Alcoa locations instituted a toll free number called ComplianceLine. When a problem is reported, the company reviews the matter and determines the appropriate manner in which to investigate if necessary. During 1994, Alcoa reported that 16 calls were made.
Employee Involvement
Employee involvement is a cornerstone of Alcoas EHS strategy. Employees are the first to get credit for EHS innovations and improvements. Financial and non-financial incentives have also been developed to encourage employee ingenuity and responsibility. Nearly half of Alcoas workforce has some form of variable compensation tied to the attainment of financial and non-financial goals spelled out in operating plans. To encourage, recognize and reward outstanding environmental achievements, Alcoa created an Environmental Excellence Program in 1993. To recognize and reward the diverse environmental activities underway in Alcoa locations worldwide, four award categories were created: Environmental Policy - awarded for achievements that exemplify the advancement of Alcoas Environmental Policy such as the development of effective environmental management programs, employee education and training programs or cooperative relationships with government agencies or environmental organizations; Environmental Progress - awarded for achievements that demonstrate measurable and sustainable progress in reducing environmental impact in a cost-effective manner such as pollution prevention, waste minimization, recycling, or energy conservation programs; Environmental Innovation - awarded for achievements that demonstrate innovation and creativity in addressing environmental issues such as the development, adaptation, and application of innovative technologies or creative management approaches; Environmental Stewardship - awarded for achievements that demonstrate a commitment to environmental stewardship, such as environmental conservation, wildlife habitat enhancement,
Information Management
A key element in Alcoas success in dealing with EHS issues has been the construction of a state-of-the-art information management system that links the diverse elements in a unified and accessible way. In 1995, Alcoa developed environmental management systems guidance material - complete with informational toolboxes for its plants - which are compatible with both ISO 14001 and ISO 9000 requirements. Another initiative was an exhaustive effort to combine numerous health and safety processes into one unified health and safety management system that is linked to the health and safety audit process. Alcoas stated goal is to meld its environmental management systems and the health and safety management systems into a single comprehensive EHS management system while keeping the inherent strengths of each.
Technology Transfer
Alcoa strategy on technology transfer is based on find it, document it and share it. With this in mind, experts from Alcoa locations worldwide collaborated on documenting the worlds best methods for managing several environmental issues that are unique to the aluminum industry. The teams completed their work
17
ALCOA
in 1994 and issued four new mandatory standards. The new standards cover bauxite mine rehabilitation, bauxite residue management, rolling mill air emissions, and spent potlining disposal. As part of an ongoing review of existing standards, revisions were made to Alcoas EHS standards that cover the assessment process for prospective acquisitions and divestitures. Alcoa employees at locations worldwide are developing or adapting safety practices that consistently produce outstanding results. These best practices amount to leading edge technologies that become part of a toolbox available to other locations, thus leveraging Alcoas best safety technologies across the company. To develop such toolboxes, ten regional networks worldwide were established. Each identified and gathered a set of the best practices that will be documented as part of a toolbox - including all resources needed to adapt to another location - and shared with the other nine networks. By year-end 1995, the best of the best were assembled in toolboxes available to every Alcoa location. fort, the Wildlife Habitat Team developed a partnership with local elementary schools to educate and involve them in mine reclamation through projects such as Alcoa Science Days, field trips and classroom discussions. In Australia - where Alcoa operates a number of bauxite mines - the company sponsors a project designed to put Alcoas resources and operational expertise at the disposal of community land-care initiatives. In Western Australia - where US$5 million has been budgeted for the project - the land-care program includes wetlands rehabilitation, a land-care field study, rehabilitation of farm land and a comprehensive range of education, information, and community awareness programs and recreational facilities. In 1990, Alcoa of Australia was awarded the UN Global 500 Award for mine rehabilitation and land management in Western Australia. The sustainable mining program was recognized as an outstanding achievement in a very sensitive area where competing land use pressures made the situation very difficult. Alcoa was the first (and perhaps the only) mining company to receive the Global 500 award.
Collaboration
Collaboration is a vital component of Alcoas business strategy. These alliances come in all shapes, sizes and agendas. In 1994, Alcoa invested approximately US$8 million in joint environmental R&D projects, with US$3 million allocated to address remediation issues. Alcoa business units contributed about US$5 million and the remainder came from Alcoas corporate R&D program. US$1 million in matching funds was provided by non-Alcoa organizations for work on joint projects. Alcoa believes harvesting collective energies through partnerships will bring the greatest progress in advancing the companys long-term EHS performance.
Research and Development

In 1995, Alcoa and its businesses invested US$8 million for remediation issues and US$5 million for nonremediation issues. By participating in industry R&D partnership and programs, approximately US$7 million of jointly-shared and in-kind service projects supplements Alcoas investment. An Environmental Technology Advisory Broad meets two- to three times a year to provide strategic direction and review Alcoas environmental R&D program. Major EHS R&D initiatives include: defining and developing guidelines for determining environmentally acceptable end-points for remediation activities related to organic contaminated soils, sludges and sediments; improving air-monitoring methods for measurement of several hazardous air pollutants and high molecular weight volatile hydrocarbons; focusing on PCBs and mercury in sediments; cyanide in groundwater and surface water; passive bio-remediation of hydrocarbon contaminated soils associated with underground storage takes; and biodegradation and containment of PCBs and poly-
Community Participation
Community outreach has always been a key aspect of Alcoas daily plant operations. As the issues become more complex, these partnerships are solidifying. In Davenport, Iowa, Alcoa uses community surveys as a way of ensuring its awareness of community concerns. Focus groups of interested community members were used to solicit comments and suggestions on a conceptual plan to reclaim the land at the former mine site in Bauxite, Alaska. In a separate ef-
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nuclear aromatic hydrocarbons associated with soils and sludges. examples of Alcoas efforts is the Wellard wetlands project. Carefully planned excavation resulted in reuse of the material in construction. The land was then rehabilitated, which turned a 25-hectare area of claybased, non-productive farmland into a thriving wetland and bird sanctuary, where hundreds of water birds safely live and breed. Wellard is now host to more than 84 bird species. In 1994, Alcoa Chairman Paul ONeill issued a new goal and measurement for all of Alcoas businesses zero citations for failure to comply with laws and regulations in Alcoas worldwide business locations. In addition, business unit presidents are required to note even the smallest infractions in their weekly business reports. Since 1992, Alcoa has paid approximately US$1.5 million in fines and penalties. A fine imposed in 1993 at a closed facility in Anderson County, Texas, was US$750,000. In 1994, Alcoa tracked compliance issues on a worldwide basis, but none were noted for non-US locations. Total EHS fines and penalties worldwide were US$300,000 in 1994. By 1997, this figure had been reduced to US$167,000. In late 1994, Alcoa concluded that large-scale complex remediation issues are best managed by a team of technical and regulatory experts who are fully dedicated to remediation projects. A Remediation Work Group (RWG) was formed with this concept in mind. The group reports to the executive vice president EHS and general counsel and is responsible for managing the companys highest priority remediation sites. Among these sites are Massena, New York and Point Comfort, Texas. At Massena, work focuses on cleaning up historic discharges of PCBs in on-site waste units and sediments in the Grasse River. At Point Comfort, the RWG is working closely with the regulatory community and Natural Resource Trustees to better understand the effects of mercury and other contaminants on the environment. Alcoa is currently involved as a potential liable party at 45 Superfund sites. These sites are generally closed or abandoned waste management facilities that were used by Alcoa, or where Alcoa waste was accepted. The majority of these sites are jointly-funded by a large number of companies and Alcoas potential liability is small.
Training Programs
Alcoa employees everywhere now have quick and easy access to benchmark technologies, information and resources via the Alcoa intranet. The new EHS home page offers a library, learning center, Alcoa EHS performance data and other useful information, as well as a link to important EHS documents that pertain to policy and mandatory procedures. EHS launched an ambitious effort to ensure that all Alcoa employees can obtain the environmental heath and safety knowledge and skills they need to perform their jobs. An EHS curriculum was developed as a guide to provide recommendations for courses by target audiences. Because it offers a variety of choices based on individual needs and skill levels, the EHS curriculum can be used to develop annual training plans and priorities. The curriculum is located on the EHS home page with links to course materials so that Alcoa users around the globe can download training materials such as instructors guides and overheads.
Liabilities and Remediation

The aluminum extraction process is associated with serious environmental impacts. During the refining process, the crushed bauxite is mixed with a hot, strong alkaline liquid that dissolves the alumina contained in the bauxite. Waste material, composed mainly of coarse sand and finer mud (silica and iron oxides), have then to be deposited in residue areas. In Australia, for example, about one third of the bauxite is recoverable as alumina. Thus for every ton of alumina, two tons of residue are produced, which is then stored in secure impoundments. Over the years, substantial technical improvements have been made in residue management. Underdrain systems are installed and tough waterproof synthetic liners cover the clay seals of the impoundments. Residues are thickened before placement in the disposal areas, and can be mounded, or stacked, to increase the amount of material that can be disposed of per acre of land. Along with technical improvements, a philosophical change has occurred in how residue areas are managed. The focus is now increasingly on rehabilitation of areas and restoration to previous standards and use as managed wildlife areas. One of the most notable
Measuring Progress
Audits are an integral part of an effective EHS man-
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ALCOA
agement system. Alcoa conducts EHS audits globally to determine overall conformity with corporate, business unit and regulatory policy and objectives. In 1998, the EHS audits were combined with the financial and information technology audits. These combined audits are systematic, rigorous processes that document best practices and highlight areas for improvement. Audits are conducted by cross-functional teams comprised of business unit and central resource experts, as well as external representation to provide objectivity and new ideas. Alcoa is committed to acting on the audit findings. The scope of the environmental portion of Alcoas audit process includes air, water, solid and hazardous waste materials, toxic substances such as PCBs and asbestos, waste minimization, land management and prevention/control of chemical releases. Management systems and resources associated with these issues are also audited. All active and inactive operating, warehouse and transportation facilities worldwide in which Alcoa has a majority ownership and/ or operating control are covered by the audit system. Each facility is audited at least once every three years. A facility that receives an unsatisfactory rating or fails to implement corrective actions from a previous audit, is audited again the following year. During 1994, 49 audits were conducted and of these, 42 were satisfactory. In 1995, out of 50 audit sites, 46 were found satisfactory. In 1996, 17 US and 22 overseas sites were audited and 37, or 95 percent, received a satisfactory rating. Audit findings deemed excellent are widely communicated among all locations to provide case models and promote technology transfer. Following an audit, the facility manager must prepare a detailed audit response and action plan that analyzes the nature of the deficiencies and outlines corrective action. Progress reports are submitted during the year. which asked US industry to voluntarily reduce the release of 17 selected toxic chemicals by 33 percent by the end of the calendar year 1992, and 50 percent by 1995. Alcoa committed itself to exceeding the EPAset targets and pledged to reduce emissions of these chemicals by 39 percent at the end of 1992 and by 51 percent by the end of 1995. In 1994, Alcoa was recognized by the EPA for exceeding its voluntary pledge to reduce releases of 33/50 program chemicals by 51 percent by 1995. Alcoa achieved a 61 percent reduction by the end of 1993 and set new goals for 1995. In September 1994, Alcoa committed itself to a 75 percent emissions reduction by 1995, from all Alcoa US operating units in the program. In 1994, Alcoa implemented a worldwide pollution prevention program to coordinate, support and track voluntary pollution prevention initiatives. Collectively, the goals add up to a 20 percent reduction in priority waste from Alcoa operations in 1995. In keeping with its philosophy that each business unit knows best what its respective financial and non-financial targets should be, each business unit was asked to establish quantitative goals to reduce its Business Priority Pollutants in 1995. The collective average commitment exceeded 20 percent, relative to baselines. The Superfund Amendments and Reauthorization Act (SARA) of 1986 established the Toxic Release Inventory (TRI), which required businesses to report emissions, discharges and off-site transfers of certain chemicals listed in the regulation. Alcoa US locations reported TRI chemical releases of about 6.5 million lbs, about 25 percent less than in 1992 and 54 percent less than the 1988 base year. As in past years, atmospheric releases were the largest but were 27 percent lower than in 1992.
Internal, Operational
Alcoa is a corporate partner in Green Lights, a volunteer program developed by the EPA. As part of this program, Alcoas US plants survey existing lighting systems and replace older lighting systems with more energy efficient ones when significant energy savings can be identified. Through 1996, 33 million sq ft of floor space in US facilities had been surveyed to identify areas where upgrades would result in significant energy conservation. Of these, 30 percent met Green Lights criteria for upgrading with high efficiency sys-
Environmental Programs
This section looks at the range of environmental and sustainable development programs that Alcoa has pursued - singularly and collaboratively - as part of its sustainability strategies.
Internal, Product Related

Alcoa was a part of the US EPAs 33/50 program
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tems. These upgrades were completed in 1997. Energy reductions from upgrades made between 1987 and 1997 exceeded 24 million kWh/year. Alcoa recently established a new program called One Million Trees. Alcoas goal under this program is to have each Alcoa employee plant a tree each year for the next ten years. This would result in over a million trees being planted by Alcoas EHS ambassadors. weight, strength, formability, corrosion resistance and recyclability make aluminum an ideal material for automotive structures. One automobile company (Audi) has been closely working with Alcoa to develop the Audi Space Frame (ASF) concept car. Audi believes that aluminum is the environmentally appropriate automotive manufacturing material. An aluminum body weighs 30-40 percent less than a comparable steel body; aluminum can be recycled back into the same applications - panels to panels, for example - for a long period of time. Another reason for adopting aluminum is that when pressed steel panels are stamped out, about 60 percent of the energy intensive metal remains unused. For the ASF body, Audi employs a high percentage of castings and extrusions that, unlike pressed steel, can be made with little wastage. This reduces the energy premium for the manufacture of an aluminum body as compared with steel from a factor of 4.5 to about a factor of two. The first car into which the ASF body has been incorporated is the Audi A8, an all-aluminum luxury
External
In 1994, Alcoa Rigid Packing and local partners broadened their efforts to tell the recycling story worldwide. Alcoas long-standing efforts to promote aluminum recycling have led employees to think of recycling as a way of life, not as an environmental goal or strategy. Employees are consistently developing programs throughout Alcoa to expand traditional office responsibilities and plan recycling efforts. Among such programs are a package return program for can sheet customers, which guarantees that all of the materials returned will be reused or recycled. A program of return and reuse started by Alcoa employees at the Itapissuma plant in Brazil will extend the useful life of shipping boxes. In fall 1996, working with the Aluminum Association, Alcoa organized and conducted a comprehensive life-cycle inventory of primary and secondary aluminum processing. Data was collected on energy, water and materials consumption as well as on emissions, wastewater and solid wastes in mining, refining, smelting and fabricating facilities representing 89 percent of the North American aluminum industry. After data validation and modeling, a life-cycle profile of aluminum automotive products was published in 1997. Bio-remediation is the use of naturally occurring processes to lessen or eliminate pollution. Alcoa has established itself as a leading researcher in bioremediation of polychlorinated biphenyls. Recently, the US Deparment of Energy awarded the Alcoa EHS Technology Center a three-year US$440,300 contract to study how PCBs are affected in soil, sludge and sediments and how to accelerate natural redemption processes. The automobile industry is the focus of a major Alcoa initiative that will aim towards making transportation more sustainable. The combination of light
Table 2: Material in a typical US automobile (kg)

Material 1978 Carbon steel 870 High-strength steel 60 Stainless steel 12 Other steels 25 Iron 232 Plastics 82 Fluids 90 Rubber 67 Aluminum 51 Glass 39 Copper 17 Zinc castings 14 Other 62 Total 1621 1988 % change 654 -25 105 74 14 19 20 -19 207 -11 101 23 81 -10 61 -8 68 32 38 -2 22 32 9 -33 57 -9 1437 -11
Source: H A Stark, ed, Wards Automotive Handbook, (Detroit: Wards Communications, 1988) as produced in T E Graedel and B R Allenby, Industrial Ecology , (Englewood Cliffs: Prentice Hall, 1995).
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ALCOA
flagship first introduced to North America in the fall of 1996. As a result of using aluminum, the Audi A8s frame is 40 percent lighter than traditional steel frames. In creating the A8, the paradigm stating that the only way to get safer was to get heavier was broken. Instead, using the ASF technology, Audi achieved significant weight savings over competitive models while delivering abundant room and unsurpassed amenities in an elegant automobile that performs like a sports sedan. Safety was not compromised - the A8 recently achieved the 5-star government safety rating. Aluminum is finding increasing uses in traditional automobiles, as shown in Table 2. A totally different aspect of Alcoas approach to collaboration on natural resource issues is illustrated by recently announced plans to provide drinking water to San Antonio, Texas. At present, this city of over one million people relies entirely on ground water from the sensitive Edwards aquifer. Repeated efforts to build a major surface water reservoir have been defeated in bond elections. Alcoa operates a large aluminum smelter and, as a source of electrical power, a lignite mine about 120 miles northeast of San Antonio. Alcoa pumps about 30,000 acre-feet a year to keep its coal mine dry. This water - drawn from the CarrizoWilcox aquifer - is of good quality, and is currently released into the Brazos River. Under Texas law, ground water is not regulated and can be used by the landowners as they see fit. Alcoa plans to redirect the pumped water to a pipeline that the city of San Antonio will build. There is also a plan to develop a new lignite mine, with water pumped from this facility also sold to San Antonio. The two projects combined would provide about 40 percent of San Antonios current water requirements. Alcoa would realize over US$1 million a year in water charges and management fees. The plan is certain to be controversial, and may require Alcoa to accept management of its ground water by a newly-formed management district composed of water users and suppliers. gressively focusing on their customers. Other changes seem to help with the bottom line, such as globalization and de-centralization. Alcoa has moved aggressively in both directions over the course of the last decade. The company has also embraced the goals of prudent environmental management and sustainable development, and found that business improved by pursuing these objectives. Alcoa leaders have evidence that business units with sound environmental and health performance will also perform well financially. Three indicators - environmental excellence, high standards of worker safety and financial profitability - are positively related. Alcoa believes that corporate sustainability and sustainable development are compatible concepts. Company survival in the 21st century will depend on maintaining this approach and further reducing energy consumption and environmental impacts. Alcoa is committed to linking globalization to sustainable development. This strategy broadens Alcoas environmental leadership, a strategy developed over the course of several decades. The company took the lead in technologies such as dry scrubbers for fluoride emissions, bauxite residue management systems and mine rehabilitation. It now embraces a pro-active policy on climate change and energy efficiency. Alcoa recently announced that chairman ONeill, on his retirement in 2001 (he retires as CEO in May 1999, but remains as chairman of the board until the end of 2000), will be succeeded in this position by the former president of Alcoas Brazilian subsidiary. This is an important step towards making Alcoa into a truly international company. The systems in place - in particular the innovative review process - suggest that the commitment to energy efficiency, environmental excellence and community and worker safety will continue and ensure the sustainability of Alcoas operations throughout the world.
Conclusion
During times of rapid change, companies differ greatly in their effectiveness and speed in identifying and transforming information of strategic importance into business plans and operations. Research has shown that corporations can maintain profits by ag-
Endnotes
Five valuesintegrity, reliability, safety and health, quality of work, treatment of people and accountability were adopted without controversy. A sixth value, profitability was also included although ONeill argued that it was not appropriate.
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ENRON CORPORATION
by Sunil Tankha Houston Advanced Research Center Center for Global Studies
wentieth Century economic development has been based upon oil and other fossil fuels. The modern oil industry - which began with the drilling of a single well in Titusville, Pennsylvania in 1868 - is today a huge industry that powers a major part of the global economy. Oil companies are now among the largest firms in the world. For example, Exxon Corporation, the worlds largest oil company, has annual revenues that exceed the GNP of many smaller countries. Indeed, of the 20 largest corporations listed in Fortune 500 magazine, seven are oil companies. The enormous and increasing global appetite for energy has driven the fossil fuel industries growth. In the 1860s, global energy consumption was only 6 million barrels-of-oil-equivalent per day (boe/d). Over the next 100 years, global energy consumption grew by a factor of eight, to 40 million boe/d. Today, global energy consumption is over 200 million boe/d and is expected to reach 400 million boe/d by 2020. Growth in global energy demand is inevitable, given increasing population and expanding economies in the developing world. Because fossil or carbon-based fuels dominate energy supplies, serious environmental impacts accompany this rapid increase in energy consumption. Environmental problems created by energy consumption have a longdocumented history. Vehicular pollution - which often created deadly smog in cities like London and Los Angeles - was first noted in the 1950s. The burning of coal with high sulphur content caused extensive ecological damage in countries like China. To a large extent, these impacts were felt only locally, and in developed countries, Clean Air laws mandating mini-
mum air quality standards, cleaner fuels, and cleaner technologies that controlled smog, acid rain, and emissions of sulphur and nitrous oxides managed in part to bring these problems under control. Today, however, the composition and level of global energy consumption is threatening global climate change. This threat has become compelling because of two factors. First, 1995 was the warmest year on record since 18561 and 1991-1995 was the warmest five-year period ever recorded, despite the cooling effects of the Mt Pinatubo eruption in the Philippines. Second, the 1995 Scientific Report of the UN Intergovernmental Panel on Climate Change (IPCC) stated that there was evidence to suggest that human activities were having a discernible influence on the global climate. Although increasing scientific evidence indicates that emissions of greenhouse gases2 are a leading cause of global climate change, opposing camps do not agree on the scientific validity of human-induced climate change and its potential impacts or the costs and benefits of instituting greenhouse gas emissions limitations. If long-term climate change does occur, it is expected to have enormous repercussions on environmental, social and economic systems. Climate change threatens to bring with it changes in local weather patterns, increasing floods and droughts, making hurricanes and typhoons stronger and more destructive and heat waves more deadly. Tropical diseases may migrate northwards. A rise in sea level caused by melting polar ice would flood many island nations and devastate coastal areas. While most agree something ought to be done, there is little agreement on the specifics.
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In an effort to combat the threat of climate change, industrialized nations gathered first in Kyoto, Japan in 1997 and in Buenos Aires, Argentina in 1998 to discuss ways to limit the growth in greenhouse gas emissions. Despite uncertainty about the economic costs of making emissions cuts and disagreements over the role and responsibilities of developing countries, a protocol was signed at Kyoto, which legally requires industrialized nations to make specific cuts in their greenhouse gas emissions. Energy companies would be greatly affected by any proposed emissions restrictions requirements. Historically, the energy industry has regularly lobbied against energy taxes or measures to control the consumption of fossil fuels. Before, during and after the Kyoto and Buenos Aires Climate Change summits, the energy industry clearly divided itself into two camps. In the first camp, oil giants such as Exxon, Mobil and Texaco joined with the automobile industry to counter any efforts towards establishing a regime of emissions cuts. These corporations spent over US$20 million funding organizations such as the Global Climate Coalition (GCC) and the Global Climate Information Project (GCIP), to mount massive media campaigns to discredit the science behind climate change, to emphasize that massive economic problems would be created if emissions cuts were mandated, and to fiercely lobby US delegates not to sign the Kyoto protocol. Not all energy companies adopted an automatic reaction against climate change negotiations. Some companies - such as Enron, Shell and British Petroleum (BP) - accepted that the evidence for climate change was strong enough to warrant action and staked out a position and policy of no regrets. Instead of locking themselves into an only fossil fuels mentality, these companies acknowledge the possibility of an energy future vastly more diverse than the current one, with renewable resources such as wind and solar providing an increasing percentage of total energy requirements. While the other major energy firms divested themselves of research in alternative energy sources, these firms have increased their stakes in the search and delivery of clean energy. This case study profiles the Enron Corporation to find out more about the strategic outlook of firms that have accepted renewable energy as a viable option traditional sources. The key question this case study asks is why did Enron pursue investment in renewable energy sources when most of the large energy companies decided to cut investment in renewable energy research programs? Being primarily a natural gas company, Enron differs considerably from the oil majors. Indeed, the company actually stands to gain competitive advantage from climate change concerns because natural gas - the cleanest burning fossil fuel will be favoured in a post-Kyoto energy policy. In spite of this advantage, Enron has chosen to invest considerable sums into the development and marketing of renewable energy sources. The company presents a rather unique and interesting case whereby it adopts a competitive, rather than reactionary, position on environmental and sustainable development issues.
Enron: Beyond Molecules and Electrons

With US$30 billion in assets and over 16,000 employees, Enron is the largest wholesaler of electricity, the top producer of solar cells and wind turbines, the biggest purchaser and marketer of natural gas, and one of the leading gas exploration and transmission companies in the US. Its revenues exceeded US$13 billion and profits totalled almost US$600 million in 1996. The company ships almost 10 billion cubic feet of natural gas per day. Enron is one of the largest independent developers of electricity in the world and among the leaders in arranging new capital for the energy industry. Enron Global Power & Pipelines, LLC, a subsidiary, owns and manages power plants and natural gas pipelines around the world. Its gas-related energy projects are scattered all over the globe in countries such as Argentina, Colombia, India and Turkey. Enron has shown itself to be a company that thrives on change and new market potentials. In the fiercely competitive natural gas market, Enron has record of success spanning over a decade. In the 1970s and 1980s when the pipeline industry was re-regulated to create more competition through open access systems, most companies reacted negatively. Enron, however, thrived in the competitive atmosphere and though it too lost profits in the industry-wide slump, the company recovered much faster than the rest. By 1996, Enron had captured more than 20 percent of the US wholesale market for electricity, earning revenues of over US$1 billion. Enrons goals are now to capture
24 PB

ten percent of the US$200 billion retail power market over the next five- to ten years and become the largest power retailer of power in the country. A company that embraces change, Enron is anticipating the deregulation of the electric power industry in the US. According to Enron CEO Kenneth Lay, the difference between a free market and a monopoly will finally mean innovation. Lay has pushed Enron into becoming a gas marketing company that is focused globally and envisages expanding further to exploit the even bigger potential offered by a free market electricity industry. To position itself as a strong contender in a post-deregulation market, Enron has begun investing millions of dollars in people and technology. Lay says that Enron is in the process of transforming the whole energy business as they try to develop products and services that really pinpoint energy problems and provide solutions: We dont just want to sell our customers molecules of gas or electrons of electricity; we want to help them look at the total energy needs of their companies, establishments, or homes, states Lay.
Transportation and Distribution

The Transportation and Distribution business of Enron comprises North American natural gas transportation systems and electricity transmission and distribution operations in Oregon. Enrons strategy for these businesses is to continue offering low-cost service, maintaining safety and reliability, and making new investments to serve growing markets.
Wholesale Energy Operations and Services

Enrons wholesale energy group operates globally, in North America, Europe and in developing energy markets in emerging economies. Enron has succeeded by focusing on its core competencies in developing, constructing and operating energy-related infrastructure worldwide; marketing gas, electricity and other energy commodities; providing risk management for commodity prices and delivery services; and offering financial products and services to its customers. Enron combines commodity market expertise with its vast physical delivery network and its substantial investments in risk-mitigating systems and processes. Wholesale energy operations have been very successful and have resulted in a large earnings base for Enron, one that grew significantly in 1997. This division is expected to continue to be a large and consistent contributor to Enrons future earnings.
Operational Units of Enron Corporation

The Enron Corporations operations can be divided into four major areas:
Exploration and Production Retail Energy Services

Enron Oil & Gas Company (EO&G) is one of the largest independent non-integrated exploration and production companies in the US. In North America, EO&G has a geographically diverse drilling and development program, extending into South Texas, the Rocky Mountains, West Texas and New Mexico, the mid-continent, California and the onshore Gulf Coast areas, as well as in Canada and offshore in the Gulf of Mexico. With a long and successful operating history in North America, EO&G is now experiencing significant international growth. Driven by a strategy of low-cost, fast-track, high-technology exploration and production, EO&G has developed a focused international portfolio. Internationally, EO&G has invested significant resources in entering the Indian market, which has a vast untapped demand for competitively priced natural gas. Retail Energy Services is a new business for Enron through it Enron aims to capitalize on the changes resulting from the deregulation of natural gas, electricity and related markets. Deregulation is allowing companies like Enron, for the first time, to offer commodities and services to end-users. Enron is transferring its expertise in providing commodity and related services to customers, and using its support systems to position itself at the forefront of new markets. This expertise is backed by substantial investments that are already resulting in significant new business. Of the total US$300 billion retail natural gas and electricity market, Enron is primarily interested in the estimated US$80 billion commodity and US$40 billion services markets for commercial and light industrial customers. The company is successfully adapting its first
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mover advantage by leveraging its strong wholesale risk management, physical and financial positions and customer relationships, to compete for a substantial market share. tional energy sources as shown in Table 1. In addition, renewables can mitigate a variety of long-range environmental problems related to atmospheric emissions and waste management. Renewables are clean and their increased use assists in reducing acid rain and other pollutants. More importantly, the use of renewables reduces global emissions of greenhouse gases, thereby mitigating the impacts of global warming. Today, many companies are constructing scenarios to investigate the role of renewables in the energy mix of the future. Potentially, renewables could contribute one-third to one-half of global energy by 2025. An optimistic Shell forecast indicates that half of the worlds energy demands could be fed by renewable energy sources not linked to coal, oil or gas. Fossil fuel use will continue to grow but not as rapidly, and the demand for renewables is expected to increase significantly.
The Pursuit of Renewables

Interest in renewable energy sources arose strongly in the 1970s. Driven by oil price shocks, long lines at gas stations and fears of an impending exhaustion of fossil fuel reserves, the idea of renewable energy sources such as solar and wind power were enthusiastically embraced and researched to provide energy security for the future. Programs were initiated in the US that set ambitious targets such as having renewables account for 20 percent of total energy supply by the year 2000. Oil companies began to dub themselves energy companies and dabbled extensively in alternative fuels. Companies like Arco, Exxon, Mobil and Shell invested heavily in photovoltaic cell research. However, as the oil markets stabilized and oil prices fell instead of rising, interest in alternative energy sources declined and many of the potential markets for renewables quickly disappeared. Most R&D programs were scaled down in the 1980s. In 1993, Mobil was the last American company except Amoco to sell off its solar operations. In the 1990s, interest in renewables experienced a resurgence. Because of broader sustainability concerns - especially climate change - it has become imperative to find cleaner energy sources and because of technical advances, renewables are competing conven-
Buying into Renewables

Renewable energy sources fall into six categories: solar, wind, geothermal, biomass, ocean and small hydro. Enron identifies four major drivers influencing its move into renewable energy: the need to satisfy increased global energy demand; concerns about carbon emissions and greenhouse gases; the value of using indigenous, no-cost energy sources; the decreasing cost of renewable energy technology. Enrons overall strategy has been to leverage its core competency in marketing and service provision in natural gas and electric power to deliver a full range of electric services, including green energy. In seeking to invest in renewables, Enron was not looking to develop expertise in new technologies, but rather to acquire the best available technologies that could benefit from Enrons service experience. The technologies Enron targeted had to be well-developed and ready to hit the market. After an extensive survey, in which other technologies such as fuel cells were investigated then rejected as they were not sufficiently developed, Enron decided upon wind and solar energy as its pri-
Table 1. Cost of electric power generation in the US: 1985, 1994, 20003
Technology 1985 1994 2000
1993 cents per kilowatt-hour
Natural Gas Coal Wind Solar Thermal Nuclear
10-13 8-10 10-13 13-26 10-21
4-5 5-6 5-7 8-10 10-21
3-4 4-5 4-5 5-6 -
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mary entry points into renewable energy. To establish its presence in the renewable energy market, Enron Corporation formed the Enron Renewable Energy Corporation in which it holds a 78.33 percent controlling interest. In addition to wind and solar, which are profiled in this case study, Enron is also developing hydropower and geothermal power as part of its green energy portfolio. tries such as the Netherlands, Germany, the UK, Italy and India, have initiated national programs for the development and commercial introduction of wind energy, but most of these are in preliminary stages. In the US, after the preferential treatment to the wind power industry was halted in the late 1980s, the industry has become very competitive and there are now considerable barriers to the entry of new firms. The failure of some of the strongest firms in the industry - such as Kenetech Corp - has led to a great deal of consolidation. Today, the field is mostly restricted to large corporations with deep pockets and staying power. It was in this highly competitive environment that Enron Renewable Energy Corporation (EREC) acquired the Zond Corporation in January 1997 and renamed it the Enron Wind Corporation. In addition to Zond, Enron Wind also acquired a controlling stake in a leading German wind turbine manufacturer, Tacke Windenergie. Figure 1 illustrates the organizational structure of Enron Wind Corporation. Zond Corporation was originally formed in 1980 and over the years has become the largest US manufacturer and developer of wind energy. Since 1981, the company has developed and constructed projects comprising of 3,400 wind turbines of over 700 MW capacity. Zond has developed 300 MW in 1997, and
Wind Energy
Wind energy, in common with other renewable sources, is broadly available, but diffuse. The ultimate potential of wind energy as a long-term power source is estimated to be approximately twice the present global electricity consumption. Indeed, before the industrial revolution, wind energy was used as a source of power. Today, in response to environmental problems and the threat of global climate change associated with the use of conventional fossil fuel sources, there is renewed interest in wind energy. Since 1975, when interest in wind energy was high following the oil crisis, tremendous progress has been made in the development of wind turbines for electricity production. Around 1980, the first modern grid-connected wind turbines were installed. The first multi-megawatt market was created in California through the Public Utility Regulatory Policy Act (PURPA). At the end of 1990, about 2,000 MW of wind power for grid-connected elecFigure 1. tricity production were in operation worldOrganizational structure of Enron Wind Corporation wide. Most of this production occurred in the US (California) and in Denmark. Minority Shareholders Enron Corp. The cost of energy production by wind tur21.67% 78.33% bines has decreased considerably over the last Enron Renewable decade, due largely to technological innovaEnergy Corp. tion, which has resulted in an approximate 90 Enron Wind Corp. percent drop in wind power costs over the last Tehachapi, CA 15 years. Turbine blades of glass reinforced plastic or wood epoxy can now be made as long as 131 feet, versus 43 feet in the 1980s. In Manufacturing Project Development the 1980s, the average wind turbine produced 50 kW. Today, it produces eight times that outZond Energy Systems, Inc. Enron Wind Corp. put for three times the cost. Soon, turbines Tehachapi, CA Tehachapi, CA averaging 500- to 750 MW will become common. These wind turbines are also more effiTackle Windenergie GmBH Enron Wind Overseas Dev. Ltd. Salzbergen, Germany Tehachapi, CA cient and reliable than they were 15 years ago. A widespread global introduction of wind turSource: www.zond.com/profile/structure.html bines has not yet been begun, although coun-
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expects to deliver 300-350 MW in 1998, which would put it in the top three manufacturers worldwide. As part of Enron Wind Corporation, the company now employs 550 people in 11 offices. Enron Wind is active globally, developing projects in 18 different countries on five continents. With over 18 years of experience, outstanding technology and now - with the backing of Enron Corp - substantial financial resources, Enron Wind is poised to become a global market leader in wind energy. Market potential and barriers The wind market was approximately 250 MW in 1991, rose to over 1,000 MW in 1995, is currently 2,000 MW, and expects to reach over 3500 MW by 2002. Enron views wind power as a growth market and has aggressively launched itself into it. In 1997, US utilities contracted nearly 500 MW of new capacity in wind power. Enron Wind Corporation grabbed the major part of these contracts, submitting winning bids for what are now the worlds three largest wind power projects: 100 and 107 MW contracts with Northern States Power Co (Minneapolis), and a 112.5 MW deal with Des Moines-based Mid-America Energy Company. Although wind energy has the potential to contribute significantly to future electricity supply, its market involvement has been limited because of technical, economic and institutional constraints. While wind turbines demonstrate impressive technological improvments, they are still not as reliable over the long-term as conventional energy sources. The cost of energy produced by wind power remains higher than conventional sources, particularly given the fall in oil prices. An important institutional constraint is the integration of wind power into the electricity production system. At a low level of penetration, the integration of intermittent sources4 such as wind energy is not really a major concern. At higher penetration levels, it is necessary to re-optimize the electricity production of the total system to provide sufficient power when wind energy generation falls. Another major institutional constraint concerns the financing of wind turbine projects. An expansion of wind turbine capacity requires a lot of capital, since almost all the generating costs are based on up-front investment. This means, especially in developing countries, it might be more difficult to realize wind energy projects because of a lack of funding. However, the emergence of a green energy market and market deregulation in energy retailing means increasing opportunities for wind power. These two factors will be more important than technical advances in promoting renewable energy. According to Kenneth Karas, CEO of Enron Wind Corporation, success in the marketplace will increasingly be based upon nontechnological factors, such as: the ability to access customers directly the ability to enhance or overcome intermittent nature of wind power through firming, futures contracts, options, etc. the ability to initiate or assist in product development the ability to assist in project financing
Solar Energy
Solar energy results from the continuous nuclear fusion in the sun that is irradiated onto the earths surface. Although the total solar energy resource is over 10,000 times the current energy use, its low power density and its geographical and time variation represent major challenges that currently limit its contribution to the total energy mix. The photovoltaic system - the most promising system to exploit solar energy - is one of five types of solar energy capturing systems. The other systems are: Solar Thermal Systems which are low-temperature thermal collectors that tap solar energy for thermal use; Solar Architecture which makes the building structure itself a solar energy collection, distribution and storage system able to provide thermal comfort and daylighting for the occupants; Solar Thermal-electric Systems which are thermal collectors that tap solar energy for electricity generation through a thermodynamic system; Thermochemical and Photochemical Systems which tap solar energy to induce chemical reactions either to improve the quality of existing products or for the synthesis of new ones. Photovoltaic (PV) systems transform light directly into electricity. They consist of flat crystals made of
28 PB

