Transitioning to the Future

Climate-driven disruptions already affect companies across multiple industries, and soon will be ubiquitous. Yet few firms are prepared to manage the impact.

“It's going to have a huge effect on corporations, but it's an element they haven't thought about very much. It's a dimension of their regulatory environment they aren't sure how to deal with,” says Geoffrey Heal, the Donald C. Waite III Professor of Social Enterprise.

Tomorrow's managers will need to understand the risks, mitigation efforts, and investment opportunities presented by climate change. To prepare Columbia Business School MBAs for the challenge, Heal developed a new course, Climate Change and the Energy Transition, which prepares future business leaders for the challenging economics of moving away from fossil fuels and man- aging the costs of environmental protection.

It's the latest addition to a suite of courses, experiential learning opportunities, conferences, and research within the Climate Change and Business Program at the School. Offered by the Tamer Center for Social Enterprise, the program focuses on using markets and business skills to mitigate, reverse, or adapt to climate change. In addition to energy transition, courses focus on topics in climate finance ranging from asset pricing, risk management, and investments to financing the transition, carbon pricing, and incentives. Courses also address strategy on climate transition across industries; supply chain and operations transition; climate analytics; and measurement, reporting, governance, and implications to valuation and markets.

Looking Ahead

Heal's course—designed for future managers, consultants, investment managers, and those going into green-industry careers—provides a framework for thinking about climate change and its consequences for business. Students consider climate change issues, mitigation costs, and business impacts from the perspectives of senior executives or CEOs. Heal taught the first class in Fall 2021; Gernot Wagner, visiting associate professor of business, taught it for the Spring 2022 term.

“There has to be a transition away from coal and gas toward renewable energy sources,” Heal says. “We need to see a transition in three areas: power generation, with a shift to sources like solar, wind, and hydrogen power; transportation, in a move to electric vehicles; and in physical spaces, which use a lot of energy for heat and hot water.”

Looking forward, a huge capital investment will be required to replace power plants and develop systems for storing power generated by intermittent sources like wind and solar. Automakers and nations have committed to phasing out internal combustion engine vehicles, which will require charging stations everywhere. In places like New York City, the greatest source of emissions is buildings, and the costs of upgrading older buildings is often cost prohibitive, Heal says.

All of this has implications for almost any business—and any business leader.

Among the challenges the course addresses are issues with renewable energy. “For example, renewable energy like wind power is not continuous,” Heal says. “How do you manage a power grid situation where there are drops in supply?”

One solution involves storage in very large batteries, he says. Another promising option Heal's class explores is storing energy in hydrogen, which can be transported through pipelines and burned like natural gas. Hydrogen can carry large amounts of energy and can be produced from different sources. For example, Saudi Arabia is experimenting with using solar power to split hydrogen out of water molecules.

“I anticipate a huge increase in the hydrogen industry,” Heal says. He finds his students are unfamiliar with this emerging technology. “A lot of the students are going into the financial sector and will be investing, so I try to give them a sense of the opportunities.”

Economic Influence

Domestic and geopolitical barriers to the transition to new energy sources abound. Still, regions like the Middle East that are built on oil economies “can't pretend it isn't going to happen,” Heal says. He predicts that economics will overcome the barriers as research and innovation reduce the cost of alternatives to fossil fuels.

“The cost of wind has come down so much that it doesn't make sense to build a coal plant now,” he explains. The cost of solar and wind power is two or three cents per kilowatt-hour, compared to about nine cents for coal. “That's really driving change in the utilities sector,” he says.

The same thing is happening with electric vehicles. The price of lithium-ion batteries dropped by more than 80 percent in a decade, making it possible to build an affordable mass-market electric car or truck, he says.

While sectors like the coal and auto industries are radically transformed, new sectors will emerge and grow in this transition.

Valuable Assets

The Business School currently offers multiple courses directly focused on climate issues, from Energy and Resource Economics to Challenges in Measurement and Disclosure of Environmental, Social and Governance Data. Faculty research fuels these courses and helps push corporate action on climate change, Heal says. “We communicate the research to students; they are next year's managers. They will be much more aware of the options and levels,” he says.

Whether it's clean air and water, low-lying airports threatened by rising sea levels, or a tourist-friendly location in the path of frequent hurricanes, businesses need to think of natural resources and public infrastructure as business assets, Heal says. From that view, firms can't afford not to invest in environmental protection.

“There has to be a transition away from coal and gas toward renewable energy sources.” Geoffrey Heal, Donald C. Waite III Professor of Social Enterprise

“Firms also realize the people they interact with have a position on environmental action,” he adds. “People used to keep their value systems separate from their economic activities, but that's no longer true. People want to buy from, work for, and invest in companies that share their values. The positions that companies take on values, whether they are social or environmental, have an impact on their ability to gain investors, sell products, and even retain employees.”

This has led many companies to set very ambitious public sustainability and carbon reduction targets. One strand of Heal's research tracks these commitments and progress toward these goals. Among the companies making a notable commitment is Microsoft. By 2050, the tech giant has pledged to remove from the environment all the carbon the company has emitted, either directly or by electrical consumption, since it was founded in 1975.

“I don't know how they are going to do this. Microsoft is founding startup companies to figure it out,” Heal says.

And Columbia Business School is preparing students to take the lead.

This article will appear as part of a “Teaching for Tomorrow” series on curricular innovations that will be featured in the next issue of the school's alumni magazine.