BP's sustainability strategy: capturing returns from first-mover advantage

Citation

Percy, S. (2013), "BP's sustainability strategy: capturing returns from first-mover advantage", American Journal of Business, Vol. 28 No. 2. https://doi.org/10.1108/AJB-08-2013-0057

BP's sustainability strategy: capturing returns from first-mover advantage

Article Type: Executive viewpoint From: American Journal of Business, Volume 28, Issue 2

In 1997, British Petroleum, acting primarily through its US subsidiary BP America, shocked the US oil industry and many in the environmental community by taking a high profile position on the potential harm to the planet and its climate that might result from the heavy use of fossil fuels and the associated carbon dioxide emissions. The Company declared that while there continued to be great uncertainties with respect to man's contribution to climate change, there was sufficient evidence to raise concerns, and that it would be prudent to begin to take actions that could mitigate the risks. The Company set about implementing an agenda that not only addressed the climate change issue, but transformed the Company.

While this corporate change in direction took place many years ago and the Company has seen many twists and turns in its fortunes since then, I believe the example is highly instructive in terms of how companies might think about incorporating important societal and stakeholder concerns into their strategies to the great benefit of their shareholders.

The societal issue I would use to frame this example goes beyond the narrow issue of climate change to the wider field of “sustainability”, for as BP found, once one proceeds down a narrow path it must soon address the broader issue in order to remain credible with the stakeholders it is trying to influence.

However, before I get into the specifics of BP’s motivations, actions, outcomes, and lessons, I would like to provide a bit of context about how it, complex as it was as an organization, was seeing its role when it came to environmental issues such as climate change and sustainability. This view is based on my experience and impressions after living inside the “moment” of the changes I will discuss. Others who were there at the same time might have seen this differently. Nevertheless, the Company did not see its leadership on sustainability as altruism in anyway. The Company saw its leadership as a way of achieving competitive advantage and sustaining itself long term as an important generator of economic benefit.

BP developed a corporate sustainability strategy that took it well beyond just complying with environmental regulations to the capturing of returns from its “beyond compliance” investments. It recognized, though, that some of the returns it sought might be highly intangible. It looked to numerous sources of value including:

• Lower costs from reduced wastes.

• Market share gains from attracting customers with concerns about the environment.

• Reduced risks from unforeseen liabilities.

• An enhanced reputation that provided exclusive access through partnerships and relationships to new ideas, natural resources, business opportunities, the best employees, and probably most importantly, a seat at the public policy table.

So let us look at the specifics of BP’s “business case” for a proactive sustainability strategy in 1997. In particular, why did BP take up the climate change issue, and embrace sustainable development despite the potential negatives for its core business? What actions did it take and what effect did they have for the Company? What lessons might be learned by companies from this?

First, the climate issue was a real issue (despite its emerging quality in 1997) for BP and society with or without scientific certainty. Public perception/opinion made it such. In addition, the issue was fundamental to BP’s core business, the production of fossil fuels. It argued for engagement rather than denial, as the rest of the petroleum industry was choosing to do. BP had the benefit of watching the demonization of the tobacco industry and wanted to protect itself and its industry. Also, BP believed that if it were to move proactively on the topic, it would be much more valuable to be the first rather than second, especially in terms of the reputational benefits that might accrue. Further, by being a “first mover”, the Company believed it could help shape the process of creating public policy, and hoped that by doing so it could gain some advantage for itself. If the world’s long term energy mix might have to change, BP wanted to influence the pace to the benefit of society as a whole but also its own business development efforts as well. Finally, the Company was finding it difficult to attract the best young talent at a time when many engineers and scientists were being attracted to the information technology and financial industries. The petroleum industry had (and has) large needs for technologists, but was seen at that time as dying. BP believed that by creating this highly distinctive, mission driven strategy and image, it might reverse its fortunes in the market for talent.

Other than the very quantifiable value that might result from the reduction of waste that comes with carbon emissions, BP knew that gains from the enhanced reputation and policy positioning of the Company would be very intangible, but it was willing to take the risk that these payoff’s would eventually offset any costs and risks (some of which were also quite intangible) of embarking upon a new strategic course that recognized limitations with its core business.

So what did BP do to implement this change in direction? First, the effort was led from the very top, and manifested by its announcement to the world by its CEO, John Browne, before an assembled group of media and NGO’s. This new strategy would require no less than a complete change in corporate ethos from top to bottom and it was important to demonstrate to the Company’s workforce that its leader was “all in”. Further, no elaborate public relations program was then necessary or undertaken, for the news of a major oil company “changing its spots” on the climate issue spread like wild fire and many in the environmental and policy community were very happy to carry the banner.

However, the Company knew that it must do more than proclaim its concerns, but that it needed to “walk the talk” and begin to address the issue that it raised. At the time of Lord Browne’s address, BP announced a series of concrete actions including emissions reductions targets (with real costs and benefits), a carbon trading pilot program, a joint implementation program in Bolivia centered on carbon sequestration (with real costs once again), a commitment to grow its solar photovoltaic business, and its intent to enter the policy debate enthusiastically. The Company then set about engaging with NGO’s and governments, educating the public, setting stretch targets with respect to sustainability metrics for its operations and employees, and seeking out like minded partners. Throughout, BP continued to argue the importance to near and intermediate economic growth of its traditional business, and that large investments in oil and gas would still be needed to allow an orderly transition over a number of decades to a more sustainable future energy mix.