thin layers of semiconductor material with different electronic properties resulting in strong built-in electric fields. When light enters the crystal, these fields separate photo-generated electrons and an electric potential develops between the top and bottom faces of the cell. This results in a direct current if the circuit is completed. The status of solar commercial markets is determined by several factors - the most important of these is the relative availability and cost of the conventional energy options. PV systems were originally developed for space applications. Currently, with the low conventional energy prices and projections of only moderate increases, the payback for solar systems is much longer and the potential markets much more difficult to access. However, solar power becomes an attractive option when the external environmental effects of the energy mix are considered. The main advantages of PV systems are that they are less affected by economies of scale and have low maintenance requirements. Solar energy is, therefore, a viable option where there is a need for stand-alone electric power such as in remote locations - emergency call boxes on highways, isolated villages in developing countries, etc. In these cases, the cost of conventional electric supply, either through grid extension or by diesel generator sets, is very high. Solar systems have not yet achieved cost-effectiveness for grid-connected electric power, not even in the peaking power markets that allow for higher energy costs. The PV systems that have been built required either research and development (R&D) funding support or government incentives to overcome the high capital cost. The recent rapid growth in grid-connected PV systems is a result of policy decisions in Japan, Germany and the US, that have led to incentives which reduce the cost of grid-connected systems. Because of these incentives, grid-connected solar power has become the fastest developing sector of the PV market, growing at the rate of about 35 percent in 1997, which is significantly higher than the historic average of about 15 percent over the last few years. As in the case of wind power, Enron has sought to establish a presence in the solar energy market by acquiring an interest in a technologically advanced operation that stood to benefit from Enrons expertise and experience in customer service. In January 1995, Enron teamed up with Amoco Oil to form Amoco/ Enron Solar, a 50:50 partnership. The goals of the partnership were to expand business, construct a large area tandem amorphous silicon PV plant, and develop solar powered electric generation facilities. This partnership established Enrons interest in Solarex, one of the pioneering companies in solar energy technology commercialization. Formed in 1973, Solarex is now the largest US and the second largest world manufacturer of PV modules and cells. Amoco began to invest in Solarex in the late 1970s, and acquired it completely in 1983. In January 1998, Solarex was consolidated into the Houston-based Amoco/ Enron Solar Power Development (AESPD) Corporation. By combining the resources of both organizations, Amoco/Enron Solars board hopes the consolidation will better serve customers and aggressively grow the solar electric business for rooftop systems and remote applications in developing countries. Solarex now employs over 550 people in its international manufacturing facilities and sales offices and markets its products through an international network of authorized distributors located in over 55 countries. Solarex has 25 years of experience in photovoltaic products. In 1979, Solarex was first to commercialize semicrystalline cells and developed a low-cost silicon ingot casting process. Four years later, Solarex purchased the RCA amorphous silicon, or thin film, technology and established a pilot plant in Newtown, Pennsylvania. Solarex consolidated its manufacturing line in 1986, creating the worlds first PV powered manufacturing plant with the lowest operating cost in the industry. With an annual production of 10 MW (200,000 modules), Solarexs newest manufacturing facility, TF1 is the largest fully integrated amorphous silicon thin film manufacturing plant in the world. With the initiation of TF1, Solarex became the first manufacturer to successfully commercialize two PV technologies. Solarexs polycrystalline modules feature high power output and are used for large energy consuming applications such as telecommunications, lighting, water pumping, and utility grid tie-ins. Solarex introduced its new Millennia modules in mid-1997. These modules, which accommodate a variety of applications such as large scale utility projects, residential and commercial roof top installations, and water pumping applications, offer a cost-effective alternative to the polycrystalline solar cells.
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ENRON CORPORATION
Solarex manufactures and markets its PV modules and components internationally. Its PV technologies were developed to serve the growing demand for photovoltaics in both traditional markets (remote habitation, water pumping, telecommunications and instrumentation) and emerging markets (residential roof tops and utility tie-ins). Solarex has been making enormous strides in recent years in promoting the wider acceptance of PV systems. Some of the highlights are: In 1996, Amoco/Enron Solar announced the signing of a 25-year power purchase agreement with the Rajasthan State Electricity Board in India for the sale of up to 50 MW of electricity from a photovoltaic power plant to be constructed in the Thar desert near Jaisalmer, Rajasthan. Amoco/Enron Solar is currently pursuing financing for the project, which will be the largest photovoltaic power plant in the world. In 1997, Solarex was chosen to supply solar cells for what will be the worlds largest solar roof, in a state-of-the-art training facility in Herne, Germany. The roof will consist of over 500 kW of Solarexs MEGA cells fabricated into glass solar modules. The cells will be laminated between sheets of glass with spaces between individual cells that will be partially transparent, thus allowing sunlight into the building and reducing the buildings energy requirements. The array will replace conventional roof materials and will offset the buildings energy consumption. In June 1997, Solarex announced a new Virginiabased program designed to expand and accelerate the use of the new Millennia thin film modules. To administer and execute the program, Solarex formed a joint venture with Virginia Power, the Virginia Center for Innovative Technology and the Virginia Department of Mines, Minerals, and Energy. Dubbed the Virginia Alliance for Solar Electricity, or VASE, this program will develop and deploy low-cost, standardized solar electric systems using the Millennia modules in non-residential systems for rooftop, building integrated, and micro-grid applications. VASE is funded with US$8.4 million of public and private funds. Federal cost share funding - which reduces the cost by approximately 30 percent - is provided by the US Department of Energy Commercialization Ventures Program. Economic and environmental benefits include material cost savings, federal tax incentives, accelerated depreciation, and an environmentallyfriendly source for reliable electricity. The success of VASE resulted in the concepts expansion into Maryland, Delaware, North Carolina, Pennsylvania, Washington DC and New Jersey, where the proposals have been extended to include residential systems. In October 1998, Solarex received the prestigious Jump Start award from consulting agency Deloitte & Touche. Jump Start awards are bestowed on companies that have demonstrated and achieved extraordinary growth in the technology field. Solarexs growth was based on expanding manufacturing capacity, increasing sales in domestic and international markets, and keeping costs on track during its expansion process. Market potential and barriers Currently, with over US$850 million in sales, American manufacturers remain the global leaders in photovoltaic systems. Some of the major international players include Siemens Solar of Germany which bought ARCO solar and is currently the worlds largest solar PV producer, and BP which bought Advanced Photovoltaic Systems and made it a part of BP Solar. Sanyo and Sumitomo of Japan control a third major competitor, Solec International. Short-term demand for solar cells is up, based on US and international government incentives programs. The US Federal government recently simplified its process for buying and installing solar cells on its own buildings. The US Government is also considering labelling solar products to promote their use. At the state level, California intends to award US$54 million in subsidies to users of solar and other forms of renewable energy, and Arizona will require that at least one percent of its new electrical generation come from solar energy. Innovations such as United Solar Systems solar cell incorporated into a roofing shingle promise further market penetration. The resulting growth represents the greatest market development since 1983. However, the Asian economic slowdown, in relation to the PV market, is complicating the market forecast for the industry. Growth figures for 1998 should average around ten percent
30 PB

due to market and economic softening in Germany, India, and other Asian countries. However, Japan which has become the largest PV market - is expanding its rooftop program even while facing significant economic growth problems. The capital cost of solar systems is a major problem in their widespread diffusion and adoption. Solar systems require high initial investment but their annual operating costs are relatively low, compared to conventional systems. Because lifecycle costs are rarely applied, especially in developing countries, the development of new markets is curtailed. In addition, in developed countries, the utility power grid is already extensive and output very inexpensive. The cost of solar electricity needs to fall to US$0.01 to US$0.015 cents a peak watt to compete with traditional power sources in the US, unless solar energy gets tax credits for not polluting or is adopted by utilities to patch weak spots in their distribution and thereby avoid erecting costly new power lines. For the next few years, solar cells will probably be too expensive to compete directly with electricity from the power grid in developed countries. The market in developing countries is much more attractive. Even at current prices, solar cells are a viable alternative in rural areas of the developing world and in Eastern Europe. which sees environmental concerns and the ongoing process of deregulation in the electricity industry as an opportunity to offer customized energy services. Already there are over ten green power retailers in California and over 30 different green energy programs in 15 states. The drive for sustainability is certainly the single most important factor motivating companies to invest in renewable energy. Environmental concerns impact on energy use in many other ways. Increased constraints on various urban pollutant emissions, the disposal of waste, the laying of pipelines and transmission lines, and the generally increased stringency of environmental impact assessments are all affecting the conventional energy industries in ways that tend to improve the support and prospects for renewable energy systems. Growth in the renewables market is also being driven by emerging economies. In many developing countries, sizeable population increases, increased income levels and the lack of a pre-existing conventional electricity grid powered by conventional fuels, combine to create substantial investment opportunities in renewables. In these areas, renewables are wellsuited to distributed applications, providing the opportunity to enhance economic growth in the rural areas and reduce the pressure of migration to the already overcrowded major cities. In addition, many renewable technologies are modular, which is beneficial for mass production of standard sizes/models, and contributes to a relatively short planning and implementation cycle. One of the driving forces behind the expanding interest in renewable energy is the progressive liberalization of energy markets, through the removal of energy subsidies for example. More importantly, by allowing independent companies greater access to energy markets, liberalization greatly increases the scope for new technologies and for smaller, entrepreneurial industries to enter established energy markets by harnessing and profiting from innovations in renewables. Finally, in many places, where government support has been given on a large scale, the capacity of the new renewables has risen, but public expenditure constraints and political vacillations have ensured that such circumstances remain limited. At present, there are considerable barriers to the broadscale acceptance of renewables. The main ob-
Powering Sustainability Through Renewables: Market, Regulations and the Environment

Incentives and Barriers to the Development of Renewables
The cost of conventional energy was high in the 1970s and as a result, there was a widespread belief that nonrenewable forms of energy would be depleted in the near future, causing many energy companies began to invest heavily in research and development of alternative fuels and technologies. As energy prices stabilized, then fell, oil companies began to divest themselves of their investment in renewables. Today, as the debate over global climate change becomes more intense, most energy companies are defending their position through publicity campaigns attacking greenhouse gas emissions limitations. In spite of this trend, the Green Power market is expanding, driven by pro-active firms such as Enron,
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ENRON CORPORATION
stacle is cost. Despite the technical advances and claims that renewables are fundamentally economic when the external costs of conventional options are considered, renewables are still not cheap when compared with conventional options at market prices. Many of the technologies necessary to make efficient use of the renewables are quite immature and relatively costly. Renewables have a relatively low energy density in their raw form and this leads to high cost to concentrate and capture the energy in useful form. Financiers are therefore wary of the risks involved in new technologies, when more familiar ones are readily available. Even where renewables are marginally economic, the margins have not been big enough to encourage risk taking. In addition, renewable energy systems typically have higher capital costs than fossil-fuelled systems, since all of the fuel equivalent over the useful lifetime is purchased at the beginning of system life. Emphasis on lifecycle costs and reduction of the risks of high capital investments will therefore be necessary for the success of renewables. Finally, one of the greatest practical barriers to rapid introduction of new renewable forms of energy is the existing level of investment/infrastructure in traditional fossil fuels. Energy is a huge industry with long lead times. To displace conventional energy suppliers, renewable energies will have to be developed over decades which will involve the redirection of vast amounts of investment funds. Primarily a natural gas company, Enron has not come under close public scrutiny or regulatory review like the oil majors. Nonetheless, Enron has responded to internal and external drivers for sustainable development and has developed a pro-active environmental strategy. As far as the environment is concerned, Enron refuses to be caught in a duel over the issue. On the issue of climate change, for example, according to senior management at Enron, the science is good enough to start taking positive steps towards mitigating potential climate-affecting factors, though not through catastrophic methods but market-based solutions. In their view, the first steps towards mitigating the potential for climate change will be based on emissions reductions through energy efficiency and alteration of the fuel energy mix. Many of these first steps will consist of harvesting low hanging fruit, which will not be too costly and are sound decisions given their focus on efficiency, cost reduction and conservation. Indeed, Enron management reasons that by 2008, even if there is still no agreement on climate change, efficiency gains alone will provide an adequate payback on their investment. The following sections briefly illustrate Enrons response to select internal and external drivers for sustainable development.
External DriversRegulatory
Enron has taken a stand that its environmental strategies will not be solely based on the regulatory environment. Enron management believes there is always going to be a system of compliance and regulations, and that their goal is not to resist upward ratcheting of environmental standards but to engage policymakers in developing an efficient regulatory system that promotes economically sound, market-based solutions to environmental issues. For example, Enron has created business opportunity through the US Environmental Protection Agency pollution permit credits program. Today, Enron is the largest market creator with sulphur dioxide permits and is ready to create similar markets in the US and abroad with nitrogen oxide and carbon dioxide permits. While regulations are not a push driver of Enrons environmental program, the regulatory environment can create the conditions that promote sound environmental management, creating, for example, new opportunities for renewable energy supplies. CEO
The Environment and Enron

Environmental pressures are acutely felt by the energy industry, but natural gas companies are at a relative advantage. Legislation has now been passed -in both Europe and the US - requiring substantial reduction in sulphur emissions from large sources, especially coal-based power stations. Related legislation has been developed on the production of nitrous oxides - precursors to nitric acid and urban smog - which are generated to varying degrees by all combustion systems. As one of the cleanest fossil fuels available, natural gas is well-positioned for the future and has become increasingly more popular. Natural gas demand has been rising steadily, from 66 trillion cubic feet (tcf) in1987, to 82 tcf in 1996. Enron estimates that by 2005, natural gas demand will exceed 100 tcf per annum.
32 PB

Kenneth Lay expects that the ongoing restructuring and deregulation of the electric and natural gas markets will result in the emergence of new energy majors, a category of megacompanies in which the generation, transmission, and distribution assets of the old industry are being reconfigured with the knowledge based assets of the new industry to create energy solutions for an increasingly sophisticated marketplace. With resulting differentiation in product whether the energy supply is firm or interruptible, or whether it is peak or off-peak green energy - may be distinguished from standard supplies and may compete successfully in the marketplace, even with higher costs. well-diffused throughout the companys ranks.
Conclusions
The main questions of the HARC Corporate Strategy and Environmental Decision Making Workshop are: why do some companies approach environmental and social challenges as a business opportunity; and what incentives drive these corporations to identify those opportunities and develop programs that capitalize on them? In the case of Enron Corporation, the key question in meeting the objectives of the workshop is why did Enron pursue investments in renewable energy sources when most large energy companies have eschewed them. The fact that Enron has made pro-active moves towards sustainability although, as a natural gas company, it already stands to gain substantially from global climate change concerns and has not come under the close public and regulatory scrutiny of other oil majors, is very useful in developing an understanding of corporate strategy in the context of sustainable development. The key to understanding Enrons moves towards sustainability lies in the fact that Enron has established itself as an innovative company that thrives on change in competitive and regulatory environments. In strategic visioning literature, exploiting critical discontinuities, i.e., breaks from established trends, is described as one of the most potent means of durably enhancing and maintaining a companys competitive advantage. The energy conundrum created by global climate change issues represents just such a discontinuity, one that can be exploited for competitive gain. In the case of Enron and the future of energy supplies and mixes, it appears that two of the critical questions that Enron needs to answer to position itself favourably with respect to this discontinuity are: What new types of customer benefits should we, as a company, seek to provide in the future - five, ten, or 15 years from now? What new competencies will be required to offer these benefits? In developing its strategic outlook, Enron sees increased environmental awareness as a growth opportunity that builds on its strengths. The company, there-
External DriversPublic Relations

Having an environmentally responsible image carries considerable value in terms of public image. An important factor motivating energy companies to comply with environmental regulations is that they expect new concessions to operate. The potential for expansion of an energy company therefore depends on gaining the trust of governments, and by extension, of the public. Internationally, Enron - which is negotiating on many energy projects with governments in developing countries - benefits tremendously from having a good corporate image that shows it to be responsible and pro-active in the face of tough environmental challenges such as global warming. But, as far as the bottom-line is concerned, Enron insists that public relations values do not come into play when calculating the worth of a business unit and deciding whether to invest in it. For Enron to continue investment and research, the business must generate revenue or demonstrate a strong potential for generating revenue and profit.
Internal DriversEmployees and Management

Leadership is definitely a key ingredient in Enrons approach to environmental management and sustainable development. Having moulded Enron into an agile company that anticipates and takes advantage of changes in the competitive and regulatory environments, CEO Ken Lay has set the basis for a pro-active strategy towards sustainable development drivers. In addition to its competitive outlook, Enron management claims that the environmental ethic and a desire to find solutions to environmental problems are
33
ENRON CORPORATION
fore, appears to have made a strategic decision to pursue renewables as a strong market driver in the 21st century. Having identified the need to provide energy based on green or renewable sources - which also is consistent with Enrons stated strategy of being able to offer a complete range of energy products and services - Enron then identified the technologies and partners required. Rather than develop in-house the required technical competencies, Enron decided to acquire and/or partner with existing centers of technological strength that would most benefit from Enrons core competencies in customer service and management. These symbiotic partnerships allowed each party to focus its own strengths and knowledge/ skill resources. The renewables companies benefited from access to Enrons market and financial resources, while Enron acquired the technologies and resources required for providing customers with a green energy option. Instead of focusing on short-term profitability, Enron has set a new standard for the energy industry by pursuing the development of sustainable energy sources for the next millennium. While renewables are not expected to radically displace more conventional energy forms in the foreseeable future, Enrons activity in this sector does provide valuable lessons for integrating sustainable development with corporate strategy. Not surprisingly, Enron was recently recognized by Fortune magazine as the most innovative companies in its Fortune 500 listing.
Endnotes
1
Data released recently indicates that 1998 is now the hottest year on record. 2 Greenhouse gases, such as carbon dioxide, are released when fossil fuels are burned. As they increase their concentration in the earths atmosphere, they trap heat reflected off the earths surface, thereby creating a greenhouse effect. 3 These prices are averages that may be affected by factors such as whether they are part of a renewable-conventional energy supply system, grid connected, or stand-alone. 4 The production of wind energy is not constant, but fluctuates according to time of day, climate, season, and weather conditions.
34 PB
FORD MOTOR COMPANY

by Michelle Michot Foss, Eduardo Gonzalez and Haluk Noyen Energy Institute, University of Houston College of Business Administration
f all the industries on the front line in the struggle between corporate objectives and environmental activism, the automotive industry is perhaps the most visible. It is at the tailpipe, where pressures for high environmental standards come head-to-head with corporate financial performance, shareholder expectations and consumer behavior. In the US, the private automobile is an unassailable icon of personal freedom and individual preference, placing this consumer object and the industry that produces it at the heart of the debate between private preferences and what is perceived to be good for society. The majority of consumers tend to make the same trade-offs, given how the marketplace is structured. People drive more when auto fuel is cheap, less when it is expensive. People value clean air, but perhaps on par with mobility and convenience. They want, and would use, cars, trucks vans and sport utility vehicles that are less polluting and more energy conserving, but not if they lose too much in performance or must pay too much of a premium in price. And they want the industry the manufacturers and all of their suppliers to operate their facilities with as little environmental impact as possible, so long as motorists can get strong returns on investment and superior value creation as shareholders. Are these preferences inconsistent and incompatible? Through much of the history of private automotive transportation in America, more than in any other country, this seems to be the case. The US freeway system, largest in the world, gets commuters from urban center to urban center, with the only constraint being ones tolerance to confinement. Economic growth and productivity owes much to the relative ease with which capital and labor can move
throughout the US (and North America). North Americans embraced automotive travel to such an extent that mass transportation serves relatively little of the urban population, but with many trade-offs. Traffic congestion has increased substantially and urban air quality has worsened. Even the urban landscape is a result of residents preferences, shifting first from rural populations to urban centers and now to extended suburban satellites and so-called edge cities that blur the distinctions between metropolitan areas. People find themselves increasingly concerned about the impacts of these preferences, but equally reluctant to abandon, literally, the engine of this growth and unique lifestyle. The dilemma as consumers is identical to that of the automotive industry. Indeed, they are one and the same, sharing the same roots. More than any other member of the industry, Ford Motor Company is positioned between twin successes - its huge commitment to its environmental programs and its position as the worlds number one maker and seller of profitable sport utility vehicles (SUVs). In fact, Ford is preparing to launch its Excursion, the 19-ft-long, V-10 engine addition to its SUV product line. Simultaneously, Ford is moving ahead with plans to advertize its SUVs as certified low emission vehicles (LEVs) or better, which are setting the standard for Fords competitors and positioning Ford exceptionally well in the high-profile California market. Ford is also to continue to commercialize its alternative fuel vehicle designs. These successes reflect two realities. First, after roughly three decades of research and development, new engine and vehicle designs that will drastically change the nature of the industry and the products purchased are now enter-
35
FORD MOTOR COMPANY

ing, or are close to entering, the consumer market. Earth Day in 1970 and the surge in world oil prices induced by the 1973 Arab Oil Embargo helped to trigger this era of Research and Development (R&D). The 1990 Clean Air Act Amendments, Californias zero emissions program and the global warming debate helped to preserve it. Auto companies are anxious to generate revenues from their R&D programs and reduce steep expenses incurred to adjust production operations to these new technologies. Second, the dichotomous reality is a return to historically low oil prices. Responding to strong consumer demand stimulated by low fuel costs, automotive companies are providing a larger array of trucks and SUVs. For Ford, SUVs account for nearly 60 percent of total pretax profitability for the corporation,1 a difficult trend for Ford and its shareholders to ignore. Within this context, this case study examines the initiatives Ford has taken to firmly establish environmental priorities throughout its vehicle lines, operations and corporate culture. The focus is on two major areas within the corporation - product development and facilities management - and three major initiatives for the corporation, as shown in Figure 1 below. Fords progress with LEVs and alternative fuel vehicles (AFVs) required innovation across all of the corporations management processes in order to maximize output and efficiency. In particular, Ford implemented a new matrix organization in order to create global platforms that facilitate not only its new LEV and AFV vehicle lines, but also production improvements and innovations in its traditional vehicle lines. The review of Fords management strategies provides a look at how deeply corporations must restructure themselves in order to implement environmental programs. In contrast, the ISO 14001 program encompasses a bottom-up response to top-down corporate leadership, being conceived and carried out by facilities employees who also are responsible for the continuous improvements that allow Fords facilities to meet ISO 14001 requirements. These two major areas of focus - product development and facilities management - are interrelated as Ford carries out the environmental pledge that underlies all initiatives: Ford Motor Company is dedicated to providing ingenious environmental solutions that will position us as a leader in the automotive industry of the 21st century. Our actions will demonstrate that we care about preserving the environment for future generations.2
Company Background and Market Profile

Overall Industry Profile
The US auto industry contributes US$260 billion a year to the US economy, or about four percent of the nations Gross Domestic Product (GDP). The US auto industry is Americas largest manufacturing industry and an engine of economic growth. The US auto industry also is Americas largest manufacturing employer. Chrysler, Ford and General Motors (GM) directly employ nearly 700,000 workers, nine out of every ten direct jobs relating to the production of cars and trucks in the US, with a total payroll of over US$35 billion (the balance of employment is provided by foreign automakers with operations in the US). When suppliers and dealers are included, employment totals 2.3 million employees working in more than 4,000 facilities and 18,000 dealerships in every state in the nation. The US auto industry is a truly high-tech industry, with the industry both driving and adapting technological innovations throughout its products. Thousands of scientists and engineers are employed by the industry to perform over 12 percent of the nations corporate R&D more than pharmaceuticals, electronics and even the computer industries. Together, the three domestic auto manufacturers spent over US$17
Figure 1: Ford areas and initiatives of environmental priorities PRODUCT DEVELOPMENT

Low Emission Vehicles (LEVs) Alternative Fuel Vehicles (AFVs)
FACILITIES MANAGEMENT
ISO 14001 Certification
36 PB

billion worldwide in 1996 on R&D. In the last five years, total investment on R&D approximated US$72 billion. The domestic automakers sold 17.4 million vehicles in the US in 1998. Also in 1998, Chrysler, Ford and GM built six of the ten best-selling cars and all of the top ten best-selling light trucks in the US record. Fords string of performance records in recent years is in stark contrast to its net income losses of US$8.6 billion in 1992, approximately US$3 billion in 1991 and essentially a breakeven year in 1990, as vigorous foreign competition cut into Fords unit sales. In addition to its auto manufacturing and sales businesses, Ford has three other subsidiaries.
Ford Motor Company and its History

Henry Ford established Ford Motor Company in 1903. Today it is the largest manufacturer of trucks and the second largest manufacturer of both cars and trucks. The company operates 111 plants in 38 countries. It has 225,900 employees and 15,800 dealers in over 200 countries. Fords major brands and business units are Ford, Mercury, Lincoln, Aston Martin, Jaguar and Mazda, the last of which Ford owns 33 percent. Ford turned in another strong performance in 1998, selling 6.823 million vehicles worldwide (3.988 million in the US, of which 2.425 million were trucks), with sales revenues of US$144.4 billion and total net income of US$22.1 billion with adjustments (US$5.9 billion in unadjusted earnings from automotive operations and financial services). As shown in Figure 2, trucks accounted for 61 percent of U.S. sales in 1998; cars accounted for 39 percent. North American auto sales provided 78 percent of Fords 1998 earnings. Total vehicle sales were down slightly from 6.947 million units in 1997, largely due to a four percent decline in US car sales. In contrast, Ford set an industry record for truck sales, up five percent from the Fords 1997
Ford Credit
established in 1959; worlds largest automotive financing company; operates 290 locations in 35 countries with 15,900 employees.
Visteon Automative Systems

organized 1997; worlds second largest manufacturer of automotive systems and components; operates 74 plants in 19 countries with 78,000 employees.
Hertz
Ford ownership since 1987; worlds largest car, truck and equipment rental and leasing company; operates 5,500 rental locations in 140 countries with 21,500 employees. Fords corporate culture emanates from Henry Fords pragmatic tinkering, leading to his innovation of assembly line manufacturing, and his conviction that in order for the auto industry to grow, its workers
Figure 2: 1998 Ford Sales Information 1998 United States Unit Sales
Financial Services 19%
1998 Earnings
Cars 39% Trucks 61%
Europe Auto 3%
North American Auto 78%
Source: Ford Motor Company website
37
FORD MOTOR COMPANY

must also be able to afford the products they made. Fords determination to pay his employees wages that would put a car in every garage led to his support for the minimum wage concept, enraging his competitors and other industrialists - it also did not protect Ford from future conflicts with labor unions. The Ford family retains close control of the corporation through the ownership of 72 million shares of a special Class B stock that is equal in value to common stock but with eight times the voting rights and three seats on the Board of Directors. However, until the election of William Clay Ford, Jr. to Chairman of the Board in September 1998, no family member had directly run the corporation since Henry Ford II stepped down as chairman and CEO in 1980. On January 1, 1999 Ford assumed his position with Jacques Nasser taking the helm as CEO. to assist with mission.
Environmental Product Strategy Team

cross-functional senior management membership; oversees and coordinates AFV, LEV and advanced fuel efficiency initiatives.
Environmental Outreach Team

cross-functional senior management membership; oversee sand coordinates facility environmental initiatives, congestion mitigation and recycling initiatives, as well as communication internally and externally of key achievements and sharing of best practices. These four committees have become deeply embedded within Fords management structure. The ESRC, in particular, plays a critical role in positioning Ford competitively with respect to its peers.
Ford Motor Company Environmental Initiatives

Ford does not term any of its initiatives sustainable development, unlike other corporations. However, Ford has established a series of environmental committees that draw from its corporate executive and senior management levels with interfaces throughout the corporation. These committees perform crucial functions in establishing strategic initiatives that can satisfy both the corporate charter and corporate financial performance. The four committees are described below.
Product Development Programs: Overview

What will the environmental automobile of the future look like? Ford hopes it will look like its P2000, a fully-functioning lightweight test sedan. The P2000 is expected to be the lightest car ever in the mid-size class with a targeted fuel efficiency of up to 80 miles per gallon (mpg). Propulsion, weight, rolling resistance and aerodynamics will be optimized within one system. The P2000 will feature an unprecedented integration of vehicle systems, leading to a fundamental re-thinking of Fords vehicle production processes. A second new test product is the Synergy 2010. This project effort is intended to create a styled concept car that incorporates advanced technologies evolving from defense and space programs and design cues from race cars for additional gains in fuel conservation and performance. Beside the P2000 and Synergy 2010 prototypes, Ford has developed a number of products that reflect the companys belief that consumers will increasingly select vehicles based on regional comparative advantages in vehicle fuels. Where electricity can be produced in abundance and with few environmental impacts, electric vehicles (EVs) will dominate. Where natural gas is an abundant resource, it will lead as the clean fuel. This extends beyond the US market, where
Environmental and Public Policy Committee

Board of Directors level; reviews all aspects of company policies and practices; reports and makes recommendations to the full Board.
Environmental Strategy Review Committee (ESRC)

cross-functional, membership primarily at the officer level; designs overall environmental leadership strategy and oversees implementation: considers all aspects of key decisions, ensures adequate allocation of resources, reduces or removes barriers to strategic implementation, integrates environmental approaches on global basis. Two support committees
38 PB

countries like Venezuela may choose to encourage natural gas vehicles (NGVs) in order to reserve crude oil for the more lucrative export market and petrochemical applications. There are, of course, considerable overlaps between the benefits of AFVs and LEVs for air quality. However, LEV technology does not necessarily lend itself to fuel conservation. Basic constraints the friction of vehicle tires on roads, weight versus safety trade offs, etc limit the advances in fuel conservation that can be achieved with conventional gasoline combustion engines and vehicle styling and construction. To break this barrier, entirely new vehicle and engine designs must be considered, as well as the benefits and costs of each thus, the emergence of the prototype programs. In order to create more efficient product development, manufacturing and sales organizations worldwide and respond to financial losses in the early 1990s, the Ford 2000 reorganization was launched in 1994. Fords internal re-engineering underlies all of the requirements associated with developing, testing and launching new products that flow from Fords environmental pledge. Ford had been operating within traditional, regional alignments, with a North American division, a European division, etc. This meant that duplication existed throughout the corporation and vehicle lines, costly in and of itself apart from the difficulties it posed for new product development and commercialization. A very simple schematic of the resulting matrix organization is shown below. Within Fords product development area are three vehicle centers for conventional cars and trucks. The advanced vehicle technology group includes the Environmental Vehicle Center (EVC) and the product lines for all of Fords AFVs, LEVs and hybrids (combined gasoline-electric motor vehicles). Ford is attempting to coordinate and share key operations activities and resources across all of its product areas, hence the matrix organization, shown in Figure 3 as a very abbreviated grid. The matrix includes everything from powertrains to sales and marketing. Within the Environmental Vehicle Center, more so than other centers, certain corporate activities are co-located in order to ease development and promotion. Fords approach has allowed the company to use existing plants and suppliers to produce EVC products. The goal is to reduce the still-high fixed costs of converting existing vehicle lines to EVC products. It is a complicated process, because Ford expects for some time to produce and sell smaller volumes across broad product lines. This overall approach is being repeated throughout Fords worldwide operations. Ford seeks to realize efficiencies from global sourcing, the ability to develop rapid spec centers adjacent to plants, or to establish cross-functional relationships for tooling and testing wherever it can.
Product Development Programs: AFVs

Ford is the leading producer of AFVs and offers the industrys broadest array of these clean cars and trucks. Models offered include electric, natural gaspowered and flexible fuel vehicles. Ford also builds vehicles capable of running on methanol, ethanol,
Figure 3: Fords Product Development Group PRODUCT DEVELOPMENT

Advanced Vehicle Technology Group
Environmental Vehicle Center AFVs, EVs, Hybrids Source: interview with Ford representatives, 12/3/98
Large Vehicle Center
Small Vehicle Center
Truck Vehicle Center
39
FORD MOTOR COMPANY

propane and experimental fuel cell engine designs. Fords dedication to the future of these vehicles was demonstrated with the 1996 opening of an Alternative Fuel Vehicle Center in Dearborn. Ford sold more than 95 percent of all the Original Equipment Manufacturer (OEM) alternative-fuel vehicles sold in North America during the 1997 model year. For the 1999 model year, the company is offering 11 North American alternative fuel products: Bi-fuel Natural Gas F-Series Pickup Dedicated Natural Gas F-Series Pickup Bi-fuel Propane F-Series Pickup Bi-fuel Natural Gas Econoline Van / Wagon Dedicated Natural Gas Econoline Van / Wagon Bi-fuel Propane Econoline Van/Wagon Bi-fuel Natural Gas Contour sedan Dedicated Natural Gas Crown Victoria sedan Taurus E-85 Flexible Fuel Vehicle Ranger E-85 Flexible Fuel Vehicle Ranger Electric Vehicle provides better vehicle internal communication; a new 2,000-poind?? battery refined to accommodate the weight and size of the battery modules without sacrificing efficiency and several safety features to protect customers against high-voltage discharges. The Ranger EV also has an improved, state-of-the-art powertrain, traction inverter module (TIM), anti-lock braking systems and electronic throttle control all of which, plus other features, make the Ranger more customer friendly. Only select dealers that meet stringent EV service criteria can sell or service the Ranger EV.
Bi-Fuel Natural Gas Vehicles (Alliance Program)

Ford offers a range of natural gas vehicles (NGVs) and liquefied petroleum gas (LPG) vehicles under the Alternative Fuel Vehicle Alliance Program. Models include the Contour, F-Series pick-up and Econoline in North America and soon the Transit and Mondeo in Europe. Under the Alliance Program, Ford selects a partner who is responsible for the bi-fuel AFV products in a particular market. Fords partner in North America is GFI of Kitchener, Ontario and in Europe it is Tickford of Milton Keynes, England. Working with Ford, the partner engineers and manufactures highquality products that have strong market demand. Customers purchase these products through Ford dealers, who also service, replace parts and provide warranties. Through Alliance Ford is able to bring a wide array of products to market quickly and at competitive prices.
Three examples of specific programs dedicated to AFV development follow.
Ranger EV
The 1998 Ford Ranger EV, Fords newest AFV, was the culmination of an electric vehicle development program that began in the 1960s. In 1993, Ford launched its Ecostar electric demonstration fleet of more than 100 vehicles at a cost of over US$100 million. The fleet gained real-world driving experience by logging more than one million miles in several countries. Lessons learned from the Ecostar program, which Ford has terminated, and customer opinion data were incorporated into the electric Ranger program. Powered by proven lead-acid batteries and third-generation EV components, Ranger EV can travel about 60 miles between charges and can be fully recharged in about six hours. The company is testing an electric vehicle fast-charging system - the PosiCharge fast charger developed by Californiabased AeroVironment Inc - that can recharge 80 percent of the Ranger EVs battery in less than 20 minutes. Ford has incorporated a number of technological advances into the Ranger EV. These include: a second generation battery thermal management system that
Flexible Fuel Vehicle (FFV)

Fords flexible fuel vehicle (FFV) program is another example of environmental leadership. In summer 1998, the company announced a major program to produce about 250,000 FFVs over the next three years that can run on gasoline, ethanol or any combination of the two.
Hybrid Electric Vehicle (HEV)

Finally, Ford is committed to the development of hybrid vehicles. Hybrid vehicles have much greater fuel efficiency than conventional vehicles through the addition of one or more electric motors and a storage battery. The motor and the battery both are significantly smaller, and therefore cheaper, than those in a pure electric vehicle.
40 PB

Despite these accomplishments, Fords management emphasizes that many issues must be resolved before AFVs truly can become practical and affordable for the general public. Fuel availability is perhaps one of the most important obstacles. Refueling stations for natural gas and propane and access to sources of electricity for recharging EVs are essential in order to facilitate a relatively smooth transition for customers. Fuel development itself is an issue. Fuel suppliers must have sufficient incentives to make alternative vehicle fuels available at reasonable prices to consumers. Because of these important components to the new marketplace, Ford has entered into several alliances to encourage industry and infrastructure development: Ford Motor Co and Mobil Corporation signed an agreement (March 1998) to research and study efforts concerning cleaner-burning fuels including assessment of different alternative fuels and development of cleaner-burning, direct-injection diesel engines. Ford Motor Co and Daimler-Benz have invested in Ballard Power Systems to develop advanced fuel cell technology that reduces both noise and emissions. The first fuel cell system was received in September 1998 and will be tested in a vehicle in early 1999. Ford Motor Co and Honda Motor Co have teamed up to build recharging stations in California for their electric vehicles. The two companies each will contribute US$100,000 initially to a fund to help build between 40 and 80 charging stations at shopping malls, airports and hospitals.
Product Development Programs: LEVs
How Low Will Emissions Go?

