Mass Transformation: From Coal Mining To A Model For Sustainability
How some companies are tying executive incentives to progress on climate change.
As governments and the general public become increasingly sensitive to the ill effects of climate change, the private sector has responded with new technology and business practices. Netherlands-based Royal DSM, a former coal company that now makes its business in life sciences and materials, puts an internal price on carbon in its capital projects and ties executive pay to sustainability goals.
Hugh Welsh, the North American president of DSM, says climate change should be an issue in the current U.S. presidential election campaigns. But he hopes for public pressure to force the changes needed to combat climate change, especially from the millennial generation that he sees as focusing on such issues more intuitively than its predecessor baby-boomer generation.
Setting a price on carbon is a must to ensure that those adding to the greenhouse gases that result in climate change pay for the consequences rather than having the costs passed on to future generations, says Welsh. He discussed these issues on the [email protected] show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)
Mass Transformation: From Coal Mining To A Model For Sustainability
Below is an edited transcript of the interview.
[email protected]: Let’s get into what DSM is doing to try and change the path of your company [in connection with climate change]. More and more corporations are jumping onto the understanding that change must be made here in the years to come.
Hugh Welsh: DSM, which stands for Dutch State Mines, started out as a coal mining company in 1904 in the Netherlands. Today we’re in every business there is except coal mining, having transformed our portfolio over the years. We continue to try to find new and unique ways to address the issue of climate change, and more or less future-proof our business against the consequences of climate change going forward.
[email protected]: That term which you just used does speak to forward thinking. Corporations forward-think all the time, but they don’t necessarily forward-think about the environment. It does make you think about what the path of a corporation needs to be going forward.
Welsh: Yes, and it’s one that resonates across our entire operations and our strategy — all the way to the work we do with investor relations. We’re a large publicly traded company, [and] when we sit down with investors, the story we want to tell is not just [about] the financial results of the next quarter, but the transformation of the organization and the execution of our strategy over the course of the next five, 10, 20 years such that we look like a much more palatable investment for the long-term shareholders we’re trying to attract.
“It’s encouraging to see companies like Royal Dutch Shell [and other] large fossil fuel companies begin to tie some of these incentives for their executives [to] not just the financial results, but the sustainability results.”
[email protected]: As you mentioned, DSM was involved many years ago in a business that has been struggling right now. What is the pushback you get from coal companies these days? They are seemingly still blocking the path … of opportunity to [address climate change].
Welsh: All I can offer them and other fossil fuel companies is to serve up DSM as an example. We were a coal mining company. We dug coal out of the ground. We delivered it to people’s homes so that they could illuminate them and they can heat them. And over the years we evolved. We moved out of those businesses into new businesses, what we think are much more sustainable businesses. We try to encourage the coal companies today who are struggling mightily in their existing business case to make a similar transformation.
[email protected]: Here in the U.S., ExxonMobil is making statements about energy going forward and carbon pricing, and jumping on board to a conversation that needs to be had.
Welsh: Yes, it is encouraging to hear that rhetoric. But we would also like to see maybe a move away from just rhetoric to dealing with remedies and in some respects, remuneration. It’s encouraging to see companies like Royal Dutch Shell [and other] large fossil fuel companies begin to tie some of these incentives for their executives [to] not just the financial results, but the sustainability results. That’s a real indicator of a genuine intent to begin that transformation process.
[email protected]: That’s something DSM does in terms of tying compensation to sustainability goals and actually getting things done, correct?
“[Many] companies like DSM are imposing upon themselves today an internal price on carbon when they’re doing an evaluation on capex projects with large-scale investment.”
Welsh: Correct. We started with tying our executives’ bonuses — 50% of their annual bonuses and 50% of their stock options — to sustainability goals in 2010. We made that decision because we realized that we needed to move beyond just rhetoric and by tying the reaching of these goals to executives’ money, we knew we would get immediate behavioral change, and that would cascade down through the organization.
We’ve seen that [change] over the past five years. We’ve been very successful in meeting our sustainability targets and coming up with new and innovative ways to do business that offer solutions, not just of course to DSM, but [also] to our customers.
[email protected]: A lot of the push has come from the general public in the last 10 to 15 years. It has to be a great experience to be able to see that initiative run by so many people in past years now having unity — something that’s in sync between the public and companies like yours.
Welsh: It’s extremely encouraging. We have a long way to go, but if I look back just five years, we’ve moved a tremendous amount, culminating in some respects in the [United Nations’] Paris climate agreement last year. But we shouldn’t rest on our laurels; we have a lot more to do — and a lot more to do in the private sector.
[email protected]: What would you like to see happen here in the next couple of decades to try and improve the lot for your company and for other companies where [sustainability] is concerned?
Welsh: One thing we need, and it’s fairly provocative here in the United States, is a price on carbon. The use of fossil fuels [and] carbon-based materials to produce products has had an impact on climate change. Rather than passing that liability onto our children and grandchildren, it’s very important that this generation accepts responsibility for that and bears the costs for that. That can come with a price on carbon.
We’ll see acceleration away from climate change-inducing gases and emissions if we put a price on carbon and we can move more to renewable energy and make those renewable energy sources, like solar, like wind, like biofuels more competitive.
[email protected]: Is that a good possibility in your mind in the years to come?
Welsh: Absolutely. We’re already seeing some early work in California and in Quebec with the carbon trading system. We’ve heard the Chinese already mention they’re going to have a