This new, trail-blazing, and distinctive strategy had profound effects on the company and the industry in which it worked. Primarily, the new strategy helped shape BP’s investment choices. The most visible example of this was the merger with Amoco Corporation, a company which had a much more natural gas rich (and therefore, lower carbon intense) hydrocarbon portfolio as well as a strong solar photovoltaic business to match BP’s.

BP became very engaged in the environmental policy arena supporting tougher sulfur levels in gasoline and diesel fuel. This support for tougher environmental standards won plaudits from the prevailing US Administration as well as environmental NGOs, and created a political environment for the company which made the merger with Amoco less contentious than it might have been.

The most apparent manifestation of the strategy shift was the Company’s rebranding itself as “Beyond Petroleum” rather that British Petroleum and the replacing its long standing logo – a shield – with the “Helios” or sunburst which signaled to the world that BP was now a different kind of energy company. This change provided an important signal to the Company’s customers and employees that it had exciting new things to offer.

The Company set very aggressive CO2 emissions reduction targets which in fact did lead to less wasted energy and materials, and thereby lowered its costs. It was sought after as a partner by NGOs and policy makers, and it experienced greater success in attracting new technically trained talent, primarily in the UK. As part of its strategy, the Company began to anticipate a coming shift in primary energy supply and demand and established efforts in wind and bio-fuels to go along with its already leading position in the solar business.

While the Company continued to drive its traditional fossil fuel business aggressively in support of shareholder returns and world economies, it was able to demonstrate its contribution to the coming, lower carbon economy from both its own emissions reductions as well as the penetration of its growing renewable portfolio. In my view, these efforts put substantial goodwill into its market valuations as it traded at higher P/E’s than competitors (except for Shell who soon embarked upon a strategy similar to BP). I would add that BP’s goodwill would be drawn down subsequently with its Texas City refinery explosion and the Deep Horizon explosion and oil spill in the Gulf of Mexico. I would also add that over the intervening years most to the rest of the oil industry have moved much closer to BP’s position of the late 1990s and have begun to address climate change and sustainability. However, BP will forever be remembered as the Company that moved first.

So what might be some “take-aways” from the BP/climate change strategy example. First, thinking deeply about the relationship of your business to the natural environment or society can lead to new strategy ideas, and while making or leading a paradigm shift can be very risky, there can be significant benefits that accrue to “first movers”. These benefits include enhanced reputation, unique partnerships and collaborations, reduced transaction costs, and the prospect of a playing field tilted to your advantage. This is especially true if there are significant public policy considerations involved.

Next, it is important that “deeds match words” to avoid any appearance of “green-washing” and this calls for significant transparency and regular communication of progress toward stated targets and to gain the trust and credibility from those from whom goodwill is sought including the firm’s employees and prospective employees. In this vein, a significant word of caution is merited. Once a company embarks upon a strategy based upon enhanced environmental or social value creation, it can become the target for those with more aggressive agendas as they know that the firm will take extraordinary steps to protect the new equity/goodwill it has established through its new stakeholder strategy. Firms need to be aware of this risk going into a strategy shift and understand what else might come on to the table once it has embarked upon a certain course.

Nevertheless, the BP example demonstrates that a company can reap substantial benefits for its shareholders from a strategy that incorporates environmental and social concerns into its core business. The key is living up to the higher standards called for by that strategy. As I said at the outset, BP embarked upon its journey in order to provide for and sustain returns for its shareholders. However, it saw that an advantaged path lay in serving the needs of constituencies and stakeholders that transcended its customers, but included those that were promoting a sustainability agenda.

Steve Percy
Monte Ahuja College of Business, Cleveland State University, Cleveland, Ohio, USA

About the author

Steve Percy is the former Chairman and CEO of BP America, Inc., BP’s US subsidiary prior to its merger with Amoco Corporation, and served in that capacity from 1996 until 1999. Prior to assuming those duties, he was President of BP Oil in the USA from 1992 to 1996. Mr Percy returned to BP America in 1992 from London, England where he served as Group Treasurer of The British Petroleum Company p.l.c. and Chief Executive of BP Finance International. Since retiring from BP he has served as the head of Phillips Petroleum’s Refining, Marketing and Transportation Company, visited as a Professor of Corporate Strategy and International Business at the University of Michigan’s Ross School of Business, lectured at Michigan’s School of Natural Resources and the Environment, and conducted workshops on corporate governance for the AHC Group, a strategic consultant in the areas of environment, energy, and materials. Most recently, he has served as Interim Dean of the Monte Ahuja College of Business at Cleveland State University. Mr Percy is a member of the Board of Directors of both Omnova Solutions Inc. and Mascoma Corporation and is Chair of each company’s Audit Committee. Mr Percy is also Non-executive Chairman of Wavefront Technology Solutions Inc., a Canadian company that has developed and commercialized innovative technologies for the oil and gas industries. He earned a Bachelor of Science in Mechanical Engineering from Rensselaer Polytechnic Institute, a Masters in Business Administration from The University of Michigan and a Juris Doctorate from Cleveland Marshall College of Law. He is a member of the Ohio State Bar. Mr Percy currently serves as the Chairman of the Chautauqua Foundation, the Development arm of the Chautauqua Institution. Mr Percy is a member of the Advisory Board of the University of Michigan’s Erb Institute for Sustainable Enterprize, is a member of both the Cleveland State University Foundation Board and National Advisory Council of the Cleveland Marshall College of Law.