Fords LEV products reflect the sharp trend in the US towards lower emissions of hydrocarbons as shown in Figure 4, as well as nitrogen oxides (NOx) and carbon monoxide (CO). Perhaps the most surprising development, not only for Ford but also for the industry as a whole, has been the extent to which auto makers are able to reduce emissions while sacrificing little in the way of vehicle performance, and for an affordable cost. Fords AFV and LEV programs intersect in that some LEV products achieve targeted emissions levels through the use of alternative fuel technologies. Ford has developed a compressed natural gas super ultra LEV Expedition test fleet (SULEV), a standard only applicable in California. The SULEV Expedition joins two other Ford SULEVs already on sale dedicated natural gas versions of the F-250 pickup and Econoline van. To promote the expansion of NGVs, Ford launched its Focused Market Development Program in seven American cities in summer 1997. In each city Salt Lake City, Atlanta, Chicago, Denver, Los Angeles, Philadelphia and New York Ford is marketing the vehicles at airports and other locations, as taxicabs and as shuttle, delivery and service vehicles. Vancouver, British Columbia and Phoenix, Arizona were added to the program in June 1998. In late 1998, the company will offered a series of new AFV products in Europe. All of these products and programs are grounded in new environmental realities for transportation markets. Ford in particular has made
Figure 4
41
FORD MOTOR COMPANY Table 1: Comparison of Ford 1999 Products with California and National Emission Standards Vehicle
Escort Tracer Taurus Sable Mustang Crown Victoria Grand Marquis Town Car Crown Victoria Ranger EV Ranger Ranger Explorer Mountaineer Explorer Mountaineer Windstar Windstar F150 F150 F150 F250 F250 F250 Econoline Econoline Expedition Expedition Navigator Navigator F-Series
Engine Size (liters)

2.0 2.0 3.0, 2V (valve) 3.0, 2V 3.8 4.6 4.6 4.6 4.6, Natural Gas N/A 2.5 4.0 4.0 4.0 5.0 5.0 3.0 3.8 4.2 4.6 5.4 4.6 5.4, 2V 5.4, Natural Gas 4.2 5.4 4.6 5.4, 2V 5.4, 4V 5.4, 2V 7.3, Diesel
California Standards
LEV LEV LEV LEV LEV LEV LEV LEV ULEV ZEV LEV LEV LEV LEV LEV LEV LEV ULEV LEV LEV LEV LEV LEV SULEV LEV SULEV LEV LEV LEV LEV LEV
National Standards
LEV LEV LEV LEV ULEV ZEV LEV LEV LEV LEV LEV LEV LEV
ULEV ULEV LEV LEV LEV LEV
Source: Ford Motor Company great strides in developing cars and trucks that are certified as LEVs or better, based on national standards or those of the more stringent California Air Resources Board. Table 1 details Fords 1999 LEV product slate. Ford has introduced dedicated natural gas-powered full-size F-250 pickup trucks and E-250/E-350 vans that are the worlds cleanest production trucks in their weight class. They are the first vehicles worldwide to meet Californias SULEV standards, meaning they emit half the level of emissions as ultra-LEVs or ULEVs, or about 25 percent of the emissions of a nonCalifornia certified gasoline vehicle. The low emissions are achieved by combining the clean-burning characteristics of natural gas with a patented emission control strategy developed by Ford scientists and engineers. These vehicles achieve SULEV standards without compromising performance. Fords leadership in producing LEVs will show up in the companys bottom line. Starting with the 1999 model year, no one will sell more low-emission vehicles than Ford. All Ford SUVs including the Ford Explorer, Mercury Mountaineer, Ford Expedition and
42 PB

Lincoln Navigator and the Ford Windstar minivan are being sold nationally as LEVs. Windstar has been further calibrated to achieve even more strict ultralow-emission vehicle standards in California. This means that one in every five vehicles Ford sells in the US for the 1999 model year more than 800,000 vehicles should be the cleanest gasoline-powered sport utility or minivan available nationwide. In addition, versions of ten other vehicles are certified as LEVs under Californias strict guidelines the Ford Escort, Taurus, Crown Victoria, Mustang, F-Series and Ranger; Mercury Tracer, Sable and Grand Marquis; and Lincoln Town Car. The SULEV Expedition joins two other Ford SULEVs already on sale, dedicated compressed natural gas versions of the F-250 pickup and Econoline van that were the worlds first internal combustion trucks to earn the designation as super ultra-low-emission vehicles. These vehicles will produce 65 percent fewer smog-forming emissions than the California standard. Fords approach is to find cost-effective, durable solutions to make cars and trucks environmentally compatible without taking away the performance that customers expect.3 Ford has demonstrated that large passenger vehicles can meet challenging low-emission standards in an economical way without compromising key performance traits.4 For all clean vehicles both conventionally fueled and those operating on alternative fuels Ford believes that the key to moving the needle environmentally is to make these choices sufficiently attractive to customers so that the vehicles can be produced and sold in high volumes. Meaningful air quality benefits can only be achieved through high-volume production and sales. Ford is well-positioned for vehicle sales and financial performance as both California and the US head toward even tougher emissions standards, as Figures 6, 7 and 8 illustrate.
Facilities Programs
Fords Environmental Management Approach at Facilities

As noted earlier, Fords environmental initiatives in its product development programs reflect very much the strategic intent and implementation of the corporations top management. Individual and team initiative and innovation are certainly encouraged, and by all indications are active, below the most senior management levels. When it comes to product design it is clear that the buck starts with Fords executives, for execution throughout the corporation. But with respect to facilities management, there is a clear grassroots effort. The genesis of the ISO 14001 certification effort is an indicator of the depth of commitment throughout Fords workforce to environmental excellence. When it comes to environmental best practices at facilities, the responsibility lies with the individual facilities managers and their staffs, but with considerable input from and feedback to senior management, as shown in Figure 5. Ford is acting on a global scale with the adoption and implementation of the ISO 14001 environmental management standards at all its manufacturing plants worldwide. It is executing those plans on the local level by placing into effect Fords Environmental System at each manufacturing location. Fords Environmental System (FES) establishes environmental management disciplines including policy, environmental objectives and targets, measurement of performance against objectives and targets, and management responsibility and accountability. Fords goal is to achieve continuous environmental improvement. It is assisted by the companys business objectives - to lead in corporate citizenship while maximizing the operating efficiency of its plants and the quality of its products. The implementation and maintenance of Fords Environmental System in all manufacturing
Figure 5: Fords Input and Feedback System of Environmental Responsibility Senior Management Environmental Pledge
ISO 14001
Facilities Managers
43
FORD MOTOR COMPANY Figure 6

Standards and California Certification Levels Hydrocarbon Emissions - 5 year/50,000 mile
Truck (5751-8500 lbs. TW) Standard (Tier I)
0.40
0.35
Truck (3751-5750 lbs. LVW) Standard (Tier I)

0.30
Passenger Car Standard (Tier I)

0.25
Emissions (grams / mile)
0.20
Truck (5751-8500 lbs. LVW) Standard (LEV)
0.15
Passenger Car Standard (TLEV)

0.10
Truck (3751-5750 lbs. LVW) Standard (LEV) Passenger Car Standard (LEV)
0.05
0.00 1998 4.0-L Ford Explorer (California) 1998 4.6-L Ford Expedition (California) 1998 5.4-L Ford Expedition (California) 1998 5.4-L Lincoln Navigator (California) 1998 2.0-L Ford Escort (LEV) (California) 1998 3.0-L Ford Taurus Wagon
(under 6000 lbs. GVWR)
(over 6000 lbs. GVWR)
(Passenger Ca
Figure 7
1.2
Standards and California Certification Levels Oxides of Nitrogen (NOx) Emissions - 5 year/50,000 mile
Truck (5751-8500 lbs. TW) Standard (Tier I) and Truck (5751-8500 lbs LVW) CFF Standard (LEV)
1.0
0.8
Truck (3751-5750 lbs. LVW) Standard (Tier I)
0.6
Passenger Car Standard (Tier I and TLEV) and Truck (3751-5750 lbs LVW) Standard (LEV)
0.4
Passenger Car Standard (LEV)

0.2
(Passenger Car
Source: Ford Motor Company
44 PB
CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING Figure 8

California Standards and Certification Levels Carbon Monoxide (CO) Emissions - 5 year/50,000 mile
1998 Light Truck (over 6000 lbs. GVWR) Standard (Tier I)
5.0
4.5
1998 Light Truck (under 6000 lbs. GVWR) Standard (Tier I)
4.0
3.5
1998 Passenger Car Standard (Tier I), TLEV and LEV Passenger Car Standard
3.0
2.5
2.0
1.5
1.0
0.5
(Passenger Car)
facilities is the strategy adopted to achieve this goal.
What is ISO 14001?

ISO 14001 is an environmental management system standard. It was developed by the International Standards Organization (ISO) to promote the development of international manufacturing, trade and communication standards. ISO 14001 provides a framework for integrating environmental responsibility into everyday business operations. It also provides a standard for third-party certification. Ford views the ISO 14001 certification process to be important for several reasons: Fords Environmental System, using the ISO 14001 standard, will help the company improve its efforts to protect air, water, land and natural resources; Conforming to the ISO 14001 standards is seen as good business; Competitive pressures in Europe are such that ISO 14001-certified automotive companies have advantages in vehicle sales; By achieving certification, Ford will demonstrate
its corporate citizenship by producing quality vehicles in an environmentally friendly manner; It is a competitive advantage to be a leader with certification when other competitors lack certification; Certification is particularly important when government and state and local municipal vehicle fleets will be conforming to environmental 14001 requirements; ISO 14001 also can play a key role in emerging markets where there is no major regulatory structure. By using ISO 14001 requirements, Ford can protect the environment and be better prepared for the advent of regulatory frameworks; The bottom line will get a boost from ISO 14001 as the company saves money by reducing waste and adopting best practices; ISO 14001 is vital to the companys future because of governments and the publics increasing scrutiny of the automotive industry.
The ISO 14001 standards provide a framework within which facilities managers can target continuous im-
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FORD MOTOR COMPANY

fied (including Visteon and Jaguar sites) affecting about 250,000 workers. Fords goal is to maintain the continuous improvement process and remain certified. Ford expects that most major automotive companies facilities will be ISO 14001 certified in five years, and so it wants to be well ahead of the pack. Senior managers view ISO certification ahead of the competition to be of vital importance.5 This is in keeping with Fords corporate philosophy that environmental concerns are going to be far more visible in the next century than they have been in this one. Consequently, for any company to be successful, particularly a manufacturing company, it is important that that company be viewed by the public as an environmentally responsible company.6 To the managers at Ford, environmental stewardship and making the environment part of everyday business is an integral part of being a good corporate citizen.7 The most significant cost associated with ISO 14001 certification is employee training. The targets are operational practices. Facilities managers and their staffs can pick from an array of best practices, established throughout the corporation, to find those that best fit the particular needs of any one plant and its workforce. Ford obtains from each plant individual continuous improvement goals, which are compiled and shared throughout the company. Senior managers at Ford help to coordinate across facilities to ensure exchange of ideas and practices. The combination of transferable practices plus individual plant initiative generates cost savings. The benefits of these approaches for new facilities are even more evident. If, from the first stage of development, a facility can be planned, constructed and begin operation using standard practices, then Ford can realize considerable efficiencies and savings. In the view of senior managers, the most important aspect of the ISO 14001 program is in changing the general mindset with regard to environmental practices and programs at facilities. Where before managers tended to spend substantial time and energy reacting to regulatory requirements, the certification process and related initiatives create a more proactive atmosphere. Ford is trying to minimize the amount of time spent responding to regulatory requirements by improving efficiencies in order to make more time for creative solutions that, in turn, can en-
Source: Ford Motor Company website
provements. These include everything from factory operations to waste reduction and recycling. Compared to many other major companies who have pursued ISO certification, Ford has taken a facility-byfacility approach rather than one in which the entire corporation is certified. This is generally felt to be the preferred strategy, given the level of individual involvement among facilities managers and the fact that unique conditions do exist across Fords facilities asset base.
First to Commit, First to Certify

Each facility uses Fords Environmental System as a basis for a site-specific system. The Halewood plants in the UK were the first automotive facilities in the world to achieve certification to both ISO 14001 and the Environmental Management and Auditing System. The Saarlouis plants were the first automotive plants in Germany to become certified. The Oakville Assembly and Windsor Casting plants were the first Canadian automotive plants to achieve certification, and the Van Dyke, Lima Engine and North Penn plants were the first automotive plants in the United States to become certified. Ford was the first automotive company to have ISO 14001-certified sites in the UK, Germany, Australia, Taiwan, the US and Canada. As of this writing, more than 140 manufacturing plants and facilities in 26 countries are certi-
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hance regulatory compliance. Fords transition in its environmental management approach has resulted in a process that fosters broader initiatives that yield tangible and significant returns. Measurable benefits include reductions in the generation of solid wastes and wastewater treatment sludge and reduced usage of water, electricity, natural gas and solvents. No major, worldwide manufacturing company operates completely trouble-free. Thus, Ford has carried its environmental management transition through to problem solving should environmental crises arise the hole in the boat scenario8 . Rather than simply apply a short-term solution, Fords environmental managers look for reasons why the problem emerged, particularly searching for gaps in the process since that is how Ford managers view the FES strategy. Ford manages its facilities programs through corporate organizations that appear traditional but have non-traditional approaches. Within Fords Environmental Services and Engineering (ESE) group is the Environmental Quality Office (EQO). ESE provides expertise co-located throughout the corporation in order to provide direct assistance for environmental programs, both routine regulatory compliance and new initiatives. EQO conducts site assessments, remediation, oversees environmental control equipment and manages special initiatives such as ISO and Fords Total Waste Management program. Ford establishes metrics through its Advanced Manufacturing Engineering group that help guide continuous improvement and ensure that technical standards in operations are met. The goal is to ensure that facilities-level initiatives are do-able within the context of operational constraints and requirements. Two considerations figure prominently in the minds of Fords senior managers as the company moves ahead with the ISO program. One is to ensure that ISO 14001 certification leads to sufficient regulatory compliance. That is, the practices put in place within the broad ISO guidelines must also satisfy the dayto-day regulatory requirements that the company faces in all of its markets. The second consideration is how to foster community interaction on the ISO program. Ford is looking for ways to link with and educate its various audiences, particularly vehicle consumers, on the benefits of the ISO program and its implications for environmental quality. Ford has a story to tell about its successes, but couching that story in such a way as to benefit the companys core businesses is the challenge.
Drivers for Fords Environmental Initiatives

External Drivers
From the last paragraph above, as well as from other concepts presented throughout this case study, it should be evident that Ford is very interested in communicating to the general public its strong emphasis on environmental protection. As a manufacturing enterprise that provides major consumer products, Ford is a highly visible corporation and stands to benefit in many ways from favorable perception of its programs, but some effort is involved in building that understanding. The tangible benefits consumer satisfaction expressed in the form of purchases is Fords bottom line. To the extent that consumers might prefer to purchase vehicles produced by a company that is widely perceived to be an environmental leader, then Fords shareholders and the investment community are satisfied. Fords ability to put forth a financial performance that exceeds expectations, while adhering to the standards managers have set for themselves, is the true test of the effectiveness of corporate environmental initiatives and the surest way to embed environmental initiatives within private corporate structures. Apart from its customers and investors - and those who scrutinize the company for its financial performance - Ford has other external drivers. One is regulatory compliance. In this area, the company dealt with a particular problem for its vehicle product lines, the implications of the Energy Policy Act of 1992 (EPAct). EPAct mandated fleet purchases of alternative fuel vehicles, and thus was the original driver for Fords reorganization and creation of the Environmental Vehicle Center. Ford responded to the AFV purchase requirements in EPAct for vehicle fleets, expecting to leverage its costs of reorganization and retooling against high volume fleet sales. These sales, however, did not materialize because EPAct had little in the way of enforcement standards, and without enforcement, fleet operators did not move towards AFVs as vigorously as the law required. In the meantime,
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FORD MOTOR COMPANY

however, emissions standards in the 1990 Clean Air Act Amendments and crucial consumer market states like California, became a reality. Along with the more vigorous move throughout Europe toward cleaner, fuel conserving vehicles, Ford now finds itself in an effort to build customer satisfaction in products that originally flowed from the regulatory environment. Another vital external driver is Fords position among its peer group. Any company benefits hugely in the investment community if it is perceived to be the low-cost innovator among its competitors. It is not yet clear if financial analysts will overtly reward corporations for their environmental excellence over operational and financial performance. It is highly unlikely that they ever will. But certainly it is not possible for a company to expect anything but criticism if it is perceived to have set goals and standards that it then does not meet. Besides Ford, other major automotive companies are experimenting with new product designs that can increase fuel efficiency and reduce vehicle emissions. In effect, a race is on, not only to make R&D investments but also to be first to profit significantly from those investments. This means not only must the automotive companies produce compelling products, but they must also sell sufficient volumes of those products to achieve both environmental, and financial, success. Similar to Ford, GM has alliances with both Exxon and Arco to investigate fuel cell engines. GM also has alliances with British Petroleum (BP) and Amoco (which have merged into BP-Amoco) to research clean fuels. The participation of Daimler-Benz (and now DB-Chrysler) with Ford in the Ballard Power Systems fuel cell research was already noted. DB also has separate R&D efforts underway. Nor are the Japanese automakers left out of the picture. Toyota manufactures a hybrid vehicle, the Prius, which has generated considerable interest for its design, performance and early success - about 12,000 vehicles have been sold to date and monthly production runs that are roughly three times what the company forecast). The Prius achieves more than 60 mpg with a smooth, continuously variable drive train. All of the Japanese automotive companies are introducing products to meet the stiff requirements imposed in California for vehicle emissions, although the Prius will not be available in the US until 2000. The Japanese companies are also driven by their internal concerns regarding energy security (Japans high levels of energy imports make the country acutely vulnerable to supply disruptions and price shocks). Thus, in this age of low oil prices, auto companies are forging ahead, fueled by environmental imperatives including the impacts from increased consumption of cheap gasoline. Fords competitive position translates into overall industry efforts to accommodate environmental initiatives and industry-wide performance standards. Ford is an active member of several committees and environmental groups that have been formed during the last two decades to foster these transitions. Many of the groups have very practical goals which aim to advance the state of technology and infrastructure so that new vehicle technologies can indeed be commercialized. Some of these groups are listed below:
United States Advanced Battery Consortium (1991)

This group was formed by Ford, GM, Chrysler, the US Department of Energy, the Electric Power Research Institute and battery manufacturers to develop electrical energy systems capable of providing EVs with range and performance competitive to gasoline-powered vehicles and to funding for high-risk, high-cost advanced battery research and development.
EUCAR, the European Council for Automotive R&D

EUCAR was formed by the major European automakers (BMW and Rover, Daimler-Benz and Mercedes-Benz, Fiat, Ford of Europe, Opel, Porsche, PSA Peugeot Citroen, Renault, Volkswagen and Volvo). Its purpose is to promote pre-competitive joint research and technology development work in areas including environmental sustainability, energy consumption, safety, intelligent transportation systems, and mobility aspects.
USCAR, United States Council for Automotive Research

Chrysler, Ford and GM are fierce competitors in the marketplace, but under the umbrella of the United States Council for Automative Research (USCAR), they work together on shared technological and environmental concerns. The three companies formed USCAR in 1992. The main objectives of USCAR are to:
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monitor current research projects and consider new opportunities; coordinate the industrys interaction with government PNGV research; share results of joint projects with member companies; seek and recommend funding form public and private sources for joint research and development; provide facilities and administration for consortia. The strategic alignment of the goals of USCAR and their suppliers with those of the federal agencies and labs has resulted in, and will continue to provide for, more effective research through the coordination of many previously unlinked research activities. For example, a number of valuable initiatives between industry and government scientists have developed including collaboration in advanced batteries for electric and hybrid electric vehicles; weight reduction efforts through the introduction of substitute structural composite and aluminum materials; progress toward development of low-cost, package-efficient vehicular fuel cells; and the establishment of programs aimed at providing a highly-efficient, low emissions, compression-ignition, direct-injected (DI) engine. dans, while achieving improved recyclability and maintaining comparable performance, utility, safety and cost of ownership. A key benefit is the achievement of societal priorities - such as improved fuel efficiency and reduced vehicle emissions - without substantial trade-offs to consumers. Also, substituting cooperative research to achieve national objectives represents a more efficient and cost-effective mechanism than past bureaucratic and regulatory practices. PNGV represents an important new way of doing business. Candidate technologies are being explored in such areas as power generation, energy storage, electronics, materials, manufacturing and systems analysis. Ultimately, the achievement of the PNGV goals should make all American industries more competitive. It should help reduce dependence on imported petroleum, lead to a stronger economy, preserve jobs, produce a cleaner environment, make business more globally competitive, and ensure technical leadership in critical fields.
European Program for Emissions, Fuel and Engine Technology

This tripartite program was formed among the European automakers, the oil industry and the European Commission to reduce tailpipe emissions from engines, using new engine technologies and reformulated fuels. For Ford and the worldwide automotive industry, the biggest though most uncertain external driver is the possibility of global warming effects from carbon dioxide (CO2) and other greenhouse gas emissions. If global warming is found to be, or is perceived strongly enough to be, a threat, policies that sharply limit greenhouse gas emissions will result in huge impacts on vehicle design and production, and exert pressure on fuel suppliers. Energy consumed for transportation - mainly gasoline, diesel and jet fuels - is responsible for 33 percent of worldwide greenhouse gas emissions. But carbon management in transportation is complicated by physical constraints, ie the contribution of road friction with traditional combustion engine technologies. Indeed, with reformulated gasolines only 15 percent total energy efficiency is gained because of friction. This increases to 20 percent with advanced spark ignition engines, 35 percent with hybrid electric vehicles, 36 percent with
Partnership for a New Generation of Vehicles (PNGV)

The federal government and the US automotive industry have joined in an historic partnership to establish global technical leadership in the development and production of affordable, fuel-efficient, low-emissions vehicles that meet todays performance standards. This unprecedented alliance, the Partnership for a New Generation of Vehicles (PNGV), was established on September 29, 1993. It draws on the resources of seven federal agencies, the national laboratories, universities, suppliers and USCAR. The PNGV program has three separate but interrelated goals. significantly improve national competitiveness in manufacturing by exploring technologies that reduce the time and cost to design and manufacture vehicles; apply innovations, when they are commercially viable, to conventional vehicles; develop a vehicle with up to three times the fuel economy of todays conventional, mid-sized se-
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FORD MOTOR COMPANY

gasoline fuel cells, 38 percent with diesel fuel cells and 58 percent with hydrogen fuel cells.9 CO2 reductions follow commensurately. A hybrid vehicle in city conditions produces half the CO2 of a conventional gasoline engine. A hydrogen fuel cell can yield a two-thirds reduction, while a fuel cell that uses hydrocarbon fuels achieves about the same reduction as a hybrid vehicle.10 The problem can be illustrated simply, as follows. CO2 emissions from transport = Drivers x Cars/ Driver x Miles/Car x Gallons/Mile x CO2/Gallon11 As populations, standards of living and desire for mobility increase, the first three factors grow inexorably. The measure of energy intensity, or efficiency, in gallons per mile is the key target for CO2 emissions reduction. But ultimately, it is the choice of fuel - and technology - that determines carbon intensity, ie CO2 per gallon. ecutives and managers expected. This may be due to a broader public awareness of environmental issues, and may also be due to the pressures placed on companies with operations in Europe where environmental initiatives may be prioritized above, although not in lieu of, profitability. There is extensive evidence that several initiatives, in particular the ISO program, stemmed from Fords European operations. From all materials gathered and interviews engaged in for this case study - including conversations with experts on the automotive industry outside of the Ford organization - there is a widespread belief that the domestic and international auto industries face the need for fundamental changes in their businesses because of environmental imperatives. While current oil and gasoline prices may be low, and the prospects for higher prices are dim in the foreseeable future, there is broad agreement from both within Ford and external to the company that the pressure for new vehicle technologies and new vehicle fuels will only increase. Given that philosophy, a prevailing sentiment within Ford is that the company must adapt if it is to maintain its leadership position and increase its market share across its vehicle lines, even as the company competes with the Expedition in its conventional businesses.
Internal Drivers
Certainly, a key question for any analysis of private sector initiatives is the extent to which they depend on individual leaders or can derive autonomy through the corporate structure. Evidence of both exists in the Ford Motor Company case. Bill Ford, Jr is often credited in the business and news media with pushing environmental imperatives through the board and executive offices. During his tenure as chairman of the boards powerful finance committee, from 1995 until his official duties as chairman of the board began, Ford did play a role in approving the companys environmental pledge as did other directors, helping to move environmental and social issues higher up on the agenda. However, officials interviewed for this case study, and outside sources and references, all attest to the extent to which the commitment at Ford extends throughout corporate management at all levels. The environmental pledge itself is probably the most important internal driving mechanism for Fords initiatives. Wide acceptance of the pledge did not come easily, but from all accounts it was adopted and has been translated throughout the corporation much more quickly and with more depth than senior ex-
Impacts
In evaluating what a corporation like Ford Motor Company has achieved with its environmental initiatives, four metrics were identified and estimated results derived based on the case study analysis. Table 2 summarizes the findings:
Table 2: Results of Fords Evaluation of Environmental Initiatives

Metric Results at Ford
Financial returns ....... Cost savings; need product growth Performance Ability to innovate Public perception ...... Must be developed Peer position .............. Domestic leadership
Source: interview with Ford representatives, 12/3/98
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CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING Financial Returns

It is unrealistic to expect firms operating in competitive markets to develop environmental initiatives that incur costs but not positive returns. Even public perception of a company ultimately can affect profitability in terms of sales of that companys products or services, ease with which that company can compete for top workers or exposure of the company to litigation. Direct financial returns in cost savings associated with environmental initiatives are measurable. Indications from officials at Ford and Fords published materials suggest that improvements at facilities have yielded real savings the company has made an effort to develop initiatives that not only achieve environmental performance targets, but are also improvements over existing processes. The test for Fords product lines will come as more vehicles are moved into the mass market. Cars and trucks that meet rigorous standards in California and elsewhere, without sacrificing performance will have comparative advantage. On the production side, the challenge is to operate as efficiently as possible, which is why organization and management for the new, environmentallydriven vehicle markets is critical. It is clear that Ford is determined to seize the advantage in both regards, and has made sometimes quite painful adjustments to restructure its corporate organization in order to ensure success. cars, trucks and SUVs enough to factor that into their decision-making calculus? Can Ford attract new customers on the strength of its new product lines in the mass market? Clearly, in a market such as Californias, Ford must provide superior performance and value over competitors that also meet the emissions targets. Can Ford build favorable public perception around its ISO initiatives and other facilities programs? Can Ford cultivate more interest within the investor community? Many efforts have been spawned regarding green investing but the advantages to targeted companies are not clear, nor are financial returns to investors proving to be strongly positive. The financial analyst community - which can heavily influence perceptions and expectations of corporate performance - has not, and probably will not for some time, give any weighting to corporate environmental initiatives. Thus, Ford faces a considerable challenge with respect to public perception, as does any company attempting to build environmental initiatives.
Peer Position
Fords domestic leadership in its key vehicle lines is well-documented. A strategic goal is clearly to retain that domestic leadership, expand it to the environmental vehicle lines and build leadership positions in key markets outside of North America. As stated previously, the popularity of Ford trucks and SUVs is such that, if Ford is able to sustain the performance that customers have come to expect, Fords LEVs and AFVs could dominate in the new environmental vehicle markets. Fords traditional product lines have benefited from the low oil prices that have been in effect since the mid-1980s. Thus, there is some risk posed to the company should oil prices move sharply upward on a sustained basis. On the passenger car side, US automakers have given up considerable market share to foreign producers in both the mass and luxury markets. The challenge for Ford in this case is not only to produce competitive environmental vehicles but also to offer conventional engine vehicles that are appealing to customers. At the time of writing, Ford announced the acquisition of Volvos (Sweden) passenger car operations. This acquisition clearly fills a niche in Fords passenger car product lines with a very competitive vehicle, and may provide a base for new environmental product development as well.
Performance
A key component of corporate environmental initiatives is the extent to which firms are able to truly innovate while, at the same time, operating in their core businesses and markets. It appears that Ford is able to do so, but again, the test on the product development side will come in the mass market.
Public Perception
Although favorable public perception is a strong goal for any company that makes a specific effort to develop environmental initiatives, it is not an easy thing to achieve. Results from research and interviews indicate that Ford is struggling with ways to gain recognition for its environmental initiatives. Will customers care about the environmental performance of Ford
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FORD MOTOR COMPANY
References
A variety of resources was used to prepare this case study: information from Ford Motor Company including Ford Internet sites interviews with Ford Motor Company officials business and trade publications, including BusinessWeek, Wall Street Journal (and Internet sites), Motor Trend Magazine and others financial analyst reviews from major investment houses information from outside experts
Endnotes
1 2 3
8 9
10
11
Based on published third-party information and reviews by financial analysts. Statement from Ford Motor Company annual environmental reports. Published quote, Haren Gandhi, Manager of Fords Vehicle Emission Research Lab and a Ford Technical Fellow. Published quote, Helen Petrauskas, Vice President, Environmental & Safety Engineering. From published quotes by Ed Hagenlocker, Ford Vice Chairman. From published quotes by Bob Transou, Manufacturing Group Vice President. From published quotes by Helen Petrauskas, Environment and Safety Engineering Vice President. Quote from Helen Petrauskas. Information from Tony Finizza, former chief economist, Arco. Information from Hiroyuki Watanabe, Director, Member of the Board, Overseas Divisions, Electric & Hybrid Vehicle Engineering Division and Future Project Division, Toyota Motor Corporation. Information from Tony Finizza.
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FORMOSA PLASTICS CORPORATION (TEXAS)

by Jim Blackburn and Diane Bailey Blackburn & Carter Larry Peyton Axis Environmental
hairman YC Wang founded the Formosa Plastics Group (FPG) in 1954 with a US$670,000 US government grant. Conditions in T aiwan were very difficult at the end of W orld War II. Nearly 40 years of occupation by the Japanese and the war itself had left the island country in very poor economic shape. The grant was used to pur chase technology for the production of polyvinylchloride (PVC). The first years production was approximately four metric tons, which was doubled the second year . This increased capacity overwhelmed the island s demand and led to the creation of Nan-Y a Plastics. Formosa Plastics Corp became one of the first ver tically integrated industries in modern times.oday T the FPG is a multinational company headquartered in Taipei, Taiwan with more than 15 divisions and affiliated companies, including natural gas exploration and processing. Revenues in 1997 were estimated at US$10.36 billion. FPG produces a wide variety of materials from wood products to computer PC boards. However , the vast majority of the products are plastics and consumable products made from plastics such as PVC, nylon, polyethylene, polypropylene, polystyrene and polyurethane. Chairman W angs goal to help build infrastructure in a Tiwan also gave rise to non-profit or g anizations operated by FPG. These include the Ming-Chi Institute of Technology, the Chang Gung Medical College and the Chang Gung Memorial Hospital, which includes four hospitals and a nursing college. Formosa Plastics Corp. U.S.A. (FPC USA), headquartered in Livingston, New Jersey , was
founded in 1978. A vinyl chloride monomer , or VCM (the raw material for PVC), unit was pur chased from Imperial Chemicals in the old industrial area of Baton Rouge, Louisiana (FPC BR). One year later , a PVC plant was pur chased from Stauffer Chemical in Delaware City , Delaware (FPC DE). New construction also started in 1982 on a new VCM/PVC complex in Point Comfort, T exas, adjacent to an Alcoa facility . The PVC pipe division of Johns Manville (J-M) was pur chased in 1983. J-M Manufacturing currently has 13 plants producing PVC pipe in the US (eight are from the original pur chase). Permits were submitted in 1989 to allow the Point Comfort plant to produce its basic raw material, ethylene. Six other plants were also scheduled, making the expansion the lar gest single capital investment (US$1.5 billion) on the Texas Gulf coast in the past 50 years. A modern PVC facility was added to the Baton Rouge site in 1991. FPGs addition of FPC USA made it the largest producer of PVC in the world. The sustainable development activities for FPC USA are highlighted in the Formosa Plastics Corporation, Texas (FPC TX) facility . Therefore, this case study concentrates on FPC TX.
Products and Services

The FPC TX facility is located near the middle of the T exas Gulf Coast, adjacent to Lavaca Bay and Point Comfort, a city of 900 people. The facility employs 1,300 people for its seven manufacturing units, producing ethylene, propylene, chlorine, caustic, ethylene dichloride (EDC), ethylene glycol (EG) and PVC, high-density polyethylene (HDPE), linear low-density polyethylene(LLDPE), and polypropy-
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FORMOSA PLASTICS CORPORATION (TEXAS) Figure 1: Product Flow Diagram at FPC TX

Natural Gas Brine
Olefins
Utility
Propylene
Ethylene
Ethylene Glycol
Chlorine
Caustic Soda
Ethylene Dichloride
Vinyl Chloride Linear Low Density Polypropylene High Density Polyethylene Polyethylene Polyvinyl Chloride PVC Pipe & Fittings
Source: Formosa Plastics-Texas lene (PP) resins. The facility produces electrical power mediate chemicals, caustic soda, EG, HDPE, LLDPE , and the balance of any product is sold on the and steam and operates its own wastewater treatment and PP open market. unit. Formosa Hydrocarbons Company , Inc supplies natural gas to the Olefins unit and the Utility unit. Other raw materials include brine (saltwater) from a Competitors nearby natural salt dome for the chlor -alkali (chlorine Formosa Plastics has domestic and international comand caustic) unit and raw water from the Lavaca petitors. A partial list is presented in T able 1. Navidad RiverAssociation. The more than 21,000 plastics facilities in the US emA product flow diagram of chemicals and hydro- ployed more than 1.3 million in 1996, a 26 per cent incarbons at FPC TX is shown in Figure 1. Propylene crease since 1991. Shipments totaled US$274 billion gas produced in the Olefins unit is a raw material to the PP Table 1: Competitors to Formosa Plastics unit. Ethylene gas produced in the Olefins unit is a feedstock International to the EG, EDC, LLDPE and Domestic Borden Chemicals & Plastics Australian V inyls Corporation HDPE units. Chlorine proCONDEA Vista Corporation European V inyls Corporation duced in the chlor-alkali plant Dow Chemical Corporation Mitsubishi Kasei V inyl Corporation is used as a raw material for The Geon Company OPP Petroquimica S A the EDC unit, and the caustic Occidental Chemical Corporation PETCO S.A. soda is sold as a product. The PPG Industries, Inc BASF Corporation EDC is used as a feedstock to Shintech, Inc BASF the PVC unit, which is made The Westlake Group Wacker Chemie Gmbh into pipe by another FPC USA Exxon Chemicals Nippon Zeon subsidiary , J-M Manufactur Amoco Chemicals Sumitomo Chemical ing Company . FPG in Taiwan Lyondale is a major customer for inter Source: Formosa Plastics-Texas
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in 1996, a 55 per cent increase since 1991. reputation per ceived by the public gave rise to concerns by neighboring communities. These local residents were worried about environmental impacts and safety because of the environmental compliance record of the existing facility and the potential impact of the expansion. Environmental non-compliance at the facility included air violations involving releases of vinyl chloride, a hazardous air pollutant; an emer gency air release of hydrogen chloride (HCL) that shut down a road and alarmed the local community; violations of federal and state hazardous waste provisions; and violations of state wastewater dischar ge permit requirements. The initial and primary opposition to the expansion was led by a local commercial fisherwoman, Diane Wilson, and Jim Blackburn, a regional conservationist and environmental lawyer . Wilsons environmental group - Calhoun County Resour ce Watch (CCR W) - filed in opposition to the original construction. Their objection was removed when both sides agreed to conditions that allayed the immediate concerns. These conditions included the appointment of a mutually acceptable outside consultant to ensure regulatory and permit compliance, installation of ambient air analyzers in Point Comfort and voluntary baseline physical exams performed on a number of the Point Comfort citizens. Construction of the facility began with start up scheduled for 1993. FPC TX had designed the wastewater outfall to dischar ge into the upper Lavaca Bay on the recommendation of their consultants. This part of the bay, however, was ecologically sensitive and very important to the hatching and growth of the shrimp population. Concerns for the effect the pollutants in the waste water may have on this environmentally-sensitive area of the bay led Blackburn and W ilson to file a federal lawsuit to stop the dischar ge. Wilson led two hunger strikes in protest; FPC TX extended a settlement offer . In exchange for dismissal of the lawsuit and permission to expand, FPC TX signed an unprecedented agreement allowing extensive community participation to oversee the environmental perfor mance of the facility . This 1992 agreement became known as the Blackburn-FormosaAgreement, and was the turning point for relations between the community and the company . The Blackburn-Formosa Agreement created a pro-
FPC TXs Environmental/Sustainability Program

The FPC TX facility was built in the early 1980s for production of VCM and PVC. In 1989, the company announced plans for a major expansion (costing US$1.5 billion) to produce their basic raw material, ethylene and a variety of intermediate chemicals. In addition, it developed related facilities in southern Jackson County that would process finished products from the polyethylene, polypropylene and PVC that would be produced by the expanded facilities. The environmental compliance history for the facility during the period before the proposed expansion was marred by equipment design and other problems that resulted in citations from both the state and federal environmental agencies. The announcement of such a large expansion gave rise to a high degree of interest by the industrial competition and the local communities, as well as the media. The regulatory agencies have established very high performance standards for the petrochemical industry . This is especially true for intermediate chemicals that are present in the FPC TX operation. Some of the most highly-regulated are vinyl chloride monomer , ethylene dichloride, chlorine, benzene and styrene monomer. Petrochemical plants located on the T exas Gulf Coast are probably some of the most heavily-regulated locations in the nation. Some of the environmental, health and safety standards they are subject to are: TSCA, RCRA, and OSHA work place standards, EP A Clean Air Act, EP A Clean Water Act, T exas Coastal Zone Act, US Coast Guard Regulations, Department of Transportation, and in some cases, voluntary standards required by membership in various trade gaor nizations. FPC USAsuffered a number of regulatory citations during the mid- and late 1980s at their locations in Delaware, Louisiana and T exas. Economic conditions in this region of T exas were very poor at the time of the proposed expansion. The increase in the tax base, as well as the creation of 7,500 construction jobs and 1,300 full time jobs, made the project very appealing to the state business and financial community as well as the local, state and federal political leaders. However , the environmental
55

cess for the involvement of outside parties in decision-making regarding the environmental and safety performance of the FPC TX facility . The process established a three-member T echnical Review Commission (TRC) comprised of an FPC TX nominee, a Blackburn nominee and a joint nominee. The TRC was given authority to review environmental and safety performance which opened the facility to a nearlycomplete process review . The open review process created by the BlackburnFormosa Agreement and the positive response by both parties to the findings and corrective action recommendations, enabled the facility to greatly improve its environmental and health and safety performance. Between 1993 and 1996, the TRC reviewed 552 audit findings that were resolved by FPC TX. It is estimated that more than US$2 million has been expended to cover the cost of the audits and resolve the findings. In 1994, the W ilson-Formosa Zero Dischar ge Agreement was signed, establishing a process to work towards zero dischar ge of wastewater from the facility . This agreement required a zero dischar ge study and analysis to be undertaken regarding the total wastewater dischar ge from the facility . The study spanned almost three years and defined major opportunities for reduction in the use of raw water supplies and the discharge of treated wastewater . The successful results of the relationships and systems generated by these agreements led FPC TX to jointly prepare and sign a third agreement - the Sustainable Development Agreement - in 1997. This agreement was a voluntary effort by the facility to surpass current environmental regulations and to apply the concepts of sustainable development to an operating plant. to participate in related discussions. The Agreement re-created a TRC originally created under the Blackburn-FormosaAgreement. The TRC plays an important role in fulfilling the Agreement and serves to identify what work elements need to be accomplished and to define the responsible individuals or consultants. The TRC is comprised of one member selected by FPC TX, one membership divided between Blackburn/W ilson representing the interests of the public, and one neutral member mutually agreed upon by both FPC TX and Blackburn and W ilson, constituting three memberships in total. Blackburn and W ilsons membership is a significant representation of outside interests and citizen participation in the Agreement. Since a universal template for sustainable development does not yet exist, the FPC TX contractual agreement outlines seven steps to develop a credible technique for the application of sustainable development principles appropriate to an industrial setting, addressing ecological, social and economical issues. The completion of the process to fulfill this agreement is planned for the end of 1999. The seven steps that are outlined in the contractual agreement include: summarize sustainability concepts; design a conceptual model of industrial sustainability; prepare an implementation study; revise and adjust the model; the adoption of the model by FPC TX; identify and implement technology transfer oppor tunities; determine ownership of property rights and publication rights. During the first step, a compilation was made of academic, scientific, social, religious, environmentalist, government and industrial literature related to sustainable development. A conceptual model, or template, was developed in the second step, identifying how sustainable development concepts apply to an industrial facility at all levels. The first two steps have been completed and summarized in theSustainable Development: Application of the Principles at FPC TX (AppendixA). The document
Description and Scope

The purpose of the Sustainable DevelopmentAgreement is to design a template of how sustainable development should be pursued at a modern chemical facility . The definition of sustainable development is based on work of the W orld Bank and others. Essentially , the definition requires economic development to be maintained in balance with ecological and social aspects. FPC TX has agreed to fund activities necessary to fulfill thisAgreement. The Agreement also allows for other industrial subsidiaries of FPC USA
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has been sent out to employees of FPC TX, the local community , and environmental, academic, religious, business, and government leaders for review and comment. Currently , the major issues associated with implementation of the conceptual model are being identified, evaluated and addressed. In this step, FPC TX will identify how the various components of the conceptual model may be applied and what issues or difficulties may be encountered. Next, the concepts will be evaluated for what may or may not be achievable and what are practical. The TRC will also select various experts in the sustainable development field to review and comment on the sustainable development models created by FPC TX. The model will be further refined in step four , based on the implementation issues and peer review conducted in the previous step. Once the model is successfully adopted (step 5), the opportunities for publication, dissemination and transfer of the technology created under this agreement will be evaluated and presented to the management of FPC USA (step 6). The signatories of theAgreement jointly own any intellectual property generated by theAgreement and will have equal access to it (step 7). Organization - some employees may not see the potential direction or career rewards associated with successful implementation. Opportunities fostering implementation of the program are listed below: Position - success will give FPC USA a chance to demonstrate industry leadership. Image - developing a leadership role in such a positive and important area will build a positive cor porate image. Return - the results of the program are very impor tant to the success of the business: reduce costs, improve profits, and improve community relations. Growth - business opportunities involving major expansions or modifications to the facility become more predictable and therefore can be realized. History - earlier FPC DE/FPC LA performance improvement programs led to positive feedback that supported the sustainability development program initiatives. Earlier agreements for community involvement built mutual trust and had beneficial effects on the performance of FPC TX. Tradition - Chairman Wang built FPG in a resour cepoor island economy . The eco-efficiency philosophy described by the sustainability development program is similar to that created as a result of Taiwans resource scarcity. Timing - competitors and industry peers support sustainable ideology . Community - a smooth running, successful facility is important to the present and future of the local economy. Support from the top management level has bolstered the success of the first two Blackburn and W ilson Agreements with FPC TX. Continued support is expected to play a role in the Sustainable Development Agreement as well. FPC TX s management is also involved and is generally supportive of the principles of sustainable development. Presentations were given to over 100 employees explaining the concepts of the Sustainable Development Application: the Application of the Principles at FPC TX after its distribution, and most appeared to accept the principles of sustainability . The implementation of supporting principles of the Sustainable Development Agreement is expected to be
Implementation
There are several obstacles hindering implementation of the program listed below; however , they are not insurmountable: Time - it is difficult to schedule a lar ge group of people to meet. It is also difficult for a lar ge group to focus on many discussion topics. Tradition - it is uncommon for the community to participate in internal decision- making. Implementation- new concepts, sometimes gener ated from an unusual team of the industry and community , must be accepted and implemented by a large group of culturally diverse people. Results - the outcome from programs and initiatives may not be immediately obvious, may be difficult to measure and/or may require longer than normal times to determine. Priority - it is difficult to allocate the appropriate time and energy for a new initiative in an already busy and established work schedule.
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accepted by employees based on the following reasons: eco-efficiency matches the common business requirement to lower cost through improved raw material, energy and manpower efficiency; employment opportunities for family and friends in the immediate community helps maintain the community; most of the managers and employees live in the community adjacent to the facility , which makes the quality of life, including a sound environment in the area, very important; qualified workers are more easily attracted to a facility that is well-run and has a good reputation within the community; came focused upon the compliance issues associated with Point Comfort and other FPC USA facilities as well. By 1991, a number of violations had been noted at the FPC TX and major enfor cement actions were initiated by both the US Environmental Protection Agency (EP A) and the T exas regulatory authorities. A major issue arose in T exas over the difference between the compliance profile of the T exas facility and the compliance profile of the Delaware facility . In 1985, the Formosa Delaware facility was shut down by the Delaware authorities for environmental non-compliance. Subsequently , a major turnaround occurred at that facility and compliance improved dramatically . By 1991, a noticeable difference once again existed between the compliance profiles of the Delaware and Texas plants. This difference was emphasized in proceedings before the T exas regulatory agencies and played a key role in the initiation of the first agreement between FPC TX and Blackburn.As will be discussed in later sections, the regulatory compliance of Formosa improved significantly after implementation of the Blackburn-FormosaAgreement. Again from the adversarial regulatory proceedings, an issue arose over zero dischar ge. Although the Clean Water Act has the zero dischar ge of wastewater as a goal, that goal is lar gely ignored in EP A wastewater dischar ge proceedings. Wilson took that goal seriously and pressed for a meaningful zero dischar ge review during the regulatory process. Ultimately , Wilson obtained, through agreement with FPC TX, what she could not obtain through the regulatory process - a meaningful analysis of zero dischar ge options and significant reductions in wastewater volume via recycling. The regulatory process was clearly an external driver in the decisions by FPC TX to initiate agreements with Blackburn and W ilson. Without these ear lier agreements, it is unlikely that the sustainability effort at FPC TX would be in place today .
Sustainability Program Drivers

External Drivers
The sustainable development program at FPC TX was generated by a series of agreements with external par ties. These parties were Diane W ilson and Jim Blackburn. The first agreement (1992) was with Blackburn and addressed regulatory compliance. The second agreement (1994) was with W ilson and addressed zero dischar ge of wastewater . The third agreement (1997) addressed sustainability . Therefore, to understand the 1997 sustainability agreement and the role of external factors, it is important to understand the earlier agreements and their genesis as well.
Regulatory
Regulatory issues were not a driver of the sustainability agreement, but were extremely impor tant in the 1992 Blackburn-Formosa compliance Agreement. The Formosa Plastics Group had expanded into the US during the early 1980s by pur chasing two plants- one in Louisiana and another in Delaware - and by constructing a new VCM and PVC plant in Point Comfort, T exas. When FPC TX proposed a US$1.5 billion expansion at Point Comfort in the late 1980s, Blackburn and Wilson opposed the issuance of air-related construction permits and wastewater discharge permits. During the course of the adversarial processes associated with permit decision-making, attention be-
Public Relations
Wilson and the CCR W announced their concerns and opposition to the FPC TX expansion plans, even though public support appeared overwhelming for the expansion due to job creation. The initial reaction of the community was not positive towards the CCR W because they were viewed as obstructionists. Eventually, however , other members of the shrimping and
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fishing industry began to support W ilsons concerns. During the construction of the expanded facility , others in the local and state community joined in opposition because of associated incidents or events that occurred with the original FPC TX plant or the construction of the expansion. Some examples that help describe the atmosphere that existed in 1991 are: In a move toward regulatory consolidation, the governor of T exas announced in August that the various state environmental agencies would be reorganized. This combined the T exas Water Commission and the T exas Air Control Board into the current T exas Natural Resour ce Conservation Commission (TNRCC). OSHA levied a US$2.8 million fine against the Union Carbide Plant in Seadrift, a small community about 30 miles west of Point Comfort. Newspapers reported that Formosa had hydrogen chloride (HCl) leaks of 7,500 lbs (7/7/91); 1,062 lbs (8/3/91); and 64 lbs (8/23/91). The reportable quantity for HCl was 5,000 pounds. The 64-lb release on or around 8/23/91 was originally reported in the local Port Lavaca W ave newspaper and was later picked up by theVictoria Advocate and Houston Chronicle on 8/24/91, and theAustin American Statesman on 8/25/91. The safety record FPC TX was experiencing dur ing the expansion was discussed in a 10/13/91 Houston Post article which cited three constructionrelated fatalities. FPC TX and the Lavaca-Navidad River Association were sued by environmental groups over construction of the water supply pipeline. employed. The relations with local business groups that would profit from such an expansion- including real estate, banks, retail, commercial and medical - were favor able. However, concerns of health and safety , environmental impacts, impacts on the shrimping industry , use of fresh water from Lake e Txana, and impacts on the local county infrastructure were beginning to be considered as the excitement of the expansion began to wane.
Financial Pressure
Financial costs associated with such a lar ge capital venture are immense. Any time delays in preventing a US$1.5 billion investment from starting up were very costly. These expenses would be immediately harmful to FPC USA s cash flow, and would impact their competitive edge. Concerns about delays obtaining permits, and construction cost increases, must have played a part in the acceptance of the early Blackburn/ Wilson agreements. This pressure, however , does not currently appear to have a significant impact on the Sustainable Development Agreement.
Government Relations
Regulatory issues were presented in a previous section. There are numerous issues associated with relations between the plant and federal, state and local government. A reputation built on positive per ception and performance is extremely important in developing the proper relations with government agencies. The development of the Sustainability Development Program will be met with favor by all of the agencies but especially those that deal with the environment, wildlife, coastal water ways and human Environmental activists and state newspapers accused health. or questioned whether FPC TX was receiving favored status and having their construction permits fast Public and Employee Perception tracked by the regulatory agencies. National televi- FPC TX learned that public relations are extremely sion magazine news programs (ie 48 Hours) high- important. It is almost impossible to separate a lar ge lighted FPC USA s environmental history and events facility with more that 1,300 full-time employees from associated with locating such a lar ge expansion in a small community . Community per ception of FPC Texas. TX mirrors the per ception of the companys employFPC USAdoes not subscribe to the public relations ees. The most believable public relations people are activities that are more typical of US companies. Its the employees; they are believed because they expeapproach was much more on a local level within the rience what is happening on a daily basis. Per cepsurrounding three- or four county region. Professional tion is reality - therefore, public per ception is very public relations consultants and companies were not important to FPC TX.
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FPC TX is located in a rural south e Txas coastal Figure 2: Blackburn-Formosa Agreement community . The original employees were hired dur decision/arbitration process ing the depths of the recession between 1981 and 1983. Most of these new employees had no previous experience in the petrochemical industry . Many had lost TECHNICAL REVIEW COMMISSION their jobs or had been unable to locate satisfactory emDr. Davis Ford Ken Mounger Jim Blackburn ployment. Almost all of them - engineers, operators, mechanics, and office personnel - were local or had local ties because of families. They were selected from hundreds of candidates. TRC Hires Auditors The early job satisfaction of the employees wore thin at times during the late 1980s and early 1990s. The opinions and attitudes from the workers who were transferred into the community may have increased Auditors Make Recommendations to TRC: local concerns about the plants performance. The concerns of the hourly workers resulted in activities to Best determine whether they should become or ganized Regulatory OR Management Practices and represented by a national union. FPC TX has instituted worker satisfaction programs to try and meet their employee s needs. However , conTRC Sends Recommendations to Formosa cerns for advancement and opportunity exist. The concerns and perceptions of FPC TX by their Formosa Accepts or Rejects employees is important. The fact that a lar ge portion Recommendations of the community is made up of the companys own employees increases the importance of their public TRC May Vote to Bind Formosa image. The perception that FPC TX is concerned about to Recommendation the future and the environment in which their employees work and live is a crucial factor in the accepSource: Blackburn-Formosa Agreement, February 1998. tance of the Sustainable DevelopmentAgreement. nity and FPC TX management by the success of the Internal Drivers original Blackburn-FormosaAgreement and W ilson Zero Discharge Agreement were the key factors that led to the signing of the Sustainable Development CEO and Management The acceptance, support and development of a suc- Agreement. Initial opposition to the FPC TX facility cessful sustainable development program was not expansion in 1989 had been converted into a coops signing possible without the support of the executive vice erative effort that ultimately led to FPC TX president andthe management team. It was very dif- of the Sustainable DevelopmentAgreement. The opficult for the executive vice president and the man- position culminated in administrative law hearings agement team to support such a program unless dem- and a federal lawsuit, which was eventually settled onstrations of improved performance were observed. by the Blackburn-Formosa Agreement. Under this As a result, upper management support was not agreement, a TRC similar to the TRC created under granted until it became evident that time and ener gy the Sustainable Development Agreement, was given were better spent in resolving these issues rather than authority to review environmental, health and safety contesting them. compliance issues at FPC TX. The scope of its review included air, wastewater , solid waste, hazardous Previous Agreements waste, emergency release and reporting, pollution preThe trust and confidence generated with the commu- vention, industrial hygiene and worker safety , fire prevention, mechanical integrity and process safety man-
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agement. The TRC has been able to resolve all Figure 3: Wilson-Formosa Zero Discharge Agreement: issues to date, without having to resort to the parties involved in the mediation agreement binding arbitration process. The decision/arbitration procedure followed Formosa Plastics DianeWilson under the Agreement is outlined in Figure 2. The TRC selected environmental and safety professionals to audit the facility for compliance with regulatory provisions and good management practices. The audit results- including TRC Dr. Davis Ford specific findings and recommendations for acJim Blackburn tion - were submitted to the TRC. The TRC then Ken Mounger sent the audits to FPC TX management for re- TNRCC EPA sponse. FPC TX s response would be that they either agreed to implement the recommendations, or disagreed with the findings or recommendations. If FPC TX disagreed with the recConsultants ommendations, they had to explain why . The TRC could then vote to enfor ce the recommendations of the auditors, thereby concluding the KEY TNRCC = Texas Natural Resources Conservation Commission binding arbitration process. It should be noted EPA = Environmental Protection Agency TRC = Technical Review Commission that throughout the process, binding arbitration was never necessary . The success of the Blackburn-FormosaAgreement The general goal of these terms was to insure that the led to the signing of the W ilson-Formosa Zero Dis- alternatives implemented would actually improve the charge Agreement. The W ilson-Formosa Agreement environment at a cost that was reasonable relative to established a mediation process, shown in Figure 3, the benefits. There needed to be a relationship between for decision-making regarding whether or not vari- the expenditures and environmental improvement, ous zero discharge alternatives developed by the TRC ensuring that water pollution solutions did not genwould, in fact, be implemented. The US EP A and the erate other, more onerous problems in ener gy usage, Texas Natural Resour ce Conservation Commission air pollution and solid and hazardous waste genera(TNRCC) co-signed theAgreement, providing regu- tion. latory insight and cooperation in the pursuit of consensus regarding zero dischar ge alternatives. Impacts of Program Under the Wilson-Formosa Zero Dischar ge Agreement, FPC TX agreed to implement technical alterna- Program Results tives identified and recommended by the TRC if those alternatives were environmentally superior to the ex- Environmental, Health and Safety Performance isting wastewater dischar ge system, and if those alternatives were economically beneficial. Under the The Sustainable DevelopmentAgreement is currently Agreement, neither environmentally superior nor in the development stage. However , earlier agreeeconomically beneficial were defined. Instead, the ments with FPC TX brought a number of positive reparties adopted a working definition that considered sults. The Blackburn-FormosaAgreement produced environmentally superior and economically benefi- four distinct benefits. Audits done by independent cial to include several aspects. consulting firms in 1993, 1995 and 1996 all produced Various elements that were environmentally supe- favorable results. The number of TNRCC violations rior and economically beneficial, shown in Figure 4, at FPC TX fell from 28 in 1990, to zero in 1996 and are complicated. However , they provided the foun- 1997, as shown in Figure 5. Reportable quantity redation for negotiations between W ilson and FPC TX. leases for the facility have also declined markedly ,
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FORMOSA PLASTICS CORPORATION (TEXAS) Figure 4 Wilson-Formosa Zero Discharge Agreement influence diagram
RESOURCE CONSUMPTION PUBLIC OPINION CAPITAL COSTS
EMISSIONS
O&M COSTS
ENVIRONMENTALLY SUPERIOR
ECONOMICALLY BENEFICIAL
FINANCING
WASTE GENERATION IMPACT/ RISKS REGULATORY/ LITIGATION RISKS PERMITS, FINES & LITIGATION
REGULATORY COMPLIANCE
Key to Diagram
Quantifiable Quasi-Quantifiable Non-Quantifiable
from 16 in 1993, to four in 1997, as shown in Figure 6. The injury rate per 200,000 man hours has declined from 6.51 in 1993, to 1.32 in 1997, as shown in Figure 7. A final indication of the success of these agreements is that water quality monitoring studies of Lavaca Bay show no increase in concentrations of toxic or ganic pollutants near the wastewater treatment plant out-
fall. The Wilson-FormosaAgreement has also proven to be an effective stakeholder involvement process.As a result of the work undertaken pursuant to the Agreement, FPC TX agreed to implement three internal recycling alternatives that will reduce the wastewater generated by approximately 2.6 million gallons per
Figure 5 Blackburn-Formosa Agreement, TNRCC inspections violations forwarded

25 Solid Waste 20 Wastewater Air
Figure 6 Blackburn-Formosa Agreement, reportable quantity releases

25 20 15 10 5
Expansion Plants Vinyl Plant
15
10
0 1990 1991 1992 1993 1994 1995 1996 1997
0 1993 1994 1995 1996 1997
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CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING Figure 7 Blackburn-Formosa Agreement, recordable injuries
8 7 6 5 4 3 2 1 0 1993 1994 1995 1996 1997 1996 1996
Industrial Texas Average Chemical Council Average
6.51 5.12 4.53 4.9
planned changed being considered. This early involvement by the community helps define the acceptance and should normally yield an unimpeded per mit.
Result Measurement
1.9
1.92
FPC TX has a number of programs in effect that may be used initially to judge success: Return on.............. investment Production rate..... per employee Improvement........ program Benchmarking....... Comparison to industry performance Comparison to competition Continuous improvement
1.32
day, a reduction of approximately 32 per cent over 1996 discharge levels. The results are summarized in able T 2. FPC TX has adopted zero dischar ge as a long term goal on all media and may eventually recycle used brine streams back to the salt dome. FPC TX s commitment to high standards of perfor mance has been demonstrated by their receipt of ISO 9000 and 9002 certification. Most noteworthy, they also became one of the first US chemical manufacturers to have all its facilities certified to the international ISO 14001 standard for environmental management systems.
Compare programs to best industry practice ISO 9002 ................ Improves quality of product ISO 14001 .............. 3 rd party certification of environmental performance Environmental performance Benchmarking Health and safety performance Benchmarking
Financial Benefits
Very few of the financial benefits from the three agreements have actually been quantified. However , raw water consumption has been reduced annually by US$2.19 million as a result of recommendations from the Wilson-Formosa Agreement. The current US$800 million-plus capacity expansion will not require additional raw water supplies nor will the dischar ge limits of the facility need increasing. This is a result of the recommendations from the zero dischar ge study . The cost savings in water , permit preparation, engineering design, public notification, etc, are very difficult to quantify but are appreciable.
One result of the audit process required in the earlier agreements was the enhancement of emer gency response capabilities. The result of this change was recently observed with the rapid response and containment of an explosion that occurred in a chemical stor age tank. It is reported that both the local community and the TNRCC were very impressed by the response
Table 2 Wilson-Formosa Zero Discharge Agreement results

Formosa commits to 3 major reuse/recycle projects
32% reduction in effluent achieved Savings of 2.6 million gallons per day of freshwater
Formosa commits to wetland creation project

Several hundred acre project Saved water used to provide wetland nourishment Possible diversion of wastewater to wetland
Change Acceptance
Major changes that require permits with public notification become more predictable because the community stakeholder process that is part of the Sustainable Development Agreement. Through the technical review committee and auditing process, the community is kept involved in current plant performance and
Continue Zero Discharge Reuse/Recycle Study

Sustainable Development Agreement Zero Discharge -- long term goal on all media
Potential Removal of Brine Stream in the Future

Necessary for additional recycle/reuse Not needed for water quality Discharge of brine from dome into bay may not be sustainable over time
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for the facility . With the objective of doing no harm to the planet, the workers or the community , the project Resource Advantages team proposes that the ultimate goal of the facility be FPC TX starts with petroleum feed stocks as raw ma- the achievement of zero emissions. It will take time terials and is vertically integrated to finished prod- to reach this goal to the maximum extent physically ucts. This may give them a competitive advantage that possible and will also require that all impacts gener helps ensure early success in the Sustainability De- ated by the facility be understood and intended. The velopment Program. facility must fully understand and predict the impacts A major resource that FPC TX has is the T ejano of its actions in order to fulfill the tenet of doing no Farms. This is a working farm in the adjacent county harm. Just as zero defects is a goal of T otal Quality that is being used for environmental studies. A 200+ Management (TQM) common in many industries, wetlands has recently been developed with guidance zero emissions is a goal of this sustainable developfrom environmental agencies, the Sierra Club and oth- ment template. ers. Very few facilities have this type of system so close A third element of the construct is a commitment to to their operation. collaboration. Sustainability is about cooperation, not domination. This commitment involves scientific and Future Plans policy issues as well as interactions with the commuSustainable Development: Application of the Principles at nity and workers. In order for FPC TX to reach FPC TX outlines a template for evaluating sustain- sustainability , the company must find ways to resolve able development progress at FPC TX. A philosophidifferences - dissenting and opposing voices must be cal construct with which to view the process is em- heard. T rue collaboration requires cooperation in the bedded in this template. The paper was cir culated decision-making process, otherwise called empower widely for review , with the aim of obtaining comments ment. on the sustainable development template and construct from the public. Table 3 The World Bank framework for sustainable develElements of the Philosophical Construct opment, expressed by Ismail Serageldin, consists of an equilateral triangle representing economics, ecolHolistic View of Corporation, Society, and Earth ogy and social structure. The conceptual model for Keeping the Balance Relationship to Current and Future Generations Sustainable Development at FPC TX, shown in Figure 8, is based loosely on this model. A philosophical Do No Harm construct was added as a guide for the project, and Zero Emissions the economic section was divided into two parts, Healing/Restoration of Earth Support of Community Structure Meeting Basic Needs and Eco-efficiency . The philosophical construct is composed of five elCommitment to Collaborative Process ements with which to view sustainable development. Cooperation, Not Domination These elements are summarized in T able 3. The first Collective Study of Science/Policy Issues element of the construct calls for the FPC TX facility Community and Employee Collaboration to be viewed holistically . While it is a provider and a Recognize/Encourage Spiritual/Ethical Values member of the community , it also discharges pollutSense of Place ants into the air and water . An essential aspect of susSense of Purpose tainable development is that a balance be maintained Responsible Steward Humility and Trustworthiness among economic, ecological and social needs, leadDignity of Others ing to the phrase keeping the balance. This means Series of Small Steps that each of these topics is of equal importance for the future as well as the present. End Points Partnerships The second element of the philosophical construct Sufficiency - Satiation is the adoption of Do No Harm as an ultimate goal and the communication.
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CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING Figure 8: The Sustainable Development Conceptual Model for FPC-TX
Philosophical Construct
Economic
Meeting Basic Needs Corporation Workers/ Community
Social
Ecology
Ecoefficiency
Community Empowerment
Ecology
Compliance
Access to Information
Education
Profit
Employment
Pollution Prevention Product Stewardship Substitution
Procedural Participation Substantive Participation
Carrying Capacity
Education
Burden Reducation/ Zero Impact Restoration/ Rehabilitation
Worker satisfaction Personal satisfaction Sufficiency
Dematerialization
Partnership
Partnership
A fourth element of the construct is the incorporation of personal values into the philosophy . A sense of place and a sense of purpose are strongly connected to sustainability and should be emphasized and encouraged. The dignity of others, particularly those lacking resour ces, should be recognized and maintained. Humility and trustworthiness should be present in all interactions. An overall goal of responsible stewardship- care of the household for those coming after us - is a key element in the incorporation of ethical and spiritual values into sustainable thinking. Finally , progress towards sustainability will occur through many small steps on many levels. There are two end points to the philosophical construct - partnership and sufficiency . Partnerships are intended to exist between the facility and the community , the facility and the workers, and the facility
and the ecological system. This is not a handshake partnership; it is a philosophical commitment to understanding and incorporating the needs of others into the definition of a relationship. Society would have sufficient things and sufficient facilities to meet basic needs in a manner that does not tax the ecological system beyond its ability to provide and sustain mankind within the carrying capacity of the ecological system. The principles identified above are expected to lead to sustainability , if adopted to the fullest extent. However, the timescale necessary to reach these goals is uncertain - capital investments in existence today will not be obsolete for decades to come. Therefore, in the interim, this philosophical construct will help to guide the facility toward a more sustainable future. Under the philosophical construct, the W orld Bank
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the current and future educational needs of the children who will, given the right knowledge, meet the challenges of tomorrow . The fourth level of this inquiry is employee satisfaction. Satisfaction with employment can encompass health and safety issues and empowerment concepts, as well as employee per ception of the performance of the facility . If workers do not feel safe and healthy in A. Area of Inquiry: Meeting Basic Needs their work environment, then the facility has failed an important and critical group of people. In addiProfit tion, employees must feel they have a say in company Employment issues and they must have a positive attitude about Education their work in particular and the company in general. Worker Satisfaction The fifth level of the meeting basic needs inquiry Personal Satisfaction involves personal satisfaction. One theory is that Sufficiency higher consumption of goods does not necessarily The first area of inquiry will evaluate the extent that lead to greater personal satisfaction. One goal of susbasic needs of the population are being met, based on tainable development may be to explore the intersecthe steps listed above. This inquiry comes from the tion of consumption and personal satisfaction. This inquiry extends beyond the facility location and bedefinition of sustainable development in Our Common Future: sustainable development is development that comes a more general theoretical inquiry into per meets the needs of the present without compromis- capita consumption patterns. The end point of the inquiry into meeting basic ing the ability of future generations to meet their own needs is simply called sufficiency . This concept came needs. To ensure the ability of the facility to provide basic from the economist Herman Daly and may be conneeds, it must generate a profit. Otherwise, the facil- trasted with the traditional view of the economy ity may eventually close down, which would elimi- whereby production increases as consumption increases, which in turn causes further production innate a source of income for the community . Therefore, creases, which again generate increases in consumpprofit, or return on investment, must be a priority . , economic productivity and conHumans have basic needs, which are represented tion, etc. Ultimately by the second level. These needs are primarily food, sumption must be balanced within the ecological s ability to absorb the material and ener gy water and shelter . Providing these basic needs in the system modern industrial society requires income of some flows associated with this upward spiral of production and consumption, a notion encompassed by the sort. This is a role that industry and other commer cial concerns have traditionally performed. There is a di- first element of the philosophical construct to achieve rect link between employment and the ability of ecological balance. The important point at this stage is to note that this people to provide for themselves. This is certainly recognized throughout the literature of sustainability and concept of limits is implicit in our view of the ecois a major concern in developing countries as well as nomic engine whose role it is to meet basic needs. developed countries. W ithout an economic engine, it is unlikely that basic human needs will be met in B. Area of Inquiry: Eco-efficiency todays world. Environmental Compliance Education is the third layer of the basic needs inPollution Prevention quiry . Education gives people the ability to meet baProduct Stewardship sic needs, both today and in the future. The facility Substitution/Alternatives can assist in providing quality education within its Dematerialization communities, both directly and indirectly . Working together , the community and the facility can explore concepts of economic, social and ecological concerns divide further into four areas of inquiry: meeting basic needs; community empowerment; eco-efficiency; and ecology. The four areas will be pursued concur rently in order to achieve a holistic view of sustainability .
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Eco-efficiency involves efficiency in both an economic sense and an ecological sense. If a company reduces its use of a resour ce, then it should spend less money on purchasing that resour ce. The underlying goal of the eco-efficiency inquiry is reducing resour ce use and pollution generation. This area of inquiry is specific to the facility and is the most technical. Addressing this area is the key to the realization of certain elements of the philosophical construct, specifically the goal of do no harm through the attainment of zero emissions in consideration of the constraints inher ent in the fundamental laws of thermodynamics. The most basic step and the starting point for this task is environmental compliance.The facility must maintain full compliance. It is simply a matter of per formance and vigilance. There is no sustainability without compliance. The next step in the eco-efficiency inquiry is to explore pollution prevention strategies. Here, the emissions inventory (waste) associated with a facility must be identified and evaluated. This includes the identification of air, wastewater , hazardous and non-hazardous emissions (waste) and analysis of the environmental impacts. Once this analysis is performed, the facility can prioritize areas for pollution prevention strategies. From the emissions inventory , an analysis can be completed that calculates a number for the environmental impacts of these pollutants.All of the materials utilized within a facility could be cataloged and a weighting system established that accounts for the material s ability to impact the environment in areas such as ozone depletion, global warming, acid rain and toxicity . The individual impacts of each compound could then be ranked against a compound that served as the base impact. An example is identifying carbon dioxide as having a global warming potential of one (1) and then ranking all other compounds against carbon dioxide. Once such an analysis is per formed, the facility can again prioritize areas for pollution prevention strategies. The third level of the eco-efficiency inquiry is product stewardship.As a producer of products, the facility has the responsibility to understand all the environmental, health and safety issues involved in the design, manufacture, marketing, distribution, use, recycling, and ultimate disposal of its products. The facility must understand that its products may have certain risks associated with their intended use - they can be misused and result in unintended impacts on the environment. Based on that understanding, the facility must critically analyze through risk assessments the impacts that might occur , and seek means to eliminate improper usage through education of employees and consumers. Information on the hazards of a product must be distributed to users and made available to anyone who might be exposed to that product. The facility must establish systems to ensure readiness and provide assistance in the event of a spill, exposure, or misuse of products.Additionally, products must under go periodic analysis to balance the true value of the product versus the risk associated with use. At the very least, issues such as recycling of spent or used products must be included in this analysis. The fourth level in the eco-efficiency inquiry deals with the concept of raw material and product substitution. Economists have long discussed raw material and product substitution as a response to sustainability concerns. Here, if the pollution prevention or product stewardship analysis identifies significant unresolved impacts, alternate raw materials, processes and products should be assessed. This step is particularly important to actions such as capital facility replacement, where issues such as raw material requirements and specifications of the final product can be evaluated and integrated into the decision-
Figure 9 Full World from Daly, Beyond Growth

ECOSYSTEM
RECYCLE
M ECONOMIC ACTIVITY E
M = matter E = energy man-made capital natural capital
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making process. In other words, it is easier to address this issue when one is building a new plant or considering new product units. The fifth level of the eco-efficiency inquiry is dematerialization, a concept drawn in part from the work of Graedel and Allenby and in part from the work of Herman Daly . De-materialization involves understanding the flows of ener gy and materials into and out of the production process and attempting to minimize these flows. Figure 9 shows one interpretation of the flow of ener gy and materials.At one level, de-materialization must occur in the pollution prevention step. However , as considered here, de-materialization is concerned with the footprint of the total production process, including full life-cycle analysis. Here, the goal is to deliver an end product with as little material content as possible. From this perspective, de-materialization is expected to be the most difficult and sophisticated analysis. This is essentially the end point of an eco-efficiency analysis. sence of this step is that certain opportunities for interaction between the community and the facility be established. There are a number of models for such interaction. The intent will be to explore and identify the most appropriate model to encourage full and open participation. The next level of community empowerment is the substantive involvement of the community regarding the impacts of the operation of the facility . Here, the objective is to provide the community with bona fide access to the decision-making process of the facility regarding these impacts. The goal is to find mechanisms to address concerns and reach mutual resolutions. The prior FPC TX agreements and the current sustainable development agreement are presumed to have responded to this issue. However , the TRC is interested in alternative formulations as well. Partnership is the end point of the community empowerment inquiry . This is not a handshake partner ship - this is a commitment to understanding and incorporating the needs of others into the relationship. This is also a two way street between the facility and the community , and the community and the facility.
C. Area of Inquiry: Community Empowerment

Access to Information Procedural Participation Substantive Participation Partnership The third major area of inquiry into sustainable development is the empowerment of the community . The community referred to here can be cities and towns adjacent to the facility or interests that are affected by the facilities operation. The philosophical construct clearly establishes collaboration as an element of sustainable development. Here, collaboration ultimately involves equal access to decision-making processes. Providing information is a starting point of the community empowerment inquiry . Meaningful information must be provided to the community and it must be accessible, understandable and comprehensive. For example, the provision of a community library with all relevant information about the facility and related references should be considered. The second issue is procedural participation, which involves the establishment of processes for involving the community in facility decision-making. The es-
D. Area of Inquiry: Ecology

Education Carrying Capacity Burden Reduction/Zero Impact Restoration/Rehabilitation Partnership The ecological area contains both traditional and somewhat innovative viewpoints of the role of the facility. In many respects, the ecological inquiry is intended to reflect certain concepts of Aldo Leopold as expressed inA Sand County Almanac , particularly those aspects regarding the development of a land ethic. There are also aspects of the religious concept of stewardship that emer ge in this section. The first concept is education regarding the ecological system near the facility . The facility must be clearly understood in the context of the ecological system within which it lies. It is impossible to meet the philosophical goal of sense of place if that place is not understood in an ecological sense. The rhythms of the natural system, the migrations and the balances must
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be recognized and appreciated. The second item applies the concept of carrying capacity or assimilative capacity to the impacts gener ated by the facility . Carrying capacity is the ability of the environment to be impacted without loss of ecological function. In many respects, US environmental law incorporates the concept of carrying capacity into permitting procedures, and carrying capacity considerations are addressed in a facilities permitting process. However, carrying capacity considerations were not evaluated with regard to all issues, including global warming and stratospheric ozone loss. All aspects of the facility will be evaluated with regard to carrying capacity. The third layer involves the application of the do no harm concept to the ecological system. In many respects, this is an advanced stage of stewardship, an attempt to ensure that the activities of the facility do not injure the ecosystem and that those of us who live today do not usurp the carrying capacity of the ecosystem to the disadvantage of those who come after us. A goal of zero emissions - especially with regard to water and air - defines this stage of the ecology inquiry . The fourth level involves engaging in activities that restore and/or rehabilitate the ecological system, regardless of whether the harm is related to the operation of the facility . Here, the goal is for the facility to view itself as an ecological citizen, acting to improve aspects of the natural system that may have been degraded over time. The fifth and final layer of the ecology inquiry deals with achieving a partnership between the facility and the ecological system. This is a partnership of action and spirit, a true melding of disparate elements. The concepts of the sustainable development program have been, for the most part, well received by the workers at FPC TX and generally supported by the management. FPC TX has improved significantly in environmental compliance, worker safety and water conservation, as a result of their agreements with outside parties - this has ultimately lead to financial savings. FPC TX has the opportunity to be a leader in sustainability for the plastics industry . The future of Point Comfort and FPC TX is very positive.
Conclusions
The conceptual model with which to carry out sustainable development at FPC TX is now complete. The TRC has moved on to step three of the Sustainable Development Agreement, the implementation study . Currently , FPC TX staff is gathering information on all of the plant s processes. Once the information is compiled and comments from the white paper on the conceptual model of sustainable development are reviewed, the TRC will move forward with the implementation of sustainable concepts.
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References
1996 Annual Report of Formosa Plastics Group Austin American Statesman 8/25/91 Blackburn, Jim, Feb., 1998 , Report on the BlackburnFormosa Agreement Blackburn/Formosa echnical T Review Commission Sustainable Development Agreement White Paper , Oct. 30, 1998. Daly, H., 1996, Beyond Growt h, Beacon Press: Boston Ford, Davis, Jim Blackburn, and Ken Mounger , July , 1994 , Wilson Formosa Zero Dischar ge Agreement Formosa Plastics Corporation, USA, September , 1997 Brochure Houston Post 8/24/91,7/28/91 Port Lavaca W ave 8/23/91 Sustainable Development Agreement Victoria Advocate 7/7/91, 8/3/91, 8/7/91, 8/24/91
http://www .socplas.org/Industry/Economy/tx.htm
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Appendix A
Blackburn/Formosa Technical Review Commission Sustainable Development Agreement White Paper
For several years, Formosa Plastics Corporation,exas T (FPC TX) has been working with community stakeholders including Diane W ilson and Jim Blackburn to integrate the concerns of outside parties into the decision making process of FPC TX. The BlackburnFormosa agreement, signed in 1992, provided for the evaluation and improvement of environmental and safety compliance at the FPC TX facility . The WilsonFormosa agreement, signed in 1994, established a process to work toward zero dischar ge of wastewater from the FPC TX facility . Copies of the final reports of these two agreements are available upon request. The success of these efforts led to the signing of a new agreement in 1997 between Wilson, Blackburn and the FPC TX facility . The subject of that agreement is Sustainable Development. This report presents a template of how sustainable development should be pur sued at a modern chemical facility . This report is being circulated with the hope that those who review it will offer a critical analysis of the contents. FPC TX, Diane Wilson, and Jim Blackburn desire input to assure that the concepts presented in this draft are a responsible application of the concept of sustainable development to any industrial facility . As background, the FPC TX facility is located adjacent to the city of Point Comfort, T exas with a population of approximately 900, and next to Lavaca Bay in Calhoun county , Texas. The facility has 1300 employees and is composed of 7 manufacturing units producing ethylene, propylene, chlorine, caustic, polyvinyl chloride (PVC), ethylene dichloride, ethylene glycol, high density polypropylene (HDPE), linear low density polypropylene (LLDPE), and polypropylene (PP) resins. The facility also maintains a Utility unit that meets the electrical and steam requirements of the facility and operates the wastewater treatment unit. The basic raw materials of the facility are oxygen, brine (salt water), and natural gas.
Sustainable Development
It is hard to find a definition of sustainable development that everyone accepts. In 1987, sustainable development was adopted by an international commission chaired by Gro Harlan Brundtland of Norway . In the Brundtland Commission Report, Our Common Future, sustainable development was defined as development that meets the needs of the present without compromising the ability of future generations to meet their own needs. The premise is simple; we should not deplete the Earth in a manner that prevents future generations from achieving a similar standard of living. Robert Solow , the Nobel Prize winning economist, has described sustainability as an obligation to conduct ourselves so that we leave to the future the option or the capacity to be as well off as we are today . This view has been described as Capitalism with Ethics. The Business Council on Sustainable Development, in its book Changing Course , has described sustainable development as being similar to living off a trust fund. W e should try to live off the interest and preserve the capital of the trust for future generations. These viewpoints do not prohibit resour ce use today, but do require that long term implications associated with resour ces and ecosystems be integrated into todays decision-making. One of the clearest viewpoints has been set forth by William Ruckelshous, a man who has twice been administrator of the U.S. Environmental Protection Agency and who has also been a successful businessman. He states that: Sustainability is the [emer ging] doctrine that economic growth and development must take place, and be maintained over time, within the limits set by ecology in the broadest sense - by the interrelations of human beings and their works, the biosphere and the physical and chemical laws that govern it... It follows that environmental protection and economic development are complementary rather than antagonistic processes. Scientific American , September 1989. The economist Herman Daly discusses sustainability in terms of the flow of materials and energy through the economy which he describes more fully in his book,Beyond Growth, and other papers. In the past (the empty world), the economy was small and the ecosystem lar ge. Today (the full world), the
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economy is large and may exceed the ability of the ecosystem to absorb human impacts. Daly believes that sustainable development requires a new way of thinking (full world thinking) that concentrates upon understanding the flow of ener gy and materials through the economy and ensures that the limits of the ecosystem are not overtaxed by our economic activity . Brad Allenby , Vice President of Environmental, Health and Safety atAT&T , is one of the leading thinkers about sustainability . He does not view sustainability as an end state or as a static concept. Instead, he views sustainability as a process - a series of inquiries and steps that are heading toward a longterm goal of compatibility between human activities and the natural system. In his view , choices can be made by corporations based upon a goal to act in a sustainable manner without necessarily defining what ultimate sustainability is. In this manner , steps can be taken to address certain issues without requiring agreement upon ultimate sustainability . In Industrial Ecology , B. Allenby and his co-author T.E. Graedel discussed sustainability from the standpoint of avoiding serious perturbations to the material cycles of nature. They placed particular impor tance on understanding the impact caused by the interference with the Earth s carbon, nitrogen, sulfur and phosphorus cycles. Ismail Serageldin of the W orld Bank has written extensively on sustainable development, emphasizing that balance is required in sustainable development. Here the process of sustainable development is viewed as a triangle, with equal sides representing economics, ecology and social structure. In order to have sustainable development, all three sides must be in balance. Even the religious community has written about sustainability . Stewardship is a religious concept of managing and protecting the natural system for those who come after us. Some religions are beginning to emphasize the importance of protecting the Earth as the Creation. Others are emphasizing the need for Earthkeeping, of protecting and enhancing the Earth in our daily actions. For many , the spiritual dimension of sustainability promises to be one of the most interesting and rewarding. Finally , collaboration and cooperation are key concepts of sustainability . In order to achieve a sustainable future, we have to learn to work together and to consider different points of view in decision-making. Such is the goal of the Sustainable Development Agreement signed by Diane W ilson, Jim Blackburn and FPC TX. The view of sustainable development that has been adopted for use in this FPC TX application is one that is derived from the work of the W orld Bank as well as the work of Herman Daly and BradAllenby . Ismael Seregelden has written about the need to maintain a balance between the economic, ecological and social aspects of sustainable development.As such, sustainable development is presented conceptually as a triangle, with social, economic and ecological sides. The project team (composed of members of the T echnical Review Commission and Formosa Plastics Cor poration, T exas staff) believes that such a conceptual approach is valid for the FPC TX case study . However, the project team has made two additions to Seregeldin s conceptual approach as shown in Figure 1. The primary purpose for these modifications is the make the model more applicable to the issues associated with evaluating a modern chemical facility as well as integrating outside views into corporate decision-making. The first major change from the W orld Bank concept is the addition of a philosophical construct to guide the project. The project team believes that the philosophical approach to sustainable development is extremely important, particularly given that an end point of sustainability may not be reached for many decades into the future. Therefore, a philosophical construct guides the work of FPC TX application. Secondly, the economic section has been divided into two parts. These are Meeting Basic Needs and Eco-efficiency. This division was considered desir able due to the extensive amount of effort that will be required under the area of Eco-efficiency. As such, the issues associated with industrial ecology are considered independent from the general economic development and worker satisfaction issues associated with Meeting Basic Needs. This division led to the identification of four major areas of inquiry shown in Figure 1. The philosophical construct and conceptual model were developed by a consensus process in accordance with the Sustainable DevelopmentAgreement. Diane Wilson and Jim Blackburn participated in this pro-
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cess as did Ken Mounger , Bob Wallace and Mae Wu of the Point Comfort facility , Bob Kelley of Formosa Plastics - U.S.A. and Dr . Davis Ford of Austin. This construct is considered in development and is being circulated for comments. unintended and unknowing harm. The facility must fully understand and predict the impacts of its actions on the path of doing no harm. Just as zero defects is a goal of Total Quality Management (TQM), so is zero emissions a goal of our sustainable development template. A third element of the construct is a commitment to collaboration. Sustainability is about cooperation, not domination. This commitment involves scientific and policy issues as well as interactions with the community and workers. T o secure a sustainable future, we must find ways to resolve our differences; dissenting and opposing voices must be heard. T rue collaboration requires cooperation in the decision making process, otherwise called empowerment. A fourth element of the construct is the incorporation of personal and spiritual values into the philosophy. A sense of place and a sense of purpose are important to sustainability and should be emphasized and encouraged. The dignity of others, particularly those lacking resour ces, should be recognized and maintained. Humility and trustworthiness should be present in all interactions. An overall goal of responsible stewardship - care of the household for those coming after us - is a key element in the incorporation of ethical and spiritual values into sustainable thinking. And last, progress toward sustainability will occur through many small steps on many levels. There are two end points to the philosophical construct: partnership and sufficiency . Partnerships should exist between the facility and the community , the facility and the workers, and the facility and the ecological system. This is not a handshake partner ship; this is a philosophical commitment to under standing and incorporating the needs of others into the definition of a relationship. Sufficiency signifies satisfaction with how much you have. At this theoretical point, society would have sufficient things and sufficient facilities to meet basic needs in a manner that does not tax the ecological system beyond its ability to provide and sustain mankind within the carrying capacity of the ecological system. The project team believes that the principles identified above, if adopted and honestly pursued by all human activities on Earth, would be sufficient to attain most notions of sustainability . However, it is important to remember that capital investments in existence today will not be obsolete for decades to come.
Philosophical Construct
From the beginning, the project team believed that sustainable development is philosophical as well as practical. For this reason, a Philosophical Construct was established to guide the project team in its detailed work. All work occurring under this agreement attempts to comply with this philosophical construct. The first element of the philosophical construct is that the FPC TX facility must be viewed holistically . While it is a provider and a member of the community , it also discharges pollutants into the air and water. An essential aspect of sustainable development is that a balance be maintained among economic, ecological and social needs, leading to the phrase keeping the balance. It means that each of these topics is of equal importance. This balance must exist both today and in the future. The second element of the philosophical construct is the adoption of Do No Harm as an ultimate goal for the facility . With the objective of doing no harm to the Earth, the workers or the community , the project team proposes that the ultimate goal of the facility is to achieve zero emissions. It will take time to reach this goal to the maximum extent physically possible and will require that all impacts generated by the facility should be understood and intended. One of the worst forms of behavior is the causing of
Figure 1
Meeting Basic Needs
Sustainable Development Construct Across Time

Ecoefficiency Ecology
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Therefore, in the interim, this philosophical construct will help to guide the facility toward a more sustainable future. These points to the philosophical construct are summarized in T able 1 below. efficiency. This is shown in Figure 2. In this manner , community empowerment stands alone; meeting basic needs contains both social and economic inquir ies; and eco-efficiency, a very complex issue, also After establishing the four areas of inquiry , the next step was to consider each area in greater detail as shown in Figure 3 on page 10. Here, each area of inquiry has been expanded into an onion diagram. These onions incorporate Brad Allenby s view that sustainable development will result from a process of inquiry rather than from predefining an end point. Just as an onion has layer upon layer , so does sustainable development. Each onion represents a series of inquiries that becomes progressively more challenging as one moves from the outer skin of the onion toward the center . By adopting this onion approach, a practical set of inquiries has been outlined that will advance the facility toward the goal of sustainability .
Table 1 Elements of the Philosophical Construct Holistic View of Corporation, Society, and Earth
Keeping the Balance Relationship to Current and Future Generations
Do No Harm
Zero Emissions Healing/Restoration of Earth Support of Community Structure
Commitment to Collaborative Process

Cooperation, Not Domination Collective Study of Science/Policy Issues Community and Employee Collaboration/Empowerment
Recognize/Encourage Spiritual/Ethical Values

Sense of Place Sense of Purpose Responsible Steward Humility and Trustworthiness Dignity of Others Series of Small Steps
Four Areas of Inquiry For Sustainable Development

As indicated, four specific areas of inquiry have been identified that must be addressed in a workable concept of sustainable development. These are (A) meeting basic needs, (B) eco-efficiency, (C) community empowerment, and (D) ecology . These four onion diagrams are shown appended to the Earth in Figure 2. Under the philosophical construct discussed above, these four areas must be pursued concurrently in or der to achieve a holistic view of sustainability . These four subjects are discussed in the following sections.
End Points
Partnerships Sufficiency - Satiation
The Sustainable Development Conceptual Model

After completing the philosophical construct, a major task under the Agreement was to develop a conceptual model of how sustainable development concepts might apply to the facility . Background resear ch and several preliminary papers were completed to identify various thinking in the field. It is hoped that this conceptual model will become a template for sustainable development implementation within FPC TX. The conceptual model, shown in Figure 2, incorporates most of the ideas previously discussed. This diagram shows four areas of inquiry that must be considered over time, thereby incorporating future generations into the concept. As discussed previously the project team agreed that social and economic aspects should be expanded to three inquiries - meeting basic needs, community empowerment, and eco-
A.
1. 2. 3. 4. 5. 6.
Area of Inquiry: Meeting Basic Needs

Profit Employment Education Worker Satisfaction Personal Satisfaction Sufficiency
The first area of inquiry is to ensure that basic needs of the population are met. This inquiry comes from the definition of sustainable development in Our Common Future that states: Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
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Philosophical Construct Philosophical Construct Public Information Procedural Public Participation Substantive Public Participation Partnership
Figure 2
Reasonable Profit Employment Education Worker Satisfaction Personal Satisfaction Enough
Meeting Basic Needs
Philosophical Construct Environmental Compliance Pollution Prevention Dematerialization Substitution
Sustainable Development Construct Across Time
Philosophical Construct Stewardship - Management Stewardship - Protection Aldo Leopold
Partnership Enough Alternatives
Ecoefficiency
Ecology
The approach of the participants to the issue of meeting basic needs is shown above. To ensure the ability of the facility to provide basic needs, it must achieve a profit. Otherwise, the facility may eventually close down, which would eliminate a source of income for the community . Therefore, profit (return on investment) must be a priority within the meeting basic needs onion. Humans have basic needs, which are represented, by the second level. These needs are primarily food, water and shelter . Providing these basic needs in the modern industrial society requires income of some type. This is a role that industry and other commer cial concerns have traditionally performed. There is a direct linkage between employment and the ability of people to provide for themselves. This is certainly recognized throughout the literature of sustainability and is a major concern in developing countries as well as developed countries. W ithout an economic engine, it is unlikely that basic human needs will be met in todays world.
Education is the third layer of the basic needs inquiry . Education gives people the ability to meet basic needs, both today and in the future. The facility can assist in providing quality education within its communities, both directly and indirectly . Working together the community and the facility can explore the current and future educational needs of the children who will, given the right knowledge, meet the challenges of tomorrow . The fourth level of this inquiry is employee satisfaction. Satisfaction with employment can encompass health and safety issues and empowerment concepts, as well as employee per ception of the performance of the facility . If workers do not feel safe and healthy in their work environment, then the facility has failed an important and critical group of people. In addition, employees must feel they have a say in company issues and they must have a positive attitude about their work in particular and the company in general. The fifth level of the meeting basic needs inquiry involves personal satisfaction. One theory is that
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higher consumption of goods does not necessarily lead to greater personal satisfaction. One goal of sustainable development may be to explore the intersection of consumption and personal satisfaction. This inquiry extends beyond the facility location and becomes a more general theoretical inquiry into per capita consumption patterns. The end point of the inquiry into meeting basic needs is simply called sufficient. This concept came from the economist Herman Daly and may be contrasted with the traditional view of the economy where production increases as consumption increases, which in turn causes further production increases, which again generate increases in consumption, etc. Ultimately , economic productivity and consumption must be balanced within the ecological systems ability to absorb the material and ener gy flows associated with this upward spiral of production and consumption, a notion encompassed by the first element of the philosophical construct to achieve ecological balance. The important point at this stage of our work is to note that this concept of limits is implicit in our view of the economic engine whose role it is to meet basic needs. formance and vigilance. There is no sustainability without compliance. The next step in the eco-efficiency inquiry is to explore pollution prevention strategies. Here, the emissions inventory (waste) associated with a facility must be identified and evaluated. This includes the identification of air, wastewater , hazardous and non-hazardous emissions (waste) and analyzing the environmental impact. Once such an analysis is per formed, the facility can prioritize areas for pollution prevention strategies. From the emissions inventory , an analysis can be completed which calculates a number for the environmental impacts of these pollutants. All of the materials utilized within a facility should be cataloged and a weighting system should be established that accounts for the materials ability to impact the environment such as ozone depletion , global warming, acid rain, and toxicity . The individual impacts of each compound would then be ranked against a compound that served as the base impact.An example is identifying carbon dioxide to have a global warming potential of one (1) and then ranking all other compounds against carbon dioxide. Once such an analysis is performed, the facility can prioritize areas for pollution prevention strategies. The third level of the eco-efficiency inquiry is product stewardship. As a producer of products, the facility has the responsibility to understand all the environmental, health and safety issues involved in the design, manufacture, marketing, distribution, use, recycling, and ultimate disposal of its products. The facility must understand that their products may have certain risks associated with their intended use; they can be miss-used and result in unintended impacts on the environment. Based on that understanding the facility must critically analyze through risk assessments the impacts that might occur , and seek means to eliminate the improper usage through education of employees and consumers. Information of the hazards of a product must be distributed to users and made available to anyone who could be exposed to that product. The facility must establish systems to be ready to provide assistance in the event of a spill, exposure, or misuse of products.Additionally , products must under go periodic analysis to balance the true value of the product versus the risk associated with that use. At the least, issues such as recycling of
B.
1. 2. 3. 4. 5.
Area of Inquiry: Eco-efficiency

Environmental Compliance Pollution Prevention Product Stewardship Substitution/Alternatives Dematerialization
Eco-efficiency involves efficiency in both an economic sense and an ecological sense. It seems obvious that if a company can reduce its use of a resour ce, then it should spend less money on pur chasing that resour ce. The underlying goal of the eco-efficiency inquiry is reducing resour ce use and pollution generation. This area of inquiry is specific to the facility and is the most technical. Addressing this area is the key to the realization of certain elements of the philosophical construct, specifically the goal of do no harm through the attainment of zero emissions in consideration of the constraints inherent in the fundamental laws of thermodynamics. The most basic step and the starting point for this task is environmental compliance. The facility must maintain full compliance. It is simply a matter of per -
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CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING Figure 3

ECOSYSTEM
RECYCLE
M ECONOMIC ACTIVITY E
tion step. However , as considered here dematerialization is concerned with the foot print of the total production process, including full life cycle analysis. Here, the goal is to deliver an end product with as little material content as possible. From this prospective, we view dematerialization as the most difficult and sophisticated analysis. This is essentially the end point of an eco-efficiency analysis.
C.
Area of Inquiry: Community Empowerment

Access to Information Procedural Participation Substantive Participation Partnership
1. 2. 3. 4.
M = matter E = energy man-made capital natural capital
spent or used products must be included in this analysis. The fourth level in the eco-efficiency onion broaches the concept of raw material and product substitution. Economists have long discussed raw material and product substitution as a response to sustainability concerns. Here, if the pollution prevention or product stewardship analysis identifies significant unresolved impacts, alternate raw materials, processes and products should be assessed. This step is particularly important to actions such as capital facility replacement where issues such as raw material requirements and specifications of the final product can be evaluated and integrated into the decision making process. In other words, it is easier to address this issue when you are building a new plant or considering new product units. The fifth level of the eco-efficiency inquiry is dematerialization, a concept drawn in part from the work of Graedel and Allenby and in part from the work of Herman Daly . Dematerialization involves under standing the flows of ener gy and materials into and out of the production process and attempting to minimize these flows. Figure 3 shows one interpretation of the flow of ener gy and materials. At one level, dematerialization must occur in the pollution preven-
The third major area of inquiry into sustainable development is the empowerment of the community. The community referred to here can be cities and towns adjacent to the facility or interests that are affected by the facilities operation. The philosophical construct clearly establishes collaboration as an element of sustainable development. Here, collaboration ultimately involves equal access to decision-making processes. Providing information is a starting point of the community empowerment inquiry . Meaningful information must be provided to the community and it must be accessible, understandable, and comprehensive. For example, the provision of a community library with all relevant information about the facility and related references should be considered. The second issue is procedural participation, which involves the establishment of processes for involving the community in facility decision-making. The essence of this step is that certain opportunities for interaction between the community and the facility be established. There are a number of models for such interaction. The intent will be to explore and identify the most appropriate model to encourage full and open participation. W e would appreciate any examples of successful models being sent to us for consideration. The next level of community empowerment is the substantive involvement of the community regarding the impacts of the operation of the facility . Here, the objective is to provide the community with bona fide access to the decision making process of the facility
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regarding these impacts. The goal here is to find mechanisms to address concerns and reach mutual resolutions. Again, we solicit any suggestions of successful integration of the public in decision making process. We believe that the prior FormosaAgreements addressed this issue. W e believe the prior Formosa agreements and the current sustainable development agreement respond to the issue. However , we are open and interested in alternative formulations. Partnership is the end point of the community empowerment inquiry . This is not a handshake partner ship; this is a commitment to understanding and incorporating the needs of others into the relationship. This is also a two way street between the facility and the community , and the community and the facility. and carrying capacity considerations are addressed in a facilities permitting process. However , carrying capacity considerations were not evaluated with regard to all issues, including global warming and stratospheric ozone loss. All aspects of the facility should be evaluated with regard to carrying capacity . The third layer of the ecology onion is to apply the do no harm concept to the ecological system. In many respects, this is an advanced stage of stewardship, an attempt to ensure that the activities of the facility do not injure the ecosystem and that those of us who live today do not usurp the carrying capacity of the ecosystem to the disadvantage of those who come after us. A goal of zero emissions, especially with regard to water and air , defines this stage of the ecology onion. The fourth layer of the ecology onion is to engage in activities that restore and/or rehabilitate the ecological system, regardless of whether the harm is related to the operation of the facility . Here, the goal is for the facility to view itself as an ecological citizen, acting to improve aspects of the natural system that may have been degraded over time. The fifth and final layer of the ecology onion is to achieve a partnership between the facility and the ecological system. This is a partnership of action and spirit, a true melding of disparate elements.
D.
1. 2. 3. 4. 5.
Area of Inquiry: Ecology

Education Carrying Capacity Burden Reduction/Zero Impact Restoration/Rehabilitation Partnership
The ecological onion contains both traditional and somewhat innovative viewpoints of the role of the facility. In many respects, the ecological onion is intended to reflect certain of the concepts of Aldo Leopold as expressed inA Sand County Almanac , particularly those aspects regarding the development of a land ethic. There are also aspects of the religious concept of stewardship that emer ge in this section. The first layer is education regarding the ecological system near the facility . The facility must be clearly understood in the context of the ecological system within which it lies. It is impossible to meet the philosophical goal of sense of place if that place is not understood in an ecological sense. The rhythms of the natural system, the migrations and the balances must be recognized and appreciated. The second layer of the ecology onion is applying the concept of carrying capacity or assimilative capacity to the impacts generated by the facility . Carrying capacity is the ability of the environment to be impacted without loss of ecological function. In many respects, U.S. environmental law incorporates the concept of carrying capacity into permitting procedures,
Conclusion
What you have read is a summary of the sustainable development template to date. W e would like for you to send any comments about this approach to our project team. Comments should be sent to either Randy Smith, V ice President/General Manager , Formosa Plastics Corporation, e Txas, Box 700, Point Comfort, T exas 77978 or Jim Blackburn at 3131 Eastside, Suite 450, Houston, T exas 77098. W e need to know if you think we are on the right track or not!
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ROYAL DUTCH/SHELL
by Peter H May, Valria da Vinha and Natan Zaidenweber Pro Natura USA
his case study documents the evolution of a sustainability strategy at the management level and in several operating companies of the Royal Dutch/Shell Group. The long-term nature of hydrocarbon exploration and development and the life of these investments have forced the Oil and Gas (O&G) industry - in which Shell is a major player - to address long-term strategic issues. The finite limits in natural stocks of hydrocarbon resources, uncertain market tendencies and the intrinsic contradiction between the exploitation of exhaustible resources and sustainability constitute important pressures on a growing environmental commitment among industry leaders. This study will describe how these factors mold the corporate response, shape commitment and drive changes in corporate culture in a process that is over a decade in the making. The O&G industry has always been a central global player in international development and geopolitics because of the critical importance of hydrocarbonbased energy as the motor of rapid industrial growth in modern economies, be they capitalist or communist. Due to the intrinsic dependence of this centurys growth model on access to ever-greater reserves, the industry has had to deal with increasing complexity in its relations with developing country governments and environments. This, in turn, has led to increased costs and a global scale of operations to match the growth models demands. Like all minerals, economically viable O&G extraction will some day reach resource limits, although technical improvements in seismic exploration and extraction efficiencies have ensured continuing growth in reserves at the resource frontier. Despite the receding horizon of fuel
exhaustion, continued exploitation to meet societal demands for energy that is essential for social development must be counterbalanced with prospects for global sustainability. Analyses of resource trends since the 1970s indicate that a continued hydrocarbon-based growth model is only justifiable if profits are plowed into technological advances that would ensure a timely and less painful transition to alternative energy sources (Meadows et al, 1972; Nordhaus, 1973; WCED, 1987). Yet significant investment that would permit a timely transition to future energy sources - particularly renewables such as biomass and solar - has been avoided by the industry, which instead has focused most technology development on extracting ever greater volumes of hydrocarbons.1 Despite this emphasis on growth in reserves and production, conservation and energy efficiency gains in the north have led to a gradual flattening of percapita and per-unit GNP demand for energy. Counterbalancing this trend, demand in the far more populous developing nations is projected to rise rapidly, surpassing total energy consumption in the north by as early as 2005 (IEA/DOE, 1998). Nevertheless, the recent economic crisis in southeast Asia, and the emissions restrictions embodied in the Kyoto Protocol, cramp short-term perspectives for growth in energy demand. Market globalization and the zealous pursuit of new hydrocarbon reserves in ever more exotic locales have combined with these trends as contributors to recent declines in petroleum prices which dropped 31 percent between 1997 and 1998 alone. Oil producing nations have been unable to cooperate in restraining production as they had successfully done during the
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OPEC price shocks of the 1970s and 80s. Consequently, they have flooded the market to maintain revenues critical to their balance of payments. Declining prices, in turn, impose pressure on the organization of the industry, leading to the current spate of mergers and restructuring. For a time, the industry resisted declining revenue from O&G sales through diversification into petrochemicals and other downstream industries. But global decline in GDP growth has affected all allied sectors. The result is the need for businesses in the industry to become more agile and responsive to changing demands. Among these demands is the incorporation of environmental content in operations, which is consequently becoming an integral part of competitive strategies. The global climate change phenomenon and the restraints adopted at Kyoto in 1997 represent a major source of pressure for a shift in strategy. In environmental terms, O&G exploitation is notorious, not only because of exhaustion in resource stocks, but even more compellingly, to sink effects. Production hazards - including risk of explosion, flaring, spills, and contamination from residuals - provoke disruption in communities proximate to extraction and refinery operations. As exploration extended into more remote regions, these effects have raised the alarm among groups concerned with the potential impacts on isolated and vulnerable indigenous societies and endangered ecosystems. Hydrocarbon combustion for energy and transport is not only the primary source of greenhouse gases, but also of acid rain, particulates and other localized pollution and health problems. These have long been a principal challenge to the O&G and power industries and their final demand sectors. A growing awareness that such impacts are bad for business has led to efforts to define an industrial sustainability strategy that addresses issues well beyond the more traditional concerns for health and safety. Such issues include the need for comprehensive guidelines regarding corporate/community relations, development of renewable energy sources and other innovative responses to global warming and air pollution. This case study assesses the evolving sustainability strategy of the Royal Dutch/Shell Group within the changing business context of the O&G industry.
History and Structure of the Shell Group

The Shell Transport and Trading Company was established in 1897 in Great Britain. Shell received its name from the decorative shell boxes it acquired for its British clients from the East Indies, but soon shifted its emphasis to fuel, trading paraffin and kerosene from wells in Borneo. Royal Dutch Petroleum began by exploiting similar resources in Indonesia. Shell soon over-extended itself in the search for new reserves, and was forced to combine its assets with those of Royal Dutch in 1906 (Howarth, 1997). Since the merger, the parent companies have maintained their original distribution of Group interest of 60 percent (Royal Dutch), and 40 percent (Shell). Both are publicly traded shareholder enterprises listed on stock exchanges in eight European countries and in the US. Currently, Shell group companies operate in over 130 countries. The Group is one of the largest and most complex commercial organizations in the world, with US$174 billion in gross revenues in 1997 (Exhibit 1), comparable with the GNP of countries such as Turkey and Thailand (UNDP, 1998). Shell companies include some 2,400 active enterprises operating under local management and serving local markets. About 90 percent of its 100,000 direct employees are local citizens, working in their home county. Shell contractors employ an additional 240,000 workers. The Groups organization is founded on the underlying principle of autonomy of Shell Companies in a decentralized structure.2 Operational autonomy and self-regulation by individual Group companies has, in the past, limited central direction, making the behemoth difficult to manage. Yet there is a fairly welldefined structural hierarchy of standard-setting, global policy and command within the Group. Only Shell US operates independent of this structure (Exhibit 2A and 2B). Shells Corporate center in London supports the internal and external communications of the Committee of Managing Directors. This unit is also charged with: setting group direction and strategy; stimulating growth and evolution of the Groups investments and resources; enhancing the performance of the groups assets;
80 PB

acting as custodian of the Groups reputation, policies and processes. The Shell Group is organized into three Holding Companies (Shell Petroleum NV, Shell Petroleum C Ltd UK and Shell Petroleum Inc USA; see Exhibit 2A). Shell Oil Company (US) is a separate subsidiary of Shell Petroleum Inc, with a distinct operating structure.3 The Group also has a number of service companies (Servcos) in the UK and the Netherlands that provide specific technical support services to both the UK and the Netherlands Holding Companies and to the numerous operating units (OUs) outside the US. The seven Servcos house organizations that competitively service the Groups core businesses. Shells operating businesses include the following: Exploration and Production Oil Products Chemicals Gas and Coal Renewables (initiated in 1997) average global production in 1997.6 These resources are transported in pipelines and tankers operated by the company, which also has an interest in some 50 refineries in countries where it operates. Besides fuels and lubricants refined from crude oil, about 10 percent of all oil produced by Shell is employed in its petrochemical operations for chemicals and polymers that are precursors of plastics, synthetic rubber, solvents and resins. The Group additionally owns over 47,000 service stations serving 20 million customers daily, making it a fully-integrated industry from wellhead to pump. With the rise of full service gas stations, Shell has also become involved in retail food and convenience sales with the Select label. The company name is widely recognized and preferred among consumers in 48 countries. Shell is ranked highly among its competitors and other multinationals on average shareholder returns from 1988-97. Over the same period, the companys Return on Average Capital Employed (ROACE) shows a greater stability and higher overall average than the other six oil majors, rivaled only by Exxon, whose net corporate income remained on a par with Shells, until the recent merger with Mobil. Shell has thus continued to offer a low risk/high yield investment to its shareholders, most of whom represent investors in the UK, US and the Netherlands (over 91 percent of shares). The company prides itself in its value and stability, and in operation in accordance with best business practice in this field (SI, 1998:10). In support of this principle, Shell spends on average over US$715 million annually on Research and Development (R&D) in support of its operations (Royal Dutch/Shell, 1997). As part of the companys principles, performance of suppliers is expected to be at an equivalent standard to that adopted by the company. The relative importance of its distinct activities to overall corporate earnings shown in Table 1 is evident - oil and gas exploration and development and the refining and marketing of these products are by far the principal businesses, responsible for over 90 percent of net corporate earnings. The chemical segment is also important, while coal represents only a very small proportion. Growth in corporate earnings suffered a downturn in the early 1990s, which led to an inward look at the
The OUs are active in more than 100 countries where they must comply with applicable law and regulations. As the Groups primary business entities, OUs are managed by their boards and chief executives (CEs) who have comprehensive authority to run their companies, and are accountable for management and day-to-day operations.4 This decentralized structure recognizes the need for strong operating companies whose management have the responsibility to develop and achieve plans and targets that capitalize on strong local positions and take advantage of global opportunities. The cornerstone of the organizational structure is a system of self-appraisal, complemented by a number of mandatory standards and policies and of effective checks and balances (SI, 1996:1).
Products, Market and Competition

Shell explores and produces oil, gas and coal from deposits in some 45 countries, extracting daily four million Bbl of oil and natural gas condensates and 400 million m3 of natural gas.5 In respect to petroleum, this volume constituted over six percent of the daily
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R OYAL DUTCH/SHELL Table 1: Shell Group earnings by industry segment (US$ million)
Segment 1997 1996 5,083 3,166 1995 2,947 2,398 1994 2,363 3,193 1993 3,000 2,648
Oil & Gas Exploration & Production 4,774 Refining & Marketing 2,617 Other Segments Chemicals Coal & other segments Total Operations
1,200 155
1,186 18
1,731 178
534 (139)
(618) (71)
$8,746 $9,453 $7,254 $5,951 $4,959
Source: Royal Dutch/Shell Group (1997), pp. 8-9
Groups principles and operating strategy. This process, described in detail below, led to the emergence of a corporate sustainability strategy that recognized the importance of operations open to societal scrutiny and answerable to principles of ethical responsibility and global benefit.
The Path Towards Sustainable Development We have an inescapable responsibility for the future (Walvis, 1998:1).
Sustainable Development as a Fixed Cost for Major Corporations
The greening of industry evolved initially from a response to societal concern for environmental regulation. In the course of the past decade, however, this response has begun to be internalized within corporations at a cognitive level (Hoffman, 1997:14). In the process, a firms image is altered to change its perception by society and improve its reputation among customers, suppliers and buyers. This last stage might, however, consist only of symbolic reforms, and are often viewed as cosmetic tactics or greenwashing, rather than pervading the firms culture or organizational structure. However, the expense to ameliorate socio-environmental concerns has quickly shifted from being seen as an undesirable but necessary evil, to being recognized more and more as part of the expected cost of doing business. In industry parlance, their adoption
is a guarantor of the license to operate. Consequently, they have become transformed into fixed costs. For this reason: Environmental management is becoming less an environmental issue and more an issue of investor relations, insurance liability, process design, competitive strategy and so on. For the corporate organization, this means that there will be less of a need for a dedicated environmental affairs department. While some sort of departments will always be necessary as long as regulations continue to be written, more of the responsibility for carrying out corporate environmental activities will fall to the core functions of the firm, which are better equipped to handle these issues (Ibid: 15). The more committed the firm is to environmental issues, the more it must promote wider institutional change rather than rely primarily on individual talents to promote innovation. In parallel, the corporation intensifies its contact with other organizations, be they peer industries or civil organizations, which helps enhance trust and communication. Whereas previously actors deemed external to the corporation pushed this new posture, the concept of sustainable development (SD) is currently beginning to be viewed with ownership by corporations. As they sought ways to fit these concerns into business as usual, corporations - driven by commerical pressures - began to develop their owns ideas and methodologies to merge SD within a market strategy. At Shell, the SD concept is important because business has an essential role in encouraging innovation, testing alternatives, allocating resources and disseminating results and because it has a role to play in safeguarding the environment. Above all, the internalization of SD into the corporation helped to reinstate a vision of the future, somewhat neglected during the last decade which was marked by high expectations of greater-than-ever economic returns. When these expectations were dashed with the recent worldwide crisis, this concept emerged as a new horizon for envisioning market choices. Therefore, it has become a strategy of competitive advantage.
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CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING Self-regulation and the Latecomers
renewable hydrocarbon resources and global sustainability. Along with many other firms in the O&G industry, Shell is admittedly a latecomer in adopting innovations such as external environmental audits and a sustainability commitment (SI, 1998). Among the reasons for this gap are the Groups sheer size, its complexity and the diversity of its technologies, products and country operating conditions. However, the corporation has begun to face these challenges and to make efforts to respond to strong external criticism, as well as undertaking intense self-criticism to close this gap. 7 During the last decade, several events can be identified as important milestones that led the company to adopt a sustainability policy. The changes in corporate views and level of understanding suggest a deepening maturity and readiness to adopt concrete commitments.
Businesses are an integral part of society - instruments for meeting social needs and creating societys wealth (Walvis, p3).
Responding to increased regulation and emerging commercial opportunities, corporations began their transformation by adopting an eco-efficiency approach, which was championed from 1992 by the World Business Council for Sustainable Development. This was a process of change in which the exploitation of resources, the direction of investments, the orientation of technological development, and corporate change maximize value-added while minimizing resource consumption, waste and pollution (Schmidheiny and Zorranquin, 1996:17). However, such technologies still did not ensure SD as a process, which is a goal for society as a whole (Walvis, 1998). Both self-regulation through spontaneous initiatives of the private sector and the need by economic agents to maintain their competitive advantage leads to a transformation in production processes, making them more environmentally friendly. These may be driven by a decline in productivity levels or a simple aversion to risk. In the latter, less productive but more environmentally beneficial technologies are preferred over others that may be more profitable due to economies of scale, but require a higher initial capital investment (Lopes,1996). The O&G industry remained reluctant to undertake some changes involved in moving towards SD because problems were considered external to the enterprise, not connected with business, but rather circumscribed to society. Meeting societys needs and expectations related to SD were not viewed as part of business responsibility until the moment that society began to pressure for deeper changes in industrial processes. This type of pressure triggered a new environmental wave, which has changed the way Shell and other firms in the industry conduct their business. Viewing the corporation in the context of a broader responsibility to society demands a change in corporate culture. This is the challenge faced by Shell and other corporations in the industry, intensified by the intrinsic contradiction between its exploitation of non-
The Great Transformation
Societys expectations had moved on, whereas Shell had not (Wade, 1996). At the end of the road, reputation is all thats left. . . (Interview, Sept. 1998)
After several decades pursuing a management style which acquired a reputation for sluggishness (NY Times, Dec 15, 1998); and that was aloof ... arrogant ... bogged-down (The Economist, Dec 20, 1998), Shell had moved behind the scenes towards a rather substantial change. Many factors - in additon to poor business results in the early 1990s - were responsible for encouraging this process. Both external and internal stakeholders strongly pressed their claims, showing that it was imperative to trigger change as soon as possible in order to avert a serious loss in competitive advantage. Since the 1992 Earth Summit in Rio de Janeiro, several managers in Shells Health, Safety and Environment (HSE) department in The Hague had acknowledged the importance of the SD concept. They consequently sought means to incorporate it into corporate practice, a concern matched by predictions of the Scenarios Group in the Planning Division of CC. However, it was only in 1994 that Shell officially
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R OYAL DUTCH/SHELL
began what became known in the company as The Transformation Process, the imperative nature of which was synthesized by the slogan TINA, meaning There Is No Alternative to making changes in light of societys growing expectations. It involved an intensive review of all aspects of the business - portfolio, leadership, organizational structure, endowment, customer orientation, the relationship with internal staff and shareholders and with society at large - in sum, the world in which the company operates. In 1995, the company faced two crises as Greenpeace occupied its Brent Spar platform in the North Sea to prevent its being decommissioned by sinking (Box 1), and the Nigerian government executed Ogoni human rights activists (Box 2). These incidents led to boycotts, public outcry and violence against the company. The crises arose soon after Shell began to review its societal relations, and further catalyzed internal support for transformation. Fortunately, they occurred at a moment when the company was casting about for ways to avoid exactly such crises, leading Shell officials to heed those who internally promoted a new approach. In 1996, these crises and worries over financial performance prompted the company to launch several efforts concerned with understanding societys expectations of the Shell Group. These included round tables in 14 countries, interviews with Shell executives, external parties, focus groups with young persons, surveys on best ideas and practice in reputation management (Wade, 1996). The surveys permitted a comprehensive assessment of popular expectations of the company, and ascertained how well it was living up to these expectations in terms of behavior and reputation. The broad pattern that emerged by the mid-1990s indicated the company was indeed no longer meeting all societal expectations and its reputation had suffered. According to a MORI (Market & Opinion Research International) survey of June 1997, the aspects in Shells reputation most affected were related to areas of environment, human rights and sustainability, perceived as weak by all groups consulted. These issues were among those considered as critical within the Exploration and Production (E&P) segment of the O&G industry, as shown in Table 2. This reinforced company concerns that it had not adequately perceived its responsibilities to society. Research previously carried out by Shell had estimated that 10 percent of the Groups worldwide profits derived from its reputation. Once lost, this reputational premium is extremely difficult to regain in the short-term. A weak or poor reputation can threaten goodwill, co-operation and ultimately the companys license of operate. Such a threat now faces Shell. Its reputation is mixed, with some areas of important strength. But it also has negative associations which, if left unchecked, are likely to undermine the companys ability to operate smoothly and efficiently in other words, its ability to serve its stakeholders and, in particular, its shareholders (MORI, 1997). According to the findings of the MORI survey, Shells image is less favorable than other industries in the energy sector, whether those questioned be young or old, women or men. More than half said they feel discomfort about Shells behavior. Two of the six main factors mentioned by both the general public and opinion leaders are related to the environment and sustainable development, followed by human rights issues. Respondents believe Shell should make efforts to take care of the environment and show proper concern for conservation of natural resources affected by its operations. Besides, the companys image is either weak or negative in terms of working in partnership with communities and understanding and listening to the views of local communities, mainly among opinion leaders who tended to criticize rather than praise Shell. However, the general public shows a high degree of credibility for social and environmental organizations.
Table 2: Issues that affect E&P industry reputation

Protecting the environment ............. 48 percent Developing alternative energy ....... 20 percent Applying technology ....................... 20 percent Profitability ........................................ 15 percent Investment ......................................... 14 percent Community responsibility .............. 12 percent Source: MORI, Opinion leaders, ten countries. Summer 1997
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CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING BOX 1: The Brent Spar Affair
s part of its operations in the North Sea that began in the early 1970s, Shell Expro (a di vision of The Shell Petroleum Company, UK) installed a complex system of plat forms and pipelines that make up the Brent system (Exhibit 5). Part of this system, the Brent Spar was an offshore mooring buoy, capable of storing 300,000 bbl of crude petroleum. Unlike most installations in the North Sea, most of its bulk consisted of six huge storage tanks displacing 66,500 tons, lying beneath the surface. The Spar itself weighed 14,500 tons. In fact, one year after being moored, the Brent Spar had been abandoned as a storage unit due to structural defects. Its tanks were mostly full of seawater. However, the fact that its bulk lay primarily underwater implied serious problems when its decommissioning became necessary. Originally put in place in July 1976, pipeline connections had made the use of buoys superfluous. Beginning in 1991, Shell Expro contracted some 30 studies to review decommissioning options according to the UKs Best Practical Environmental Option (BPEO) criterion. These were narrowed down to two: onshore dismantling and deep-sea disposal. 8 Both options were judged to have fairly minimal environmental impact; however, deep sea disposal had significantly lower fatality risk and lower cost (Faulds, et al, 1998). Onshore dismantling could cost as much as 46 million, whereas deep water disposal was estimated at only 12 million (Financial Times, 1995). By 1995, the UK government gave its approval to plans for the spars deep sea disposal. In carrying out the planning and responding to governments BPEO requirements, however, Expro undertook no external consultation beyond a statutory requirement to hear fishermen who could be directly affected by decommissioning impacts. To Shells surprise, the decommissioning of Brent Spar faced virulent opposition, for which the company found
itself totally unprepared. Protesters felt that the sea should not be used as a dumping ground and were concerned that other oil installations would be disposed in the same way if Brent Spar were allowed to be decommissioned at sea. Protests were vocal and physical. They ranged from the personal intervention of senior politicians in several European countries, to the occupation of the Spar by Greenpeace activists. In Britain, Greenpeace organized protests surrounding over 100 Shell gas stations, but in Germany, matters were much worse. There, 1,713 Shell stations were under threat. Two, in Hamburg and Kessel, were firebombed. A third, near Frankfurt, was shot at. (Financial Times July 15, 1995). According to internal estimates, lost revenues were in the hundreds of millions of dollars. On June 20,1995, Shell UK announced that the operation would be halted. The Spar was towed to a mooring in a Norwegian fjord while its final fate was decided. Shell then began a two year dialogue to gather a wide range of views, through a series of meetings in Denmark, Germany, the Netherlands and the UK, in search of a solution (Faulds, et al, 1998). In January 1998, Shell selected the innovative re-use proposal put forward by a British-Norwegian consortium as its preferred solution. Key in the choice was not only feedback from the dialogue, but new safer opportunities for dismantling and re-using the Spar which had not been previously available. The proposal, to use cleaned slices of the Spars hull to build a quay extension at Mekjarvik near Stavanger in Norway, was then submitted as a decommissioning proposal and approved in August 1998 by the UK Department of Trade and Industry. While the solution would be at least 34 million more costly than the original deep sea option (not to mention the costs ensuing from protest and loss in corporate reputation), many outstanding concerns had been resolved, leading the way to a new approach toward corporate dialogue regarding critical decisions.
The show me world of today is ready to reward those corporations which live up to their business principles, upgrading their reputation through market competitiveness and enabling them to recoup costs applied in SD programs and relevant social areas. And these investments are perceived as good by shareholders and company staff as well. It then becomes rewarding for them to work towards changing corporate culture in this direction. It is often argued that the Shell Group has historically operated from a solid base, vested in strong internal values that its managers and staff adhere to. These values reflect the corporations role in society but, due its long hegemony as the worlds largest oil
company (strong and silent), and a preponderance of short-term thinking, represent a force that impedes innovation (M Jones, pers comm, 1999). This may explain why emerging societal concerns for environmental quality, human rights and sustainability were not captured in business strategy until recent crises pushed them to the forefront. In 1997, as a product of the transformation process, the Group updated its statement of General Business Principles, ie a document that governs how each of the companies which makes up Shell conducts its affairs. The first such statement had been prepared in 1976, demonstrating an early commitment to business principles and values. In its 1997 statement, the Shell
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R OYAL DUTCH/SHELL BOX 2: Shells Role in Nigeria: Signaling the Need for Change
riginally a British colony, Nigeria received its independence in 1960 and for all but nine of the 38 years since then, has been ruled by the military. Nigeria comprises over 300 ethnic groups, of which the Ogoni tribe is a minority numbering approximately 500,000 people, accounting for less than 1percent of national population. Ogoni land covers about 375-435 km2 near the Niger Delta in southeast Nigeria. The region is both fertile and densely populated, serving as a major source of food for Nigeria. Furthermore it contains an important reservoir of hydrocarbons. Sub-surface resources in Nigeria are state-owned, and are exploited by development consortia in which the government holds a majority position. Shell Petroleum Development Company of Nigeria Ltd (SPDC) has conducted onshore operations there since 1958 as part of a consortium led by NNPC, the Nigerian National Petroleum Corporation (55 percent) and including Shell (30 percent), Elf (10 percent) and Agip (5 percent). SPDCs operations concentrate in the Niger Delta and offshore shallows nearby, where it holds oil mining leases covering an area of 31,000 km2. There, it has installed more than 6,000 km of pipelines and flowlines, 87 flowstations, eight gas plants and more than 1,000 producing wells (Exhibit 4). In 1997, SPDC produced 899,000 barrels per day from this system (about 40 percent of Nigerias OPEC crude oil quota). The SPDC workforce stands at more than 10,000 people of whom 4,500 are employees; the remainder work for contractors. Of total workers, 98 percent are Nigerians. However, only a small portion of Shells overall production has ever been derived from Ogoni territory. The Ogoni people have received little compensation for the extraction of oil from concessions on their lands. The area has been subject to environmental impacts from oil operations and from sabotage (Shells annual reports continue to register major oil spills attributed to sabotage in Nigeria). Although Shell often provided support to community infrastructure needs such as hospitals, roads and schools, the sustainability of this form of assistance was questionable given widespread poverty. The Ogoni have sought greater compensation from the Nigerian government for many years. In 1990, Ogoni elders formed the Movement for Survival of the Ogoni People (MOSOP) to press for compensation of environmental damages to the Ogoni homeland and to share oil revenues. They appointed Ken Saro-Wiwa a successful author, playwright and businessman as their spokesman. MOSOP submitted a bill of rights for Ogoni regional autonomy to the national government, but argued it was not a separatist movement. The military regime ignored
this plea. In 1991, the Ogoni took their case to the international press and human rights movements, and in November 1992, demanded that the NNPC, Shell and Chevron pay the Ogoni US$4 billion for environmental damages and US$6 billion in unpaid rents and royalties. Saro-Wiwa dramatized this appeal in a widely distributed book Genocide in Nigeria. By 1993, the movement had achieved sufficient support to muster a demonstration by 300,000 people against Shell. In the same year, the company withdrew its staff and operations from Ogoni territory. By 1994, tensions among the Ogoni, the Nigerian Government - with the oil companies often in between - had escalated to violence, culminating in torture and death. Not all Ogoni were content with Saro-Wiwas confrontational tactics. Some of those who challenged him were killed, and Saro-Wiwa was arrested on charges of inciting murder. A Special Civil Disturbances Tribunal tried him and eight co-defendants. The military-appointed tribunal found Saro-Wiwa and his co-defendants guilty and sentenced them to death. The Ogoni eight were executed by hanging on November 10, 1995. Official international condemnations against Nigeria for this incident came from both Europe and the US and included a UN resolution but no sanctions. The media and non-governmental organizations were more strident, calling for radical response. High profile pressure groups such as the Sierra Club and Friends of the Earth launched efforts urging US consumers to boycott Shell and for the government to embargo Nigeria. In Europe the Body Shop had become passionately involved in the Ogoni peoples movement in 1993, establishing a campaign hotline, attempting technical missions to Nigeria (blocked by authorities there), publishing leaflets, placing ads in British newspapers and lobbying governments worldwide. A letter-writing campaign among Body Shop franchises and customers led to 50,000 protest letters being sent to Shell and the Nigerian government. As a result of the international outcry, conditions today in the Niger Delta have improved somewhat from those that prevailed over the past 40 years. Shell has maintained its presence in the region, and has even increased investment, although seeking to distance itself from the military government. Support toward community development in Ogoniland was renewed in 1996, although production in the region remains suspended . The Nigeria crisis had the effect of moving human rights and ethics issues to the center of the corporate agenda, leading to a change in the companys approach to gas and oil development, promoting social capital and sustainable development efforts (see Camisea, below).
86 PB

Group reinforced this commitment toward responsible business, expressing support for fundamental human rights in line with the legitimate role of business and to give proper regard to health, safety and the environment consistent with their commitment to contribute to sustainable development (SI, 1997). its activities. ... (to do so implies companies) must continuously meet societys needs for good and services, without destroying natural and social capital... (This) demands a deep shift in corporate culture, values, decision-making processes and behavior (Elkington, 1998: 46-47). Considerable time was required to bring SD to the level of corporate policy. The most challenging task was to integrate the commitment throughout the company and assess and monitor its progress given the complexity of Shells decentralized structure and the difficulties inherent in changing corporate culture. The Profits and Principles report incorporates a Road Map, providing an overview of major steps taken by the enterprise since the 1950s toward corporate accounting, gradually incorporating health, safety and environmental concerns in the course of the 1980s and social responsibility, ethics and sustainability in the late 1990s. The document recognizes as an objective the need to integrate vision, values and principles in management systems so as not to lose further ground. Travel along the Road Map is deliberately slow. Even those measures adopted in 1998 continue to reflect the need for understanding and exploring SD, integrated accounting, progress monitoring and stakeholder engagement, which are expected to continue through the year 2000. For the first few years of the next millennium, Shell will test these approaches through piloting and progressive implementation. Only in 2002 will the process achieve the desired integration through unified management processes and alliances with society. Shell International has assembled an internal Social Accountability Team with Arthur D Little (ADL) and SustainAbility, pooling resources to develop a range of total net value added metrics. The indicators will be developed with inputs from Shells internal and external stakeholders. Although Shell has made progress in monitoring progress towards physical environmental targets, data have only been consolidated at a Group level since 1993, the most important achievement being an Integrated Verification of Group HSE standards. The challenge of an integrated accounting approach is formidable, given the lack of agreed criteria for attributing monetary values to social and environmental concerns.
Shells Sustainability Programs

Balancing the Triple Bottom Line
This report is about values (SI, 1998).

In its Statement of General Business Principles, the Group adopted the Brundtland Commission definition, 9 recognizing that sustainable development comprises three pillars - economic, environmental and social aspects - which are interdependent (SIEP, 1997). Shells contribution to sustainable development is perceived, from within the group, as a journey of continual but steady change, building on these three pillars - economic progress, social development and environmental improvement through an accounting concept often referred to as the triple bottom line. This expression for the three pillars of SD, although often described by other terms in much of the discussion on sustainability since the Brundtland report (1987), has been more recently popularized by Elkington (1997) with respect to business accountability.10 In an essay prepared for Shells groundbreaking annual report to society: Profits and Principles: Does there have to be a choice? (SI, 1998), Elkington was asked to elucidate his personal views on the companys role in SD and the need for a more socially responsible approach: To create long-term trust and shareholder value, companies need to manage this complex new agenda... (T)o do so both companies and their stakeholders must be able to measure progress against the triple bottom line. ... Happily, the evidence suggests no fundamental conflict between sustainable value creation and long-term shareholder value added...(F)or value creation to be sustainable, a company must acknowledge and manage the full range of relevant economic, social, ethical and environmental costs associated with
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Climate Change as Part of a Broader SD Strategy

Society at large harbors great expectations regarding energy companies efforts to change their environmental profile. The issues of greenhouse gas emissions and their effects on global climate change have increasingly become a major factor driving adoption of SD strategies. Energy companies have indeed begun to play an important role in both defining targets and innovations to reduce CO 2 emissions. The Shell Group issued its first public statement lending support to prudent precautionary measures to limit greenhouse gas emissions in 1996, preceding by 18 months the Kyoto summit, where quantitative restrictions were finally adopted on a global level. In mid-1998, prior to the Buenos Aires Conference of the Parties to the Climate Change Convention, the Group committed itself to a 10 percent reduction below 1990 emissions levels in its own operations by 2002. This will be accomplished through such innovative mechanisms as
intra-firm emissions trading and investment in renewable energy technology as well as energy efficiency measures. The Group has identified several contributions that Shell companies can make towards efforts to combat global warming (Box 3). The quantitative commitments to greenhouse emissions reductions, innovations and targeted investments were announced by Shell shortly after British Petroleum came forth with similar announcements. It is evident that such announcements were aimed more at image-building than major commitments to ameliorate global climate change.11 However, corporations have indicated they will innovate in response to market signals, while governments should limit themselves to set emissions targets (Watts, 1998).
We realize that communities want us to do more than simply pay taxes and leave the building of the necessary infrastructure to government (SI, 1998:26).
Integration of Social Capital and Sustainable Development
The emerging global framework regarding corporate social accountability implies the need to integrate social and environmental features of a companys performance. More and more companies are introducing routines and developing tools and indicators to assess progress toward such integration. Corporations such as Shell - whose operations are often located in sensitive areas - are more vulnerable to scrutiny of their socio-environmental performance. In this sense, a key strategy is the companys capacity to offer evidence its delivery of social benefits while protecting against harm to the natural environment. In this respect, Shell has begun to explore the link between social capital and SD. Prior to such explorations, Shell had conducted a business as usual approach, helping communities leverage income and improve their quality of life in conventional ways, such as by paying taxes, creating jobs and assisting to defray costs of social overheads such as roads, schools and hospitals. Building social capital is a different exercise altogether, requiring a distinct way of looking at corpo-
BOX 3: Contributions of the Shell Group to combat global climate change

measuring and reporting on their own unit emissions of greenhouse gases and targeting continuous improvements; find cost effective opportunities and new measures to achieve those targeted improvements, taking account of the direct and indirect benefits that such actions might bring; work with governments and international bodies in the policy debate to help find cost effective solutions; promote the development of energy efficient products and promote their efficient use by customers; participate in the development and marketing of alternative energy sources, including renewables, as appropriate for their business capabilities. Source: Climate Change Briefing Notes (Pre-Kyoto Info)
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rate/community relations. The extent to which a community itself can be considered as an asset depends upon stocks of social capital, identified as: the networks, norms and trusts that facilitate coordination and cooperation for mutual benefit (ERM, 1996). Yet, according to management, the social aspects of SD are generally not well understood in the business. We are a technological company and a lot of work in awareness building has to be done. The economic (area) is well understood, although its not often expressed in ways that reflects the contribution to society (interview with SIEP/HSE director, per comm, Sept. 1998). A Sustainability Assessment Guideline was recently issued by the HSE division at Shell International Exploration and Production (SIEP, 1997). This was based, in large measure, on social capital and allied corporate/community relations experience at Shell Canada, the Camisea gas project in Peru, as well as innovations at Shell Expro. The latter had launched similar initiatives as part of its 1997 Year of the Environment (see case studies of these experiences in chapter 4, below). This Guideline serves as an important - although admittedly still somewhat precarious - reference, to demonstrate how the commitment to SD may be integrated into day-to-day business activity, together with assessment and monitoring of its progress. The complexity inherent in such a strategy begins with the need to find a new perspective for a firms cognitive framework, traditionally formed strictly by an engineering outlook. Another factor militating against
Figure 1: Sustainable development challenges and issues for the E&P business
Components of Sustainable Development
Challenges and Issues for the E&P Business Climate change
Potential contribution areas Efficient use of energy and resources Reduce discharges and emissions Preservation of natural environments
Environmental
Impacts of operations and products Conservation of biodiversity
Social responsibility Social Openness and communication Finite reserves Economic Internalization of external costs Income and wealth generation Energy for growth
Maximize social benefits and minimize adverse social effects Stakeholder involvement Transparency and assurance Maximize economic benefits of business activity Include environmental and social criteria in business decisions
Source: SIEP (1997)
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a uniform SD approach arises from the enormous diversity in Shell Group products, technologies and local production conditions. For these reasons, the Guideline considers what it terms potential contribution areas for undertaking SD actions, as shown in Figure 1, offering a checklist of SD components and respective indicators in order to allow definition of policies based upon the experience of each operating company. It also offers suggested tools and procedures at each phase or level of assessment. The practical implications of SD for the E&P business are examined, to provide a basis for selfassessment and to build a profile of strengths and weaknesses, as gauged against the triple bottom line. The Guideline admits that greater attention must be placed on consultation, communication and partnership with stakeholders, as strategic measures for defining a policy to deliver social capital. Shell is thus designing its SD program within the context of ongoing debate about the roles of multinationals vis--vis those of state and society. The Group has recognized the need for partnership among these actors to identify and promote solutions for environmental dilemmas, perceiving that its success in this realm depends on its partners assuming part of the responsibility. What remains is to discern ways to mobilize appropriate contributions from each party in specific operating environments. grated throughout the business, and that progress towards this end be continuously assessed and monitored. Shells sustainability program is a process rather an end point, and depends on changing corporate culture in a dynamic way, so as to be able to reply to significant shifts in societys expectations. This means that sustainability must be pursued not only within a macro policy framework, but also within the realm of each operating companys standards and approach, reflecting consultation with stakeholders and participation in design processes to reflect these concerns. From a Group perspective, SD is still perceived more as a philosophical precept than an operational approach that, although it can serve as an action principle, still lacks a tangible connotation. Thus several initiatives have been undertaken to bring SD down to the operational level. Shell frequently identifies three of its OUs that were pioneers in design and implementation of SD strategies: Shell Canada, Shell Expro (UK) and the Camisea gasfield development of Shell Prospecting and Development Peru (SPDP). These endeavors emerged in different operating environments and were designed to address distinct sustainability issues affecting conditions in both developed and less developed countries, in response to equally distinct cultural settings and societies. Indeed, all three initiatives are still very recent, but some valuable lessons may be derived from their early stages. The three SD experiences arose independently, each with its own particular motivations. However, all share the drivers that have led the company to initiate its transformation at a policy level. Each example represents a different interpretation of approaches to operationalize the Groups commitment to sustainability. However, the social capital approach, as adopted in Camisea, may offer a framework to avoid or minimize the effects of cutbacks in O&G industry operations and their consequent employment and community impacts, in both developed and developing countries.
Sustainability Programs: Operating Company Experience

Operationalizing Sustainability: from Concept to Practice
Civil society concerned with the repercussions of Shell Group operations in a range of circumstances signaled the need for new business approaches and the redefinition of competitive strategies. Building market conventions is closely linked with the need to devise and improve tools and information to enable construction of scenarios and to reduce risks (Hoffman, 1997). Over the past few years, the Shell Group has responded with efforts to internalize the concept of Sustainable Development (SD) as it extends to business practice, beginning particularly at the policy level and through individual project assessments. However, corporate leaders recognize that this commitment must be inte-
Shell Canada
The environment has long been of concern in Canada, a nation at the forefront of global dialogue aimed towards redefining progress. This has made it imperative that major enterprises operating in Canada offer
90 PB

concrete responses to the challenge of sustainability. Shell Canada is an integrated O&G enterprise with assets of US$6 billion. The company employs almost 3,600 people in operating units spread widely across the country (Exhibit 6). The company explores for and produces natural gas and oil in Alberta, Saskatchewan and offshore Nova Scotia, and processes natural gas in facilities throughout Alberta. Shell Canada also operates three refineries, which convert crude oil into gasoline, diesel and aviation fuels, solvents, lubricants, asphalt and heavy fuel oils. Other facilities produce lubricants and greases. The company operates a nationwide network of about 2,050 Shell-branded service stations and also distributes gas to other retailers (Shell Canada, 1997). Shell Canada began monitoring its residuals emissions and safety conditions against planned targets as early as 1988 with targeted efforts to improve waste disposal. A company Health, Safety and Sustainable Development (HSSD) policy was first articulated in 1990, with the aim of integrating economic and environmental decision-making. The company updated the SD Policy in 1994, shown below. In 1997, Shell Canada published its seventh report of progress towards sustainability, auditing its compliance with emissions standards and progress toward targets, efforts to promote self-regulation and management of environmental expenditures. The latter have increased nearly 70 percent between 1993 and 1997, from US$75 million to US$127 million, with major capital expenditure in the last year to reduce greenhouse gas emissions through energy improvements as well as modest tree planting efforts with local organizations. Shell Canada has also made efforts to surpass national standards for reduction in emissions of benzene, SO 2, and volatile organic compounds. Other areas where progress is reported include reduction in water pollutant discharges, wilderness and wildlife protection, soil and groundwater quality, site restoration, waste reduction, emergency preparedness, stakeholder consultation, social responsibility, and employee health and safety. Responsibility for ensuring these aspects are integrated with business decisions has been delegated to line management, with support from HSSD groups who report to senior management and the company president. An HSSD Steering Committee made up of upper management officers oversees and provides direction to implementation of the policy. This strong, visible management commitment matched by employees awareness and involvement were key to successful implementation of this strategy. To report on its progress toward SD objectives, Shell Canada developed and implemented a formal Health, Safety and Sustainable Development (HSSD) Management System that incorporates a consolidated set of standards consistent with the ISO 14001 series. Shell Canada was one of the first operating companies of the Group to develop its own tools to assess progress toward SD, which are now incorporated in the Group HSE Manual on Sustainable Development Assessment (SI/E&P, 1997). These include an HSSD checklist and tools to assess how each project or action complies with SD principles, as well as to integrate both economic and environmental objectives in investment decisions. Objectives and targets defined for 1998 are presented in the companys annual report on Progress toward Sustainable Development (Exhibit 7). Although Shell Canada has made progress in the transition from monitoring environmental residuals to an integrated management model, the more complete incorporation of societal concerns through social capital aspects is not apparent in this model. Community socio-economic development as a function of business activity is not addressed in any of the management objectives, plans and targets, being limited only to ensuring that no significant health or safety incidents affect community members. Broad stakeholder engagement in planning for business sustainability is also unclear, although an interroga-
Shell Canada Sustainable Development Policy
hell Canada is committed to sustainable devel opment through the integration of economic and environmental decision-making in its business activities. In addition to complying with legislation and exercising environmental due diligence, we will continuously improve the overall environmental performance of our operations and products while ensuring short- and long term commercial success. We will set measurable targets and report our progress on a regular basis. All employees and contractors are committed to, and accountable for, sustainable development performance within Shell Canada (Shell Canada, 1997).
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tory process has been undertaken to solicit community opinions regarding oil and gas operations. Suffice it to say that interrogation does not necessarily ensure integration of community concerns into decisions on running such facilities. The case of Shell Canada highlights the crucial role of regular monitoring and assessment and of management commitment to implementing an integrated HSSD policy. Only through day-to-day operational processes is it possible to monitor and assess the adequacy and adherence to measures adopted in the name of sustainability. Corporate culture can thus be more readily adapted to these new parameters for evaluation, given a good fit of assessment indicators with the overall company purpose. Council. According to one participant, the workshop agenda was equally open, stimulating participants to set the course during the event. The numerous proposals for action led to definition of ten categories, around which working teams were formed to define project proposals (Interview, Sept 1998). The proposals were further developed, prioritized and grouped by staff into projects, which formed the basis for a Shell Expro Business Plan for Sustainable Development (Shell Expro, 1998b). The Business Plan is complete, and will address a number of issues (Box 4). Projects include: a study on the feasibility of carbon storage in new forests as an acceptable means to offset some of Expros CO2 emissions; the implementation of Lifecycle Analysis on a new field development; and joint projects with Aberdeen Council to promote waste reduction and sustainable commuting as part of a support program for Local Agenda 21 initiatives. The plan will also develop a set of sustainability indicators in order to monitor the effective progress of the various projects (Shell Expro,1998a). The Expro Business Plan on Sustainable Development was not a traditional top down management exercise. Many of the proposals result directly from active staff involvement and individual initiatives (Interview, Sept 1998). A team leader was identified for
Shell Expro UK
Shell Exploration and Production (Expro), which discovers and produces crude oil and gas from company concessions, is one of three main businesses of Shell UK, along with Oil Products and Chemicals. Overall, Shell UK has over 6,700 direct employees, and produces 19 percent of the UKs crude oil, 17 percent of it is gas, 18 percent of it is oil products and 15 percent of its petrochemicals. The companys operations range from exploration and development of the Brent field in the North Sea, to the supply of domestic heating oil to remote customers. Between these, Shell UK owns and operates two refineries, a network of pipelines, loading and distribution centers and a nationwide network of service stations. Shell UK has published its progress toward HSE targets on a wide range of indicators since 1995, and has pursued independent external verification of these indicators since 1996 (Shell UK, 1998). Furthermore, Shell UK has named environmental representatives that provide a link between the workforce, HSE advisors and managers in each aspect of the company (Shell Expro, 1998a) In 1997, the companys managing director launched an initiative to define how it might best fulfill its commitment to sustainable development as part of its 1997 Year of the Environment. To this end, in April 1997, an open invitation was issued to all Expro staff to share ideas by attending a two-day workshop. This involved some 35 interested Expro staff and facilitators from The Natural Step and The Environment
BOX 4: Sustainable Development projects at Shell Expro (UK)

define development for Shell Expro; incorporate sustainable development into Shell Expros Business Strategy; develop indicators to measure sustainable development performance; improve sustainability of the hydrocarbon production processes; improve sustainable use of material and energy resources; diversify into renewable energy; awareness and education among staff on SD issues. Source: SI/E&P (1997)
92 PB

each of the sub-projects and workshop participants were asked to sign-up for the project to which they felt they could contribute the most. These project teams, consisting of four- to ten staff each, then produced proposals for progress in their area. A one-day follow-up workshop was then held where all eight teams presented their project proposals and provided a series of recommendations on the ways that they believed the projects should progress. The responsibility moved from voluntary group to line management, which then formed an SD coordination committee involving staff from Finance, New Business Development, the company reputation manager and the Sustainable Development Coordinator. In November 1998 the group held its fourth workshop, where coordinators identified new projects to be executed during the coming five- to ten years. Expros leadership team has thus examined its business strategy in an SD context and identified challenges and opportunities from both an internal and external perspective (Kleiburg and van Kersen,1998). Shell International identified a number of factors critical to Shell Expros successful launching of an SD business planning process (Box 5). One of the important challenges at Shell Expro was to ensure that SD is internalized at all levels off the company (staff and management) and that the concept is translated into positive action on a day-to-day basis. The strategy therefore ensures that more frontline staff feel they own the issue.
BOX 5: Factors critical to Shell Expros sustainable business planning process

Management commitment to the process, including allocation of time and resources to the initiative. In Expro any member of staff wishing to be involved was allowed to take time out from their normal activities to participate. Wide involvement through initial invitation sent to all staff. Sustainable development involves everyone and the wider and more diverse the involvement, the greater the range of views and ideas. Strong commitment from all those involved. This was heightened by the fact that everyone regardless of group job, was given the chance to put their views forward and to help progress their work. Allocation of overall responsibility to one person to fully co-ordinate the process and to provide a focal point. Without organization and defined responsibilities, many of the ideas may get lost and the process becomes disorganized and frustrating. Regular updates and feedback through e-mail and a newsletters to maintain interest in the commitment of staff. This helps to demonstrate to staff that their views are relevant and are being taken on board. Involvement of parties external to the company, both from within the Group and outside organizations, to help provide advice and expertise and to offer alternative view points. Source: SIEP/HSE (1997).
The Camisea Gas Project

The Camisea gasfield is located deep in the Peruvian Amazon forest in the Lower Urubamba watershed, an area inhabited by about 10,000 people in over 35 villages, representing seven distinct native cultures. Regional isolation impedes their access to markets and the provision of public health care and education services.12 Shell first came to the region in the early 1980s during an exploration campaign which led to discovery of a world class gas deposit (11 trillion cubic ft of natural gas and 640 million bbls in liquid condensates). During exploration, Shell was accused of abusing human rights, endangering the health of isolated indigenous peoples and disrupting the fragile rainforest environment. Such abuses - which had ap-
peared throughout the Amazon basin wherever gas and oil exploration was underway - mobilized protest from environmental and human rights organizations in both Peru and industrialized countries. On returning to the Lower Urubamba in 1996 through a joint development venture with Mobil (Exhibit 8), the Shell Group had already initiated its transformation in relations with society at large, having been faced with conflicts over Nigeria and Brent Spar (Boxes 1 and 2). Camisea was perceived as an oppor-
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tunity to further advance the learning process at Shell, enabling the company to apply approaches under discussion at a Group level in this particularly fragile and controversial setting. To this end, Shells national OU - Shell Prospecting and Development Peru (SPDP) - launched a comprehensive program of consultation and stakeholder participation that enabled effective translation of emerging issues into technical and design decisions. This approach helped the company to resolve several potential show-stoppers that threatened continuance of the project, and established essential contractual and good neighbor relationships with local indigenous communities. Furthermore, it adopted longterm strategies for Social Capital and SD aimed at building autonomous local capacity to respond to the project, and that hoped to deliver a net benefit to local communities during and beyond the 40-year period in which Shell planned to operate its gas facility in the area. To develop the Camisea project, SPDP assembled a management team experienced with problematic working environments and committed to application of Highest Industry Standards. Responding to concerns regarding the socio-environmental legacy of Shells prior exploration campaign, SPDP management made a commitment from the outset that Camisea would operate as an Offshore. Its base camp and operational personnel would be completely isolated from native communities. Workers were required to present a Health Passport certifying their inoculation against diseases and ailments that could be devastating to the indigenous population. Infractions of this ruling were punished with dismissal. Management also adopted a No Roads policy for the Lower Urubamba watershed and gas export corridor. No roads would be built that could facilitate access to the fragile region by colonists or loggers, to avoid competition and conflict over scarce resources. In-field road construction was also prohibited. Instead, transport of all equipment and materials from the Atlantic Ocean was upriver from the mouth of the Amazon, and then by helicopter to the infield wellsites. When natives demonstrated violent alarm over the use of demonic hovercraft for river transport, consultations found ways to avoid a stand-off that could have seriously delayed the project. Each of these important policy and project design decisions resulted from consultations with local communities, visited by Community Liaison Officers (CLOs) during six consecutive consultation rounds regarding Full Field Development issues, and continuously on other themes of local concern. At their meetings, CLOs presented design features and aired local problems for potential company assistance. Shell steered away from a purely compensatory approach, avoiding cash transactions in favor of communitywide investments with wide distribution of benefits, such as health posts, training facilities and scholarships. The company also made efforts to strengthen and legitimate local organizations, such as Mothers Clubs, empowering them to receive funds and administer local projects on behalf of local women and their households. Shells commitments to an integrated social capital and SD approach stemmed from a mid-1996 workshop in which core management began to design their own project to meet the long-term goal of net social benefit to native communities. In this venture and throughout its work with communities in the region, Shell received technical assistance from ProNatura, an international NGO founded in Brazil that had devised and implemented model approaches in a range of partnerships. Pro-Natura emphasized the importance of achieving buy-in from government agencies and the national NGO community to achieve advances toward social capital. The very concept of social capital emphasizes how critical it is to mobilize local collective organizations and the state to build local capacity toward the assumption of ever more complex development tasks. Shells primary emphasis in its social programs in the Lower Urubamba was to attract buy-in from existing institutions and service providers whose interests and capabilities matched local needs. National and international NGOs began to assume a more pro-active role in the planning of regional sustainable development. A Health Baseline Assessment at the very outset of the project focused attention on the gaping deficiencies in local health and social services, stimulating discussion of additional opportunities for intervention. Further collaboration with regional government led to preparation of a regional socio-economic diagnosis and plan for sustainable development of the Lower Urubamba watershed, securing further public and NGO commitment in this
94 PB

direction. Finally, the Smithsonian Institutions Conservation Biology Institute, long active in the neighboring Manu Reserve, was engaged in biodiversity assessment and monitoring, creating an exceptional knowledge base that added further value and visibility to project efforts. This biodiversity program not only fed into an Adaptive Environmental Impact Assessment process (Box 6) but also had the virtue of providing a practical training ground for young national scientists based at collaborating institutions. It also motivated natives who were hired as guides to recuperate and value their indigenous knowledge endangered by the onslaught of modern civilization. Shell tendered for bids in late 1997, and placed control over gas exports from Camisea to a construction alliance involving a three-firm consortium (BechtelCosapi-Odebrecht: BCO). The difficulties of transferring commitment towards social capital and sustainability became evident when work began along the pipeline corridor. Despite efforts by Shell to mirror its social and environmental policies by intervening in the BCO Alliance, distinct structures, corporate culture and incentives complicated the interpretation of Shells concept of net benefit by its contractors. For a contractor, the need for an explicit definition of the limits of contractual responsibilities was important, and this was found to be difficult to define in an adaptive approach to corporate-community relations during project design. BCO therefore placed most attention on efforts to avoid serious operational impacts on the physical environment. Social concerns and community relations actions by the separate CLO team engaged by BCO focused on achieving adequate compensation agreements with property owners and communities in the pipeline right-of-way. This differed substantially from Shells role with natives of the lower Urubamba, where efforts toward social capital and sustainable development became central long-term objectives. Shell learned a number of valuable lessons from its experience in Camisea. These included the following: companies first must build sensitivity through stakeholder consultation, thus permitting their early identification of the socio-environmental issues at stake; management must internalize these issues and re-
BOX 6: Adaptive EIA in the Camisea Gas Project
oon after returning to the Camisea region, Shell decided to initiate an Adaptive Environmental Impact Assessment (EIA). This self-regulating approach exemplifies how Shell had become sensitive to its international reputation. The company devised an EIA process as well as an adaptive biodiversity monitoring program that went well beyond any Peruvian government requirements, to comply with its commitment toward Highest Industry Standards. By the nature of the oil and gas business further exploration would be needed to better define known reserves and to prove additional leads. Both seismic and drilling programs aim to reduce the level of uncertainty that exists within exploration. Due to their urgency, the time-line of such activities has in the past been determinative of the likely scope of EIA. These limitations of the EIA process can be overcome by ensuring other avenues are in place to gather information, make scope changes, minimize impact and provide for benefits. These avenues all work in parallel but with synergy between them. Thus consultation and biodiversity study became themes that would remain throughout the project life. Social and health assessment would need to be continued to reflect the changing baseline conditions and recognize subsequent baseline conditions and represents a life cycle approach of progressive learning and change (Jones, 1998).
ward staff advances in understanding and learning with stakeholders; a fair and transparent process will help to achieve long-term relations of trust during project development and implementation; companies must make early commitments at the highest managerial level to rigorously uphold socio-environmental policies throughout the enterprise; the company should seek to ensure staff continuity, recognizing how important are individuals themselves as guardians of corporate memory and commitment; throughout, the company must emphasize setting creative and modest targets rather than unattainable or costly ones, thus enhancing credibility with stakeholders.
Above all, the Camisea experience showed how important it is to provide a framework for collaborative
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learning among civil society, government and private enterprise. With a complex cultural and environmental milieu, there were no right answers at the outset lessons had to be learned along the way. These lessons are broadly replicable and allow all players to build their capacity to identify and contend with socioenvironmental conflicts, not only during design but also throughout the implementation of major natural resource development projects. Despite Shells cancellation of investment in Camisea in July 1998, its experience there in stakeholder consultation, social capital and sustainable development are perceived internally, and in the industry as a whole, as a model for how O&G enterprise should be conducted in sensitive environments. The value of adequate stakeholder consultation and participation was affirmed by statements from indigenous leaders and environmental groups concerned that others who may take on the development at Camisea might not do as good a job. Furthermore, Shell found that the marginal incremental expense incurred in this effort more than paid for itself as insurance against project completion delays, local dissatisfaction and potential sabotage (Dabbs and Bateson, 1998; see discussion of financial benefits below). societal shifts toward a new competitive environment and to select innovations that promise to become most profitable (Penrose, 1959; Nelson and Winter, 1982; Best, 1990). In so doing, these firms bring into their organizational structure new routines and behaviors, thereby altering corporate culture. Environmentalism has been one of the deepest forces provoking cultural change within enterprises, because it is associated with the complexities of dealing with social dynamics. Thus, to survive in this new competitive context, the firm must incorporate societys dominant beliefs and conventions of environmental behavior. In so doing, these features are absorbed as part of a firms assets, affecting its ability to act and influence its markets and to seek competitive advantages. In this regard, the firms internal structure must follow this direction, setting goals and adapting departmental routines in order to promote its principles and commitment to sustainability. Organizational structure and corporate culture thus represent superior indicators of long-term environmental commitment, even more so than tracking overall environment expenditures and emissions levels. To date, it must be admitted that Shells efforts to address SD at a Group level and in operational companies, have not brought about a thorough change in corporate culture. Some companies are more advanced than others in this debate (see the case studies above), but it is too early to conclude that this process has reached a consolidated footing. Shells SD initiatives are only beginning to take effect. Nevertheless, the response of upper management of the Group is encouraging, as they have adopted this new concept at the level of discourse, and because they severely criticized themselves for the delay in addressing it earlier. Inclusion of concerns for sustainability in the companys portfolio might or might not be implicit in recent measures oriented to centralize decisionmaking processes and concentrate corporate activities in its core business. The degree of this commitment to a new model of corporate behavior will be apparent from the incidence of cost-cutting measures currently underway in response to the current industrial performance crisis. It may be a gross presumption to conclude that these decisions were in any way influenced by the SD strategy. Nevertheless, a serious sustainability program requires overall manage-
Impacts of Shells Sustainability Program

Changing Corporate Culture from Society: New Competitive Strategies
We have learned that we must change the ways we identify and address issues and interact with the societies we serve (SI, 1998:40).
The institutional environment13 in which the firm takes part plays an important role in corporate behavior and, along with market signals, is now largely considered responsible for corporate change and innovation. Indeed, the boundaries between a firm and its business environment are blurred, and because of this may shift and even disappear over time. Several renowned economists address this new competitive strategy - the strategic firms are those capable of identifying early manifestations of significant market and
96 PB

rial accountability and is signalled by new considerations affecting competitiveness in the industry. There is some indication that the SD strategy will not be cutback in the interests of greater efficiency.14 1998). The staffs adherence to an SD strategy in a marketdriven corporation is closely tied with their firms reputation. External and internal stakeholders expectations and aspirations are, in fact, closely connected. The shared concern for the companys reputation demonstrated by the MORI research found that 583 Shell managers across 55 operating countries are positive about the Groups environmental performance, although they share concern with external groups regarding company performance on human rights and social investments. However, their opinion alone is insufficient to bring the entire staff along toward shared SD objectives. Shell staff will come to believe that contributing to SD means good business when it is seen to reflect the values Shell people share. In other words, they will believe that through this means, business may help to improve the world (a principal factor mentioned in the MORI survey), when they realize that this also means continued commercial success and a proper return to Shells shareholders, and second, when they believe that the businesss long-term profitability depends on retaining public trust, which reflects on the firm reputation. To attain this commitment, the entire staff must be willing to expose its performance to external scrutiny.15
Governance Structure and Corporate Culture

The Groups decentralized structure - which aims to invigorate local business opportunities as well as profitability and shareholder value via autonomous companies - may serve as an obstacle to the diffusion of SD principles among all Shell companies. This is true, above all, because to operationalize SD requires that strong commitment be translated into procedures and connected actions difficult to apply in an independent management structure. In this regard, it is pertinent that although each company is responsible for its own policy and appraisal, the Group Holding Companies are the sole authority for mandatory Group standards and policies (SI, 1996:i). It is therefore necessary that there be appropriate and sufficient channels by which SD standards and policies be conveyed and adopted. Moreover, their assimilation and operational application may be impeded if the hierarchy of command in a corporation is excessively top-down. Horizontal structures allow easier transit of ideas, providing a context for interdisciplinary and cross-cutting appraisal and resolution of problems. Some specific departments may become more important than others when corporations opt to prioritize SD in their commitments, absorbing new responsibilities and commanding greater management attention. One of the most prominent is the External Affairs department, whose core function has in the past been to intermediate the firms communication with society. In Shells Corporate Centre today, External Affairs is integrated with Planning and Environment under the same direction, and performs added functions in crisis management and in the engagement of partners from civil society. This group now works closely with the HSE Department to ensure a greater capacity to respond to external concerns. However, this structure is restricted to Group management. No Shell OU is organized in this fashion. Nevertheless, the most fundamental difference is that HSE management is no longer inwardly focused. There is now widespread involvement with civil society (Watts,
Financial Benefits of SD Performance: Camisea Case

Shells reputation as perceived by the market could result, among other consequences, in either winning or losing opportunities to enter new regions and to renew operating licenses. Changes in societys expectations - which also means societys collaboration could result in limiting access to information, essential for defining strategies and identifying risks in an uncertain environment. It is difficult to generalize financial assessment of benefit from an SD strategy to different enterprises, much less to the Group as a whole. However, analysis of publicly-traded firms has often shown that financial and environmental performance are closely correlated - sustainability implies good management. Many decisions made on environmental grounds imply win-win solutions (with a triple bottom line, another win should be added for social benefits).
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R OYAL DUTCH/SHELL
Recent work to assess the benefits of the social capital and SD strategy adopted in the Camisea gas project offer a benchmark against which to assess other experiences, despite the uniqueness of that setting.16 By the time of the Final Investment Decision on Camisea in mid-1998, investment by Shell in socioenvironmental safeguards, stakeholder consultation and modest local investments toward social capital and sustainable development, constituted about US$33 million, or only about 1.2 percent of project startup costs estimated at between US$250-300 million. These investments - over and above what would be expected under traditional E&P operations - were directed toward implementing policies that answered key management commitments at the outset of the project, with the objective of limiting access and thus preventing boom-bust development, minimizing the ecological footprint, isolating workers, incorporating local concerns, designing contracts and compensation and building stakeholder involvement. These investments and safeguards leveraged benefits quite out of proportion to their costs that included risk reduction (socio-environmental and country risk), goodwill, and cost avoidance in future moments. Dabbs and Bateson (1998) examine and quantify these financial benefits derived from addressing social and environmental concerns in the design and operation of the Camisea gas field. While the cost of addressing the social concerns are primarily felt by business operations in the short term, the financial consequences can be felt beyond the life of a project. The authors identify three levels where decision-making might affect the financial outcome of the project (Exhibit 9): communities and the environment, operating company profitability and profitability of the Shell Group. At a national level, integrating or ignoring social concerns may impact such areas as project security, marketing and sales, project financing, government relations and legal action that may result in serious project delays. At an international level, financial consequences may affect international public reaction, the companys ability to win future projects, and shareholder/stockholder satisfaction. Dabbs and Bateson valued the financial impact of several of those aspects affected by adoption of SD policies, based on analysis from those managerial units responsible for each of the areas in question. In the international arena, attention was placed on extrapolating results from similar circumstances, where the lack of proper initial investment and management commitment had brought devastating losses for the company. For example, lack of long-term investment in social capital as an added aggravation to the larger political struggle between government and Niger Delta peoples, or failure to predict and take into account stakeholder concern in Brent Spar (Boxes 1 and 2). In total, the net financial benefits in Camisea were estimated to lie between US$79 and US$165 million, far outstripping the incremental costs, even in the lowest benefit scenario.18 The authors conclude that there is growing awareness that addressing these concerns does not depend on a tremendous investment but more on a pro-active approach, managerial ability and commitment tied to smart investment . The initial cost of incorporating these concerns is indeed an investment rather than an expense. It is an investment that has significant impact on the overall business. Those companies with the skills to manage these issues do so at a fraction of the cost, and far more effectively than those without an integrating approach. Thus, these conclusions indicate that it makes little difference whether one predicts or calculates if SD programs are cost-effective since their absence might
BOX 7: Key Additional Social Investments in Camisea (Net Present Value17 )

No Road Commitment: use of helicopter support rather than roads Hovercraft Modifications: redesign to incorporate community concerns Health Passport: vaccination program to protect workers and natives Consultation Program: identifying key social issues and viable solutions Social Capital and Biodiversity Programs Compensation Program: consultation and negotiation process US$10 Million US$5 Million US$1 Million US$1 Million US$15 Million US$1 Million
98 PB

generate deep, irreversible and much more costly problems of competitiveness, given the uncertainty that pervades the industry. These consequences reflect themselves in the Groups reputation, a major source of continued market superiority. In this regard, the most important driver is the SD concept itself, which has already become a market convention. Therefore, there is no alternative but to assume these expenditures as a fixed cost of operations. All of these have changed Shells perceptions of sustainability. What is new is not how SD has been absorbed into corporate behavior and discourse, but rather how the convention of SD responds to societys needs and expectations, which in turn are a crucial factor in market competitiveness. So, companies are also society-driven.
Building from Shells Basic Values

A new role in society was virtually inescapable for companies. They couldnt get away with what they did in the past. We had no mandate in certain areas, but society said we expect you to assume new roles and there is a reverse side of that coin, that is, you have to become more transparent, more open, honest and more accountable. And after a lot of internal thinking we came to the conclusion that: yes, we were going to accept those lessons with relative ease because in a company which was already beginning to prepare itself for a transformation, in a company which was based with very explicit and strong values, the gap between what we are and wanted to be was significantly smaller than in the case of other companies (Interview, Sept 1998). Shareholders today are concerned with their longterm value even if it implies additional costs. They expect that the company to have a strategy for longterm survival, which contemplates ethical issues and thereby avoids expensive and embarrassing publicity and campaigns. They also expect the company to motivate the workforce. In turn, employees want to feel proud to be part of a reputable company which contributes to community improvement, but they also want to keep themselves employed. According to the survey of Societys Changing Expectations (Wade: 1996), these expectations are very close to those of external stakeholders such as the government (which expects a trustworthy and responsible company, both socially and economically), the general public and customers (who demand a company that is trustworthy, which cares for the community and for the environment), and NGOs (who want companies to uphold principles and high standards, and address local community issues). Environmental organizations represent a significant source of pressure to Shell because international NGOs have a strong influence over developing coun-
How Drivers Become Drivers

There is an emerging consensus regarding the external and internal drivers that influence corporations to promote changes towards an SD approach. Usually, internal drivers are those directly related with the companys day-to-day operations, such as shareholders, employees, CEOs and managers, while external ones are those attributed to the outside environment, such as government, civil pressure groups, competitors and the financial sector. But a driver only becomes one when performance, and consequent financial results, jeopardize the firms reputation and position in the marketplace. According to recent research in Canada - where strict environmental regulations and high standards prevail, corporations were affected, first, by governmental regulations and consumer pressures, but later by a plethora of stakeholders including shareholders, employees, neighborhood groups and trade associations, consistent change of attitude. Each of these pressure groups presents a firm with a daunting array of potential environmental risks. Firms are fundamentally compelled to manage environmental issues, regardless of costs. And once formulated, environmental plans must be communicated to all who are interested, and not only to shareholders and staff. According to this same research the larger the firm the more susceptible it may be to public scrutiny because size affects firms visibility (Henriques and Sadorsky, 1996). Shell recognizes three principal drivers compelling its transformation process: the increasing importance of sustainable development on market competitiveness, which was lagging behind its competitors; significant changes in societys expectations and company history of incidents posing environmental and social risks.
99
R OYAL DUTCH/SHELL
tries environmental movements, and are able to influence corporate behavior via their communications with the public and government organizations. Contracts are lost due to boycotts and sabotage as in the Brent Spar incident. On the other hand, a corporations staff is made up of people who are neighbors to local residents, customers and NGO members. All of them, along with internal staff, are essential partners for defining and implementing a sustainability strategy and therefore influencing corporate culture (Kleiburg and van Kersen, 1998). As Shell perceives itself a company with strong values, all these claims and expectations strongly affect its self-esteem. The corporation prizes its reputation as its most important asset. And Shell is willing to make efforts in order to restore its good reputation and, consequently, its market position, incorporating social accountability. After all, external drivers may affect reputation but it directly influences employees, managers and shareholders. In sum, these key drivers took place virtually at the same time, and became the fuel accelerating the pace of transformation at Shell. As a result, the Group revisited its code of General Business Principles, introduced support for Human Rights, and a commitment to Sustainable Development. The implications of the transformation on the drivers of relevance to the company are compared in Table 3.
Shells Views Regarding Principal Challenges to Sustainable Development
Even our most realistic scenarios for renewables suggest that by the year 2050, at least half of the worlds energy will still come from conventional fossil fuels. In the rush to do something about global warming, therefore, we have to be careful. Economic growth and social development depend on energy consumption (Interview, Sept 1998).
The Challenge of Growth
The challenges of growth have currently been faced by Shell in two different ways. In remaining a key
Table 3: Traditional approach and matching SD drivers

Traditional External Drivers Regulatory measures Public perception vis--vis company Public perception vis--vis industry/sector Competitors Financial sector pressure Traditional Internal Drivers Employees CEO and management Shareholders Risk intolerance Environmental and social performance Matching External SD Drivers From governmental regulation to self-regulation and highest industry standards Communities: from hostages to hosts From shareholders to stakeholders From adversaries to fellows or partners Not matched yet Matching Internal SD Drivers From individuals to stakeholders From personal realization to commitment with a firms performance From individual share earnings to pride with a responsive and reputed firm From risk aversion to risk management From bad performance to a commitment to attain good performance
100 PB

player, Shell has the role of responding to societys expectations, which means moving towards sustainability, but also having the responsibility to continue providing energy to the world economy. These objectives are by no means contradictory the question is how to serve societys needs for energy while curtailing environmental costs from the extraction of increasingly remote hydrocarbon reserves, and simultaneously searching for alternative sources of energy to sustain welfare improvement as fossil fuel sources dwindle. Shell is making efforts to manage this transition. Although emissions reductions and the acceleration of renewables research are part of the sustainable development commitment, many think that Shell will not be able to compromise itself with high reduction rates and rapid technological change. However, given the need to demonstrate a response, the Group adopted the so-called precautionary principle regarding the Climate Change issue. According to one managing director: In Kyoto negotiators will have to take into account the absolutely fundamental contribution of reasonably priced energy to development. Without affordable energy almost every form of development stops [ even sustainable ones19 ]. So, unrealistic emissions targets, which drive energy prices up, will only hurt those least able to protect themselves (Watts, 1997:7). Internationals HSE division is aware that it will be difficult to put all 2,400 companies on the same track simultaneously. So far, a commitment has only been made to seek continuous improvement toward attainment of high standards. Some OUs lag behind others in implementing such standards, and in other circumstances, the standards themselves differ due to different operating environments, eg, salt discharge to seawater will be greater than those to bodies of fresh water.20
Movement from Shareholder to Stakeholder Responsiveness

Historically, companies like Shell, have been accused of putting the financial bottom line before their wider social responsibilities and of concentrating on shareholder interests to the detriment of other stakeholder groups such as employees and customers. Commercial enterprises dont exist just to raise operation standards. However, some see their purpose purely in terms of increasing shareholder value. This is essential, but too narrow. In Shell we see our wider purpose as helping people to build a better world. This is reflected in our commitment to sustainable development. We must, of course, do so profitably in order to fund investment for the future and create wealth for society - including making a proper return to our shareholders (Watts, 1998:6).21
Overcome Double Standards

One of the prices paid for being big is the accusation of double standards. As conditions are different in each country where Shell operates, management and technological processes are equally diverse as are the rules and specific policies with which they must comply. Thus, OUs do not exhibit the same performance standards. The target is by the end of the year 2000 all Shell companies managing major installations with significant environmental risk should have an environmental management system meeting independent certification standards such as ISO 15000, the European EcoManagement and Audit Scheme (EMAS), those of the American Petroleum Institute and the Chemical Manufacturing Association (HREF= , Living by our values). In addition, all companies will be publicly reporting on HSE matters, and those reports will be externally verified (Watts, 1997:7). But Shell
Movement from Trust Me to Show Me

Multinationals have been criticized as being overly concerned with profit and failing to take their broader responsibilities seriously: to defend human rights, to protect the environment, to be good corporate citizens. Such accusations reflect a shift in what society expects of both business and government. Faced with such uncertainty, people are withdrawing their trust in traditional institutions unless it can be demonstrated that such faith is warranted - what has been termed a move from a trust me to a show me world (SI, 1998: 2). The engineers tyranny is no longer accepted without question in the show me world: Sound science and regulatory compliance are not sufficient to secure public support for decisions or to guarantee a companys long-term license to operate (Faulds et al., 1998:6).
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R OYAL DUTCH/SHELL Competitive Advantage and the Future

Shell is a global leader on the sustainability front, with its initiatives in emissions reduction and renewables, and innovations in E&P in Camisea and sustainability assessment and planning in Canada and the UK. However, the extent to which these exceptional advances will result in competitive advantage is still an open question. The perception among corporate managers is that these actions will not as yet lead to a competitive edge, because we still have a lot of negative image to combat from Nigeria and Brent Spar (Interview, June 1998). Sustainability leads to innovation, given its responsiveness to both the physical and social environment. Its dynamics will, in turn, generate different responses that require other innovations. Experiences from the three cases described, if adequately permeated throughout the corporation, will become a resource for broader adoption of this new profile, as in the Sustainable Assessment Guideline (SIEP, 1997). Guaranteeing this result will largely depend on efforts to document and spread the lessons learned, a new corporate role for innovative business leaders. That Shell has adopted this tactic is in itself an indicator that the company perceives this resource retained by individuals as a basis for devising a broader strategy. In like fashion, efforts made by the company to assume a transparent stance in its innovations has generated a great deal of goodwill, such as that expressed by national and international NGOs regarding the Camisea experience. However, this public perception does not extend to the overall O&G industry. In general, people remain skeptical that these industries will be the wave of the future, and they must therefore be forced into taking a more proactive stance. The backlash against the Global Climate Coalition led its members to change their tune as other industries joined forces with the few outspoken O&G leaders to develop a distinct agenda on climate change. The Group is clearly seeking strategies to respond to the climate change dilemma by reinforcing areas in which it may emerge as a market leader. The Shell Renewables business plan to capture at least 10 percent of the growing world market for renewable energy technology by 2005 is indicative of this strategy (van der Veer and Dawson, 1997). This was considered a commercial decision based on the future prospects for renewable energy - and the value of Shell strengths in such areas as forestry and photovoltaic technology. Yet, the investment in renewables does not in and of itself indicate a transition to sustainable enterprise. Renewable energy could create competitive advantage and be a source for enhancing new capabilities based on SD. Or it could become yet another enterprise, subject to the same sort of conflict with community and societal aspirations that have plagued Shell in other settings. Renewable energy by itself is not necessarily sustainable (witness problems already perceived in a Shell project in South Africa, and the experience of a biomass gasification project in Brazil, which have largely ignored community interaction and need). It is still too early to assess how extensively and effectively Shell will adopt the precepts of its Road Map, and successfully integrate SD as an operating approach throughout the enterprise. As the level of understanding and internalization of the concept remains fairly limited in the majority of Group OUs, its success in this regard cannot yet be evaluated. As a first step, all efforts should be targeted towards enhancement and institutionalization of this new strategy, providing it with adequate R&D and logistical support.
102 PB
References
Dabbs A. and M. Bateson (1998) Corporate impact of addressing social issues in projects in the developing world. Pro-Natura. Lima, Peru. Davis, J. (1998) A Commitment to Sustainable Development WBCSD, London. Best, M. (1990) The New Competition: Institutions of Industrial Restructuring. Harvard University Press, Cambridge. Elkington, J. (1998) Contributing to Society, a personal view. In Shell International, Ltd. Profits and Principles: does there have to be a choice?, London. pp. 46-47. Elikington, J. (1997) Cannibals with Forks: The Triple Bottom Line of 21st Century Business. Capstone, Oxford. Energy Information Administration, U.S. Department of Energy EIA/DOE (1998) International Energy Outlook 1998. Washington. Environmental Resources Management ERM (1996). Camisea: Increasing Social Capital. London, May. Faulds, E., F. Morrison and A. Wilkinson - Shell, UK (1998) Engineering in a Show Me World: A Brent Spar Case Study. The Annual Achievement Lecture to the Institution of Mechanical Engineers, University of Teesside, Middlesbrough, UK, 4 November. Financial Times (1995) Brent Spar a strange affair. Energy Economist Briefings, July. Financial Times Energy Publishing, London. Henriques, I. and P. Sadorsky (1996) The determinants of an environmentally responsive firm: an empirical approach. Journal of Environmental Economics and Management 30:381-395. Hoffman, A. (1997) From Heresy to Dogma: An Institutional History of Corporate Environmentalism. New Lexington, California. Howarth, S. (1997) A Century in Oil: The Shell Transport and Trading Company; 1987-1997. Weidenfeld and Nicolson, London. Jones, M.G. (1998) Environmental Impact Assessment within a Multi-National Enterprise: Adaptive EIA in the Camisea Project. Presented at the Conference on: Impact Assessment in the Development Process, University of Manchester, Oc-
tober 23-24. Kleiburg, R. and H. van Kersen (1998) Matching green words with clear action. Exploration and Production Newsletter, Shell UK, SIEP 98-7008, August. Lopes, I.V., et al. (1996) Gesto Ambiental no Brasil. Experincia e Sucesso. Fundao Getlio Vargas. Rio de Janeiro. May, P., A. Dabbs, P. Fernndez-Dvila, V. da Vinha and N. Zaidenweber (in press). Corporate roles and rewards in promoting sustainable development: lessons learned from Camisea. Energy and Resources Group, University of California-Berkeley. Meadows, D. et al. (1972) The Limits to Growth, A report for the Club of Romes Project on the Predicament of Mankind. Universe Books. MORI (1997) Shell Global Reputation Management Summary. n.p. Nelson, R.R. and S.G. Winter (1982) An Evolutionary Theory of Economic Change. Harvard University Press, Cambridge. Newbury, W.E. and T.N. Gladwin (1997) Shell, Environmental Justice and Nigerian Oil. Business Case and Teaching Note, The Global Environment Program, Stern School of Business, New York University. New York Times (1998) Shell plans a big revamping and charge, December 15. Business. Penrose, E.T. (1959) The Growth of the Firm. Oxford University Press, Oxford. Nordhaus, W. (1973) The allocation of energy resources. Brookings Papers on Economic Activity 3:529-576. Royal Dutch/Shell Group of Companies (1997) Financial and Operational Information 1993-1997. London. Schmidheiny, S. and F.J.L.Zorranquin. (1996) Financing Change. The Financial Community, Eco-Efficiency and Sustainable Development. The MIT Press, Cambridge. Shell Canada (1997) Progress Toward Sustainable Development: 1997 Sustainable Development Report. Shell Canada Limited, Calgary. Shell International Exploration and Production B.V. SIEP (1997) Sustainability Assessment Guide. HSE Manual EP 95-0373. Shell Expro (1998a) Sustainable development in Shell Expro. Shell UK, Aberdeen.
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Shell Expro (1998b) Shell Expro Sustainable Development Business Plan. Shell UK, Aberdeen. Shell Expro Brent Spar website: HREF= . Shell International, (SI) Ltd. (1996) Reference Guide to Group Organizational Structure. London. Shell International, (SI) Ltd. (1997) Shell is.... London. Shell International, (SI) Ltd. (1998) Profits and Principles does there have to be a choice? The Shell Report - 1998. London. Shell Prospecting and Development Peru Camisea website: HREF= . Shell UK (1998) Shell UK Report to Society. London, May 1998. Wade, B.N. (1996) Societies Changing Expectations: Executive Report. Shell International, London, November. Walvis, R. (1998) Market choice: the commercial impulse for Sustainable Development, Shell International, London, September. Watts, P. (1998) The business of raising standards. HSE imperatives for E&P companies. Fourth International Conference on HSE in Oil and Gas Exploration and Production, Society of Petroleum Engineers. Caracas/Venezuela. June. World Commission on Environment and Development (1987) Our Common Future. (The Brundtland Report).
104 PB
Exhibits
EXHIBIT 1: Operating Revenues and Earnings
$14.0 $100.4
Expenses, explorations, R&D Cost of Sales Taxation Sales Taxes
Exploration and Production $4,774 Oil Products $2,617 Gas, Power and Renewables $15 Chemicals $1,200
$7.4 $43.5 $8.7

Earnings
1997 Income (US $billion)

Source: SI(1997)
Earnings by Business ($million)
EXHIBIT 2A: Shell Group Organizational Structure

Individuals and Institutions
The "Shell" Transport and Trading Company, p.l.c. UK 40%
Royal Dutch Petroleum Company Netherlands 60%
Shell Petroleum Inc. USA
Shell Petroleum Company Limited UK
Shell Petroleum N.V. Netherlands
Service Companies
Shell Oil Company
Source: SI (1998)
USA
Operating Companies in more than 130 countries (other than Shell Oil Company and its subsidiaries
105
R OYAL DUTCH/SHELL EXHIBIT 2B: Shell Group Servco Organizational Structure
CUSTOMERS OPERATING COMPANIES

Professional Services
BUSINESS ORGANISATIONS
Exploration and Production Oil Products Chemicals Gas and Coal Renewables
CMD
CORPORATE CENTRE Source: SI (1998)
Exhibit 3: ROACE and Brand Share of Preferenceof Major Competitors

ROACE for 7 oil majors 1988 to 1997
20
15
10
Texaco Exxon Chevron BP Amoco Mobil Shell
ROACE %
0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
106 PB
CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING Exhibit 3: ROACE and Brand Share of Preferenceof Major Competitors (contd)
50
Brand share of preference 1997
40
No. of Countries
30
20
10
1st 2nd 3rd 4th
1st 2nd 3rd 4th
1st 2nd 3rd
4th
1st 2nd 3rd 4th
1st 2nd 3rd 4th
1st
2nd 3rd 4th
Shell
Esso
BP
Mobil
Texaco/Caltex
Other
Exhibit 4: Petroleum Operations in the Niger Delta
Western Region
Eastern Region
Forcados Terminal
WARRI
PORT HARCOURT
Cities Terminals Producing Oil Fields Ogoni Fields (Closed) Pipelines State Boundaries
Bonny Terminal
107
R OYAL DUTCH/SHELL Exhibit 5: Shell Exploration and Production Facilities in the North Sea
Exhibit 6: Shell Canada Operations
108 PB
CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING Exhibit 7: Shell Canada 1998 Health, Safety and Sustainable Development Objectives and Targets Area
Management
Objective
An effective recognized health, safety and sustainable development (HSSD) in place and verified. Appropriate involvement with community and other stakeholders including sharing our health, safety and sustainable development performance.
Target
Continuous improvement in HSSD management system. Auditing against this system to begin in 1998 Annual Sustainable Development Report
Regulatory Compliance
No incidentals that have adverse effects on health, safety and environment or the Company. Among the best in class in overall HSE compliance performance. Influence legislation to achieve integration of environmental and economic considerations.
Zero incidents resulting in charges or orders.
Zero high severity incidents Compliance among the best in identified peer group. Up-to-date emergency response plans in place, and regularly tested, for all significant activities.
Emergency Response
Emergency response plans in place with demonstrated ability to implement. Positive feedback to our response in the event of a real emergency.
Product Stewardship
The main HSE risks or impacts associated with the exploration, production, manufacture, use, shipping and handling and ultimate disposal of our petroleum and chemical products are identified and processes are in place to manage and communicate the hazards Maintain an inventory of air emissions identified as significant Specific control targets are in place for the following: Toxic substances defined as ARET Green Houses Ozone depleting substances Ground Level ozone precursors Acid-rain precursors Particulates Heavy metals
Zero adverse safety or health effects arising from responsible handling use and disposal of Shell Canada Limited.
Air
Track emissions of identified air contaminants. Target reduction of specific contaminants as follows: Benzene: 50 percent of 1998 by 2000 Hydrogen Sulphide: 25 percent of 1998 levels by 2000 Greenhouse Gases: 1990 levels by 2000 Volatile organic compounds: 50 percent of 1988 levels by 2000 for downstream operations Ozone-depleting substances: CFCs from process Operations and all halons Removed by 2000 Zero quality compliance incidents by 1997 where quality monitoring is required
Water
Full compliance with regulations Minimize the use of water trough efficient use
Soil and Ground No new contamination with adverse effect Water on health or environment Prevent further contamination of currently contaminated sites. All high risks are remediated
Zero high-severity spills, leaking underground storage tanks or pipelines All known contaminated high risks sites being remediated or controlled
109
R OYAL DUTCH/SHELL Exhibit 7 (contd) Area

Waste
Objective
Meet the requirements of Canadas solid waste objectives which call for a reduction in waste to disposal of 50percent over 1998 levels by the year 2000. Reduce hazardous waste to disposal by 20 per cent over 1996 by 2005. Amongst the best in class in terms of volume of waste generated and hazardous waste disposal
Target
Reduce waste to disposal by 50 percent over 1988 by 2000
Reduce hazardous waste disposal by 20 percent over 1996 by 2005
Energy
Energy efficiency in the top quartile of peer group to be achieved through profitable investment.
Downstream: to improve the energy efficiency of its refineries by 5 percent over 1994 by the year 2000 Upstream: to implement projects to reduce energy consumption by 7 percent or 85000e3m3/year of fuel gas over 1995 by 2000
Land Use and Wildlife
Return land to acceptable condition for future use. Maintain access to high potential lands for exploration and production activities by demonstrated
95 percent of well sites reclaimed within five years of abandonment. HSSD assessments performed on all major development projects and wells Begin quarterly reporting and analysis of occupational illnesses.
Employee Health
Continuously reduce employee occupational illnesses and exposures to chemical and physical agents which approach or exceed occupational exposure limits. Employee illness/ injury absence reduced to minimum through workability programs. Employees' work functionality improved through the Employee Assistance Program (EAP).
For key chemical and physical agents, prepare summary of existing employee exposure assessment data. Design and implement performance indicators to measure effect of EAP on work performance. Zero LTIs for employees and reportable contractors. Employee Total Recordable Injury frequency of <0.4. Contractor Total Recordable Injury frequency of <2.5. Minimum WCB assessments for our industry rate group. Zero defined adverse health effects exist for the community resulting from our operations. Zero major public or customer safety incidents resulting from our operations. Zero incidents of direct cost >US$500k.
Employee and Contractor Safety
Best-in-class safety performance.
In the long term, contractor injury rate as low as employees. Best-in-class Workers Compensation Board (WCB) assessments. Community and No adverse health effects on the surrounding Customers community resulting from our operations. No operational incidents that have high impact on the safety of the public or customers. Physical Integrity/ Safeguarding Risk management techniques for assessing hazards are integrated into business decision-making processes. Safeguarding reviews (process hazards analysis) of all high-risk facilities completed by year 2000. Technical integrity management standards in place and verified.
Safeguarding reviews completed on 80percent of high-risk process units by year-end 1998.
110 PB
CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING Exhibit 8: Camisea Project Location and Design
111
R OYAL DUTCH/SHELL EXHIBIT 9: Financial Impact on Corporation of Incorporating Key Social and Environmental Concerns Camisea Project Example (Source: Dabbs and Bateson, 1998)
Operational Decisions Affecting Communities and Environment

Logistical Decisions Export pipeline access In-field road vs. helicopter Hovercraft and helicopter operations
Project Security Low Risk High Risk
Policy Decisions: Off-shore Health passports
Facility Design Decisions: Gas plant location Flowline/pipeline route
Affect on Financing Lower price Risk and high cost of delay
Stakeholder Interface Decisions Effective consultation Community development initiatives
Marketing/Sales Steady customer optimism Customer concern of supply
Affect on Government Relations Government establishment of equitable tax structure Government forced contract negotiations
Local Social and environmental impact Promote conservation of biodiversity and social integrity Catalyze resource exploitation and colonization and local dependence
+/- Impact of Operational Decisions on SPDP Profitability

Performance Impact on Future E&P Contracts Peru South America Impact on Shareholder/Stockholder Strong share performance Shareholder aversion Downstream Perception: Company of Choice Boycott
+/- Impact of SPDP Operational Decisions on Profitability of Shell Group
112 PB
CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING EXHIBIT 10: Formal Letters of Representation incorporate HSE commitments
Shell applies some formal tools to guarantee a concrete and committed involvement of Chief Executives to their principles and to assume responsibility for their actions. One of these, the Letter of Representation, first introduced in 1978, had its function adapted to support HSE policy. These letters are signed by the Chief Executive and Chief Financial Officer of Shell Companies. They contain a number of assurances which include confirmation that business is carried out with integrity, according to Principle 4 of the Statement of General Business and Principles. They are also a declaration by management as to the effectiveness of sound financial controls, the proper recording of transactions and any instances of bribes or illegal payments. (SI, 1998:7) The so-called HSE Letter was introduced within the Group to show the public concern about environmental issues. It is required that each Chief Executive submit such a letter, describing the implementation and state of compliance with the Group Policy and the status and effectiveness of their HSE management system (Ibid.), including audits, in order to ensure that the necessary procedures are in place. Following the update of the Statement of General Business Principles, whose adoption has so far been confirmed by the vast majority of the Boards of all Group Companies, another innovation, now addressed to the implementation of this commitment, has recently been introduced. Each Country Chairman (responsible for Group activities in each operating country) was asked to prepare a Business Principles Letter confirming their understanding of the spirit of the policy and to indicate how the Principles are being implemented, defining plans that include communications and employee awareness training on their application in each local setting. Shell has shown concern to extend this approach to partnership enterprises where the Group does not have a controlling interest. An external auditor verified these commitments. A Social Responsibility Committee was set up in 1997 consisting of six members of the Boards of the Parent companies of the Shell Group, three from the Royal Dutch Petroleum Company and three from the Shell Transport and Trading Company. The role of the Committee is to review the policies and conduct of Shell companies with respect to the Business Principles, the Group Health, Safety and Environment Policy and Commitment, as well as major issues of public concern (SI, 1998: 6).
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R OYAL DUTCH/SHELL EXHIBIT 11: Indicators of Changing Corporate Culture

The Societies Changing Expectations Project sought to obtain views of changing expectations of different groups in global society regarding large multinational companies and how they might be expected to change in the future. The starting point was concern about Shells worldwide reputation. The study concluded that reputation is likely to be positive where expectations are met and negative where behavior falls short of expectations. It became clear that Shell did not meet societies expectations and because of this its reputation had suffered. November 1996 In 1997, all reports of major Shell companies emphasized the importance of meeting societys expectations. These include Shell UK Report to Society; People and the Environment, the 1997 Shell International E&P HSE Report; Shell Transport and Trading Company, Annual Report 1997; Shell Canada published a report dedicated to Sustainable Development; the process culminated with the overall Group report of 1998, Profits and Principles. Revised Statement of General Business Principles. For the first time the Group included a commitment to contribute towards sustainable development, to uphold the highest customer standards, to protect the working conditions of its staff, and to promote best practices among all contractors, suppliers, co-ventures and partners. March 1997 MORI (Market Opinion Research Inc.) Report. June 1997 Social responsibility policy (including corporate ethics and social accountability). A Social Responsibility Committee was set up in 1997 consisting of six members of the Boards of the parent companies of the Shell Group, three from the Royal Dutch Petroleum Company and three from the Shell Transport and Trading Company. The role of the Committee is to review the policies and conduct of Shell companies with respect to the Business Principles, the Group Health, Safety and Environment Policy and Commitment, as well as major issues of public concern. (SI, 1998: 6) Profits and Principles: does there have to be a choice? Annual Report 98. April 1998 Shell UK Report to Society. This report could be synthesized as a listening and learning process about stakeholders needs and expectations, in order to anticipate and address their concern, and to offer more information without having to be asked that implies a commitment to honesty and transparency. May 1998 Business and Human Rights. A Management Primer.. This guide was prepared to facilitate a better understanding of human rights, its history, vocabulary and dilemmas, and to help Shell companies identify and understand their role and responsibilities in supporting human rights. Innovation on stakeholder communication: ProNatura Financial Value Seminar; Shell Expros Sustainable Development Project Group (a network of staff and contractors who have volunteered to help Expro contribute to SD. They publish a non-official Newsletter and have their own website.
114 PB
CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING EXHIBIT 12: Indicators of Sustainability
HSE management system, Guidelines and Verification More than 90 companies have HSE management systems; The HSE 97 and 98 Reports were verified by independent auditors; Shell E&P published in 1997 the Sustainability Assessment Guide/HSE Manual. Environmental targets Indicators of emissions reduction have been published regularly since 1993; In 1997 reducing gas flaring, hydrocarbon emissions and oil concentration in discharged water were met; All Shell companies will have certifiable HSE management systems by 2000 and all major sites are to be certified by 2001. Environmental Accountability is being elaborated. Certifications (ISO, EMAS)* 13 companies gained ISO 14000 and 14001 by end 1997 Associations and Networks Signatory of Business Charter for Sustainable Development of the International Chamber of Commerce (ICC) One of 125 companies to have adopted a management philosophy called eco-efficiency, which was developed by the WBCSD. Member of Business in the Community (UK) The Group participates in a number of industry bodies, e.g., Exploration and Production (E&P Forum) and the International Petroleum Industry Environmental Conservation Association (IPIECA), to share best practices and learning Public statement. Signature of climate change agreement. Shell stated that is committed to reduce its emissions by 10percent below 1990 levels by 2002. Awards. The Shells Group environmental reporting has been praised by the US-based Investor Responsibility Research Center (IRRC), which said the Group provides the most extensive environmental data for its global operations and commend all four of the Groups HSE reports published in 1997. (SI, 1998: 24) Examples of self-regulation. SPDP Adaptive Environmental Impact Assessment (EIA) and Social Assessment went beyond any requirements of the Peruvian Government for consultation process. Compensation Program. Virtually all companies now pay some kind of compensation for impacts. While SPDP may have paid more than some companies the more significant different lies in the consultation and negotiation process rather than the actual compensation for direct impact. NGO partnerships. The NGOs The Natural Step and The Environment Council participated at Shell Expro/ UKs first Business Plan for Sustainable Development 98. Pr-Natura participated in the SPDP Camisea Project. SustainAbility is collaborating in implementation of Shell Groups Triple Bottom Line strategy. * The ISO and EMAS series of standards is published by the International Organization for Standardization (ISO). Eco-Management and Audit Scheme (EMAS) is the European Unions environmental management standard. It is compatible with the ISO standard, but goes further to require conforming sites to report publicly on the results of regular audits which must be verified by outside experts.
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Endnotes
1
2 3
Shell Renewables (a new business created in 1997) stands as one exception, along with a similar enterprise (BP Solar) launched by British Petroleum. However, Shell Renewables would only absorb US$0.5 billion in investments over the next five years, less than 15percent of the overall Shell Groups annual expenditure on R&D alone. This section is primarily based on SI (1996). This case study is focused on those Shell affiliates managed from the UK and the Netherlands. Shell corporate leadership announced a major reorganization in December 1998 in response to global economic conditions, consolidating control over the principal businesses of Exploration and Production and Oil Products, previously managed by Business Committees, under two CEOs. Management also determined to divest itself of 40percent of its Chemicals portfolio, and to make significant cuts in staff and production costs. Because many Shell operations are joint ventures with industry partners or governments, its share of this output is only about half of total production. (SI, 1997) Global oil production including lease condensates, EIA/DOE (1998). If based on oil and condensates production attributable to Shell Group and Group share of associated companies (Royal Dutch/Shell Group, 1997), Shells contribution to global production is 3.4percent. The Group recognizes the need to answer societys expectations regarding the role of multinationals as to human rights and environmental damages, adopting a humble posture before its failure. We believe that we acted honourably in both cases. But it is not enough. Clearly, the conviction that you are doing things right is not the same as getting them right. For us at least, this has been a very salutary lesson. (SI, 1998:2). See Boxes 1 and 2 on Shells response to its crises in Nigeria and Brent Spar. Modern structural analysis showed that the original installation sequence could not safely be repeated in reverse order. Such an operation would impose unacceptable high stresses in the hull structure (Faulds, et al., 1998: 1).
10
11
12
13
14
15
The Shell Scenario Processes and Applications team had in fact absorbed the Brundtland Report, incorporating the concept of SD since the late 1980s in its scenarios (a Sustainable World Scenario was first projected in 1989), as an integral part of corporate strategic planning. Elkington is Chairman of SustainAbility, which benchmarks major corporations on SD criteria; Member, EU Consultative Forum on Environment and Sustainable Development. Shell promised a US$500 million investment in renewables throughout the Group over a five-year period, less than one-fifth the capital investment in a single major energy project such as Camisea in Peru or Campos in Brazil. This section summarizes research on Shell in Camisea detailed in May, et al. (in press). According to Hoffman (1997:7), external environment is defined as the collection of organizations that are influential in the formation of and alteration of industrial norms. In a staff communication Mark Moody-Stuart, the Chairman of CMD noted on 15 December 1999: With this emphasis on financial performance, does this mean that we are abandoning the efforts that we have been putting in to improve our environmental and social performance? The answer is very firmly no, because while it is clear that if we do not improve our financial performance all our efforts in the environmental and social field will be in vain, it is also true that our business cannot be sustained on the basis of good financial performance alone. If we are to be a top performer, we have to fix our overall financial performance urgently, but for a really sustainable business we have to make sure that the other two legs of the stool are in good shape also. See Exhibit 10, describing Shells adoption of Letters of Representation incorporating HSE policy commitments, subject to external verification. In these letters, corporate country chairmen are not only implicitly signing-off on the Groups Human Rights policies, but also must state their commitments toward raising awareness of human rights in their country of operations.
116 PB

16
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19 20
21
The remainder of this section and associated exhibits relies principally on Dabbs and Bateson (1998). Net Present Value = the net value of future financial costs and benefits, discounted to the present with a common rate of interest. For a detailed explanation of this analysis, see Dabbs and Bateson (1998). Our emphasis. The authors are grateful to Murray Jones for this distinction. In a study of recent oil industry experience, McKinsey estimated that 103 companies collectively eroded their shareholders wealth by nearly US$300 billion over the period 1980 to 1993, primarily by misestimating future developments and investing in high-cost oil (Davis, 1998).
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118 PB
APPENDIX A:
WORKSHOP DISCUSSION HIGHLIGHTS

This workshop summary presents the highlights of Harts presentation and the break-out group reports and ensuing discussion.
Beyond Greening: Sustainability as a Driver for Business Strategy

Stuart Hart
Environmental challenges pose one of the biggest challenges and, therefore, opportunities for the business community in the immediate future. The Economist wrote in 1990 , What defense has been to the worlds leaders for the past 40 years, the environment will be for the next 40. From 1900 to the 1960s, the business community denied the importance and impacts of pollution. As the consequences of this pollution denial became more obvious, controlling pollution through end-of-pipe regulations became the dominant environmental management approach in the 1970s. These regulations forced companies to pay to reduce the negative impacts of business operations on society. Since the 1980s, a cultural change has begun in some companies. In the United States, the Toxic Release Inventory, which makes emissions information available to the public, accounts for much of these changes. Companies started to realize that they could actually gain competitive opportunities through greening, which involves pollution prevention and product stewardship. The predominant corporate environmental management goal became zero waste and win-win solutions. In the 1990s and beyond, sustainability will become the dominant paradigm of corporate operations. While the greening of companies provided the first sign of environmental responsibility, sustainability represents the next step. Greening the effort to re-
duce negative environmental impacts is largely an operational challenge which flows primarily from the plant level up the organizational hierarchy. Sustainability, however, is about making transformational changes and about emerging technologies and markets. Sustainability is fundamentally a strategy issue that involves decisions about research and development, markets, core competencies, and problemsolving. Another aspect of sustainability that is different from greening is that sustainability involves a social dimension to company operations. This component challenges corporations to make positive contributions to society through business operations rather than simply reducing the negative impact and maximizing ecoefficiency of activities. Joseph Schumpeter, an economist active in the middle of this century, provides a useful framework with which to view the corporate changes that sustainability requires. Schumpeter wrote in Capitalism, Socialism, and Democracy (1947) about how major changes occur in a capitalist system. Schumpeter believed that the problem that is usually being visualized is how capitalism administers existing {industrial} structures, whereas the relevant problem is how it creates and destroys them. What makes capitalism a phenomenal system is creative destruction: periods of change and disequilibrium that revolutionizes the economic structure from within, destroying the old one, and creating a new one. The current list of Fortune 500 companies contains about 40 percent of the companies that were on the list in 1940. Only ten percent of the companies on the list in the 1900s are still included today. One explanation for this shift is that large, incumbent firms are the first victims during periods of creative destruction where innovation and agility are required for survival. Companies that cannot respond and inno-
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APPENDICES
vate quickly enough are replaced with new companies led by entrepreneurs with a vision for the future. The quest for global sustainability implies this type of Schumpeterian innovation and its achievement presupposes an episode of creative destruction. Greening is incremental and results in continuous improvement in current products, processes, suppliers, customers, and shareholders. Because of its emphasis on these existing elements, greening strengthens the power of existing industries in the overall business structure. An example of greening is the chemical industrys Responsible Care program. Those companies that originally established Responsible Care were the leaders of the chemical industry and they have benefited financially from being members of the program. However, the later movers and industry laggers have not enjoyed the financial benefits of membership like the original members earned. In addition, the non-Responsible Care companies have made bigger environmental improvements on their own than member companies make through the program. Sustainability involves creative destruction rather than the continuous improvement of greening. It is discontinuous rather than incremental, involves restructuring industries rather than rationalizing them, and emphasizes coopetition rather than cooperation. A closer examination of the recent changes in the chemical industry is instructive to illustrate creative destruction. Yesterday, the dominant firms in the industry were Dupont, Dow, Monsanto, BASF, CibaGeigy, Sandoz, Hoechst, and ICI. Today, the fundamental structure of the industry has changed, with these firms forming mergers or biotechnology subsidiaries. The result of this creative destruction is that life science companies are created and biotechnology and chemical companies have been spun off. Many of these life science companies have moved from manufacturing with petroleum feedstocks and toxic materials to biological feedstocks and benign materials. Creative destruction is becoming apparent in the oil industry as well. Mergers such as Exxon-Mobil and British Petroleum-Amoco-ARCO support the idea that corporate size is becoming more important in the current global economy. Also, some of the companies that comprise this industry are beginning to break ranks with and separate from the traditional industry opinion of some environmental issues, especially global climate change. Several oil companies are beginning to invest in renewables and to consider ways to integrate social issues into company decision making. Do todays existing corporations possess the foresight and agility to seize the opportunity for sustainable development before it is too late? The confusion surrounding corporate sustainability issues is the source of competitive advantage for the companies that do already possess the characteristics. As demonstrated by Responsible Care, once the members of an industry adopt the same operational approaches and rules, the opportunity for profit making and enhanced competitive positioning may be compromised. Companies have the opportunity to define and operationalize sustainability now and those that do will still be found in the Fortune 500 decades from now. Those that do not take the opportunity or industries that fail to restructure as needed, will be victims of creative destruction. Several motivations are already driving some firms to pursue sustainability, including: Legitimacy: Our key stakeholders require it Responsibility: Its the right thing to do Competitiveness: We can gain advantage Intent: Its our path to the future Responsibility and strategic intent have longer time parameters than legitimacy and competitiveness, which are short-term. These basic drivers are summarized in the matrix that follows.
CASE STUDY MATRIX Harts Example

Internal Drivers
Corporate culture Core values Internal champions Executive vision Strategic intent Corporate goals
External Drivers
Suppliers Competitors Stakeholders Customers Markets Technology
Push
Pull
120 PB
Matrix Reports and Plenary Discussion

The five break-out groups met for one hour to complete the case study matrix presented by Stuart Hart. After reconvening the participants, an individual from each group offered brief comments and the groups completed matrix. These discussions and matrices are summarized here.
100 years ago and what characterizes them today. The group identified the external/push quadrant as the main source of creative destruction. It is in this quadrant where the rules of the business game are changed and where opportunities presented by these changes must be identified.
Yellow Group: Mitchell Mathis, reporter

The yellow group divided its identified drivers only into external and internal drivers, rather than further into the push and pull categories. The group agreed that the internal factors are the deciding factors that determine if a corporation moves to pursue sustainability. The most important of these internal drivers is corporate culture and inspired leadership. It is relatively easy to train a good manager, but very difficult to create an effective leader. Leaders must be able to identify and pursue the market opportunities that sustainability offers. One of the problems identified by the group related to how to develop a generalizable framework related to these drivers. Several factors make these drivers not generalizable, including time horizon, locations of business operations (developing or developed countries), maturity of company, longevity of asset base, market structure, and customer satisfaction.
Pink Group: Michelle Foss, reporter
CASE STUDY MATRIX: Pink Group

Internal Drivers External Drivers
Push
Wealth creation
Threat of punishment Potential for reward
Pull
Business acumen Corporate culture
Market opportunity Competitive advantage
The pink group agreed that the internal/push quadrant is the essential element that ensures the viability of a corporation. Sustainability actually enhances this wealth creation, making it an important driver for sustainability. For example, Alcoas bauxite lease in Australia is located in a sensitive environment that could be compromised without Alcoas sustainability plan that allows bauxite to be mined in a responsible manner. If this plan had not been developed, Alcoa would have been forced to exit from the area, thus compromising the wealth creation capabilities of the company. Also, the wealth creation driver stays constant over time. How a company creates wealth does change over time, however. The group also identified the importance of an organization itself and the people within it for pursuing sustainability. The corporate culture, core competencies, knowledge base, and employee inclinations are important elements that help determine a companys willingness to pursue sustainability. As explained in Built to Last, there is little difference between what elements, including leadership and corporate culture, characterized successful companies
CASE STUDY MATRIX: Yellow Group

Internal Drivers
Sustained revenue Inspired leadership Systems thinking Efficiencies/ cost savings Corporate culture
External Drivers
Public pressure Regulations Consumer demands Competitive advantage
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APPENDICES Green Group: Joe Donnaway, reporter CASE STUDY MATRIX: Red Group
The green group identified the most basic of drivers of sustainability: human emotion. Internal Drivers
Appreciation for environmental issues by new generation of managers Leadership by visionary individuals Lack of profitability from existing systems
External Drivers
Greater investment opportunities with financial companies interested in risk aversion Social pressure Consumer willingness to pay more for green technology Incentives from success of other companies Perceived or real depletion of natural resources
CASE STUDY MATRIX: Green Group

Internal Drivers
Greed = market opportunities
External Drivers
Fear = defensive strategy
Push
Push
Pull
Pride = company image
Ego = public recognition
The element of greed involves wealth creation, market opportunities, and corporate leadership. Fear relates to protection of existing markets, avoidance of regulatory penalties; and efforts to prevent stakeholder, customer and shareholder discontent. Pride involves corporate culture and the drive of managers and employees to work for successful, responsible companies. These companies attract the best employees, which enhances competitiveness. Finally, ego drives corporate managers to seek out recognition from stakeholders, government, or competitors for superiority, including sustainability or environmental programs. The group also mentioned that enhanced corporate environmental reputation prevents problems from arising in the future, thus sustainability begets more sustainability.
Upper management Location
Possibility of competitive advantage Deregulation
New market share
Pull
International pressure In developing countries, lack of infrastructure Participation throughout company Markets as a result of international treaties Human rights pressure in developing countries
Blue Group: Sunil Tankha, reporter

The blue group found that the push quadrants represent drivers that lead to incremental change. This evolutionary move toward sustainability might be too slow. The pull quadrants lead to transformational change and creative destruction. Profit is still central to the mission of any corporation. However, an element may be both a driver and an incentive. For example, the implementation of environmental standards is a driver, but to be involved in developing those standards is an incentive. The group agreed that large corporations respond more to external pressure. Smaller companies are
Red Group: Tina Davies, reporter

The generalization reached by the red group was that, to reach a mature stage, sustainability requires employee support throughout the corporation, which may take at least ten years.
122 PB
CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING CASE STUDY MATRIX: Blue Group
Internal Drivers External Drivers Push Drivers/ Incremental
Regulations Stakeholders ISO/ Standards Peer pressure New markets New products (in existing markets) Defining standards
Employees Culture
Pull Incentives/ Transformational
Leadership
driven more by internal factors. For example, it is considered easier for entrepreneurial ventures to exploit market opportunities than large, bureaucratic corporations. The group discussed the need to be able to motivate mass markets to offer products that are manufactured with consideration given to sustainability without sacrificing utility or cost. The Toyota hybrid vehicle that gets 80 mpg while retaining the features that customers want is a good ex-
ample. The main barriers to this progress are the short-term view that characterizes the business community and large capital investment required to create new markets and products. A large amount of capital investment is stranded in nonsustainable development. The group identified the importance of the globalization issue. The view of sustainability in developing countries is different because those countries do not generally have the infrastructure based on unsustainable technologies like in the developed countries. The opportunity to create new sustainable markets and new technologies appears more promising in developing countries. At the conclusion of the workshop, participants offered some discussion regarding the possible followon activities and research that HARC could pursue to further contribute to the question of corporate incentives for sustainability. The group agreed that the best approach is to continue building on the observations made through the five case studies and workshop results. The development of teaching cases from some of the five cases is a possibility, in addition to further research. The need to define sustainability, between companies and between countries, before studying the drivers was discussed.
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APPENDICES
124 PB
Appendix B:
Workshop Agenda
CORPORATE STRATEGY AND ENVIRONMENTAL DECISION MAKING
A DIAGNOSTIC WORKSHOP JANUARY 14, 1999 HOUSTON ADVANCED RESEARCH C ENTER C ENTER FOR GLOBAL STUDIES T HE WOODLANDS, TEXAS JURGEN S CHMANDT, DIRECTOR STUART HART, CHAIR MARILU HASTINGS, PROGRAM DIRECTOR TINA DAVIES, RAPPORTEUR AGENDA Workshop participants will explore five corporate case studies that highlight proactive environmental and social policies and will develop generalizations about what internal and external incentives drive corporations to be proactive in this area.
8:00 TO 8:20 PART I: 8:20 TO 8:40 8:40 TO 8:50 8:50 TO 9:10 9:10 TO 9:20 9:20 TO 9:40 9:40 TO 10:00 10:00 TO 10:10 10:10 TO 10:30 10:30 TO 10:40 10:40 TO 11:00 11:00 TO 11:20 11:20 TO 11:30 11:30 TO 12:00
OVERVIEW AND I NTRODUCTIONS REVIEW OF CASE STUDIES FORD MOTOR COMPANY DISCUSSION ROYAL DUTCH/SHELL DISCUSSION BREAK ALCOA DISCUSSION FORMOSA PLASTICS DISCUSSION BREAK ENRON DISCUSSION GENERAL DISCUSSION
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APPENDICES
12:00 TO 1:00 1:00 TO 1:30 PART II: 1:30 TO 2:30 LUNCH PRESENTATION: SUSTAINABILITY AS A STRATEGY DRIVER, STUART HART DISCUSSION BREAKOUT GROUPS:
PARTICIPANTS WILL BE DIVIDED INTO WORKING GROUPS TO DISCUSS AND PROVIDE ANSWERS TO THE FOLLOWING QUESTIONS:
WHAT INCENTIVES - BOTH INTERNAL AND EXTERNAL - DRIVE SOME CORPORATIONS TO ADOPT PROACTIVE ENVIRON MENTAL AND SOCIAL STRATEGIES? CAN GENERALIZATIONS BE DRAWN BETWEEN AND WITHIN INDUSTRIES, OR ARE THE INCENTIVES COMPANY SPECIFIC? 2:30 TO 4:00 PLENARY PRESENTATION AND D ISCUSSION:
WORKING GROUPS WILL REPORT ON THE RESULTS OF DELIBERATIONS FOLLOWED BY A PLENARY DISCUSSION WITH THE
FOLLOWING OBJECTIVES:
INTEGRATION: IS THERE A CONSENSUS ON WHICH INCENTIVES DRIVE SOME CORPORATIONS TO MOVE PROACTIVELY TOWARD SUSTAINABILITY ? CAN OTHER CORPORATIONS LEARN FROM THESE FIVE EXAMPLES? NEXT STEPS: WHAT ADDITIONAL WORK WOULD PROVIDE FURTHER INSIGHTS INTO THE STRATEGIC CHALLENGE OF CORPORATE SUSTAINABILITY? WHAT IS A USEFUL NEXT STEP FOR HARC TO PURSUE TO INCREASE UNDERSTANDING OF THESE ISSUES ? RECEPTION: 4:00 TO 5:30
126 PB
Appendix C:
Rob Abbott, Conoco
Workshop Participants
Robert Kelley, Formosa Plastics -U.S.A. Florence Kosmala, French Consulate Trade Office Sarosh Manekshaw Mitchell Mathis, HARC Peter May, Pro-Natura USA William Miller, G. William Miller and Company George P. Mitchell, Mitchell Energy & Development Corp. Haluk Noyin, University of Houston Larry Peyton, Axis Environmental Carlos Romero, ITESM (Monterrey Tech) Jurgen Schmandt, HARC Isabelle Silverman, Pro Natura USA Randy Smith, Formosa Plastics-Texas Sunil Tankha, HARC Michael Terraso, Enron Tom Veblen, Superior Business Firm Roundtable Valria G. da Vinha, Pro-Natura USA Natan Zaidenweber, University of California Shere Abbott, National Research Council Marcelo de Andrade, Pro-Natura Intl Pat Atkins, Alcoa Diane Bailey, Blackburn & Carter Charlie Becher, Ford Motor Company Beth Beloff, BRIDGES to Sustainability Michael Bertolucci, Interface Research Corporation Jim Blackburn, Blackburn & Carter Cabell Brand, Recovery Systems, Inc. Jennifer Burtner, University of Texas John Butler, HARC Tina Davies, HARC Joseph Donnaway, Mobil Michelle Michot Foss, University of Houston Eduardo Gonzalez, University of Houston Stuart Hart, University of North Carolina Marilu Hastings, HARC Ronny Just, Southern Company
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APPENDICES
128 PB
Appendix D:
Biographical Data
Diane Bailey is an air quality planner at the HoustonGalveston Area Council. She was formerly an environmental specialist at the Houston law firm of Blackburn & Carter. Ms. Bailey has a degree in Chemical Engineering from Washington University and a Master of Science degree in Environmental Engineering from Rice University. Jim Blackburn is an environmental lawyer and planner and teaches at Rice University. Mr. Blackburn is a principal in the law firm of Blackburn & Carter in Houston. His law practice involves litigation and consultation on air quality, land contamination, risk assessment, environmental auditing, and zero discharge planning as well as natural resource issues such as wetlands, flooding and endangered species. Mr. Blackburn received his J.D. in Law from the University of Texas at Austin and a Master of Science degree from Rice University. Michelle Michot Foss is Director of the Energy Institute at the University of Houston-College of Business Administration. She has been an analyst of U.S. and foreign energy and non-fuel resource development and environmental issues for nearly 21 years. Dr. Michot Foss has worked on environmental permitting and market research studies for a variety of natural resource projects, both in the United States and in Latin American. She holds a B.S. from the University of Southwestern Louisiana; an M.S. in mineral economics from the Colorado School of Mines; and a Ph.D. in political science from the University of Houston. Valria Gonalves da Vinha is a Professor of Economic History at the Federal University of Rio de Janeiro and was recently a Visiting Scholar at the Center for Latin American Studies at the University of California, Berkeley. Dr. da Vinha has been involved with Pro-Natura in its work with the pulp and paper sector in Brazil and is instrumental in designing and implementing Pro-Naturas corporate-community strategies. Dr. da Vinha holds a Ph.D. in Development, Agriculture and Society from the Federal Rural University of Rio de Janeiro. Eduardo Gonzalez is a research associate for the Energy Institute of the College of Business Administration at the University of Houston. Mr. Gonzalez has over four years of experience in the oilfield service industry, with particular knowledge in waste management and fluids treatment for oil and gas exploration and production activities in Latin America. Mr. Gonzalez holds a degree in Petroleum Engineering. Stuart Hart is Associate Professor of Strategic Management at the University of North Carolinas KenanFlagler Business School. Prior to joining the KenanFlagler faculty, he taught corporate strategy at the University of Michigan Business School and was the founding director of the Corporate Environmental Management Program, a joint initiative between the Business School and the School of Natural Resources and Environment. Professor Harts research interests center on strategy innovation and change. He is particularly interested in the implications of environmentalism and sustainable development for corporate and competitive strategy. He has published over 40 papers and authored or edited four books. His article Beyond Greening: Strategies for a Sustainable World won the McKinsey Award for Best Article in the Harvard Business Review for 1997. He has consulted or served as management educator for a number of organizations, agencies and companies. Stu earned his Bachelor degree from the University of Rochester, Master degree from Yale University, and Ph.D. from the University of Michigan. Marilu Hastings is a Senior Research Associate at the Center for Global Studies at the Houston Advanced Research Center where she is responsible for conducting HARCs research and outreach efforts related to business and sustainability. She has over nine years of experience analyzing a variety of issues concerning corporate behavior and the environment. Her areas of interest include industry strategies for addressing environmental issues and interdisciplinary
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work on corporate behavior related to the environment. Ms. Hastings earned a Master of Public Affairs and a Master of Business Administration from the University of Texas at Austin. She has a degree in Economics from Duke University. Peter H. May is the Executive Director of Pro-Natura USA and Professor in the Graduate Program in Development, Agriculture and Society at the Federal Rural University of Rio de Janeiro. Dr. May recently directed an assessment of lessons learned from the Shell/Camisea project and also coordinates ProNaturas project on conservation and sustainable use of biodiversity in Juruena, Mato Grosso, Brazil. Mays experience spans nearly two decades of resident research, teaching and consultancy in Latin America, New York, Rome, and Southeast Asia. Dr. May holds a Master of Regional Planning and a doctorate in Resource Economics from Cornell University. Haluk Noyin is a research associate for the Energy Institute of the College of Business Administration at the University of Houston as well as a graduate student in business at the University. He has experience in international business, with particular interests in power marketing, energy finance and derivatives. Mr. Noyin earned a B.A. in Business Administration with University Honors from Marmara University in Turkey. Larry Peyton is President of Axis Environmental Services, Inc. He was worked for several large chemicalmanufacturing companies in the United States, Europe and Asia, in positions ranging from Unit Engineer to President of Operations. Through these experiences, Mr. Peyton has gained unique insight into bridging the technical and credibility gaps between industry and communities. Mr. Peyton has a degree in Chemical Engineering from the University of Kentucky. Jurgen Schmandt is a professor of public affairs at the University of Texas in Austin. He is also Chief Policy Officer and director, Center for Global Studies, at the Houston Advanced Research Center. He current areas of interest include water management, impacts of global climate change and policies for sustainable development. In Austin, Dr. Schmandt participated in the planning and development of a new school of public affairs. At HARC, he has developed a research center specializing in assessing the regional impacts of global change. Dr. Schmandt received his Ph.D. in Philosophy from the University of Bonn. Sunil Tankha is a research associate at the Center for Global Studies at the Houston Advanced Research Center. His current areas of work include participatory decision-making as it relates to public infrastructure projects; corporate strategy for sustainable development; and stakeholder-based environmental protection initiatives. Mr. Tankha has a Master of Public Affairs from the University of Texas at Austin. Nathan Zaidenweber is a Mexican national with several years of experience in assessment of indigenous community relations in development projects. Mr. Zaidenweber has worked at Pherin Pharmaceuticals and is involved in designing cutting-edge approaches to incorporation of indigenous knowledge in a startup biotechnology research and development undertaking. Mr. Zaidenweber holds a Master of Economics, Food Policy Research from Stanford University.
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CGS
Center for Global Studies

A CASE STUDIES AND WORKSHOP REPORT
CENTER FOR GLOBAL STUDIES HOUSTON ADVANCED RESEARCH CENTER 4800 RESEARCH FOREST DRIVE THE WOODLANDS , TEXAS 77381 HTTP://WWW.HARC.EDU/CGS.HTML

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CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING

CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING

CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING

THE WORKSHOP AND THIS REPORT

CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING

CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING

CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING

CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING

WORKSHOP THEMES AND COMMENTS

CASE STUDY MATRIX

Details of these discussions are provided in Appendix A.

PART ONE: WORKSHOP THEMES AND COMMENTS

Table 1. Ranking of Incentives for Sustainability

Number of Mentions in Matrices

CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING

PART ONE: WORKSHOP THEMES AND COMMENTS

CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING

CASE STUDY SELECTION AND DEVELOPMENT

Royal Dutch/Shell Group

Ford Motor Company

PART TWO: CASE STUDY SELECTION AND DEVELOPMENT

CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING

PART TWO: CASE STUDY SELECTION AND DEVELOPMENT

CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING

CORPORATE CASE STUDIES

CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING

Alcoa: A Brief History

Figure 1 Life Cycle of Aluminum

Aluminum: The Wonder Metal

3.9 kWh/kg Production of ingot

Ore in the ground

Production of Aluminum 70.4 kWh/kg

Production of Sheet 7.3 kWh/kg

Production of Cans 16.6 kWh/kg

Alcoas Philosophy, Strategy and Programs

CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING

Addressing Climate Change

Reducing dependence on fossil fuels

Metal Steel Copper Aluminum Zinc Lead Titanium

CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING

Research and Development

CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING

Liabilities and Remediation

Internal, Product Related

CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING

Table 2: Material in a typical US automobile (kg)

CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING

Enron: Beyond Molecules and Electrons

CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING

Transportation and Distribution

Wholesale Energy Operations and Services

Operational Units of Enron Corporation

Exploration and Production Retail Energy Services

The Pursuit of Renewables

Buying into Renewables

1993 cents per kilowatt-hour

Natural Gas Coal Wind Solar Thermal Nuclear

10-13 8-10 10-13 13-26 10-21

4-5 5-6 5-7 8-10 10-21

3-4 4-5 4-5 5-6 -

CORPORATE INCENTIVES AND ENVIRONMENTAL DECISION MAKING