How Businesses Can be “Bold and Pragmatic” on Climate Change: BCG Global Chair Rich Lesser

Who knows how to be bold and pragmatic? It's business leaders. You don't prepare for the future if you're not bold and you don't get to have a long term unless you have a short term. Business can be a great partner to government to move this, but it has to earn trust. It has to be seen as putting society's interests really up there and not just working to further its own short-term interests in this.

It's a pleasure, Mike. Really happy to be here.

Well, the how I got there is pretty straightforward. But I've been at BCG 36 years and for nine of those years between 13 and 21 I served as our global CEO and after one serves as the CEO at BCG you become the global chair. Terrific title, extremely limited role description. So really that is an opportunity to make a difference for the firm and for the world. It's really a dialogue between current CEO and the former CEO to say how does the former CEO with that global chair role contribute most. In my case, I had really started getting into the climate topic in 2018 as I began my third and final term as CEO and I had said that I would really prioritize it more heavily than I had in my first six years as CEO. And Christoph Schweizer, the person we elected after me, had decided that he would have a couple moonshots, one in AI and one in climate. And frankly, I'm interested and involved in both. And I know we're going to get into the AI and climate intersection a little later, but I had said, 'Look, I'd really like to dive in on the climate stuff. It's so hard. It cuts across so many parts of the economy and business and government.' And he said, 'That'd be fantastic.' And so for the last three years since I stepped out of that role, I probably spent a little over half my time on the climate side and then some on AI and then some with just new CEOs and other leaders coming into big roles to try to be helpful and then some on the complexities of the world where I can contribute.

The impetus, if one's completely honest, is I had just been elected to my final term. So, I had no more elections. I knew I was termed out, but I had some really frustrated partners, particularly in Europe. Several of our European partners were just felt like it had been 3 years since the Paris Accord was signed. The world was doing not nothing but a tiny fraction of what it needed to do. And here was BCG with networks all around the world, unbelievable depth in every sector and every function. And it's not that we weren't working in the space. We'd had a sustainability practice since my predecessor Hans-Paul Bürkner had started it in 2008 or so, but we weren't doing nearly enough given our scale. And at first, when your partners send a video around to all the partners about how screwed up we are, you get a little frustrated. But then I actually watched the video and I read all the data that they circulated and I just concluded that they were right. Like we have so much power as a firm to make a positive difference in the world and we were already doing it in health and education and economic development. I mean this has been a huge part of BCG almost my entire tenure. But we weren't doing as much in this topic. And so I stood up in front of the partners in the fall of 2018 and I said I acknowledged that I had been too slow to realize this and I said that will change and we will prioritize this planet alongside what we do to drive our performance and support our people that this was going to be a real priority. And then once I said that then it was how to make it real. And I realized the first person who needed to go on a learning journey was me. Like you know it's easy to say the words and it's easy to make big commitments particularly when you know it'll be your successor that has to live up to all the grand ambitions you stated. And I really didn't want to make commitments that would be unfair to whoever came after me. You know it's a partnership. I didn't know who was going to get elected next, but and so I felt like I really had to educate myself so that everything we signed up to do, we had a real shot. Wouldn't be easy, but we had a real shot to be able to deliver. And we started our center for climate and sustainability and started building that capacity. So we had a lot of work to do.

I think you have to separate. We leaned in on three fronts. The first of course was to walk the walk. So we started by making a carbon neutral commitment and I didn't realize how limited a commitment that really was at the time it sounded grand but then I realized that wasn't what we should do and then we really dug in and said no what we really need to commit to is being net zero by 2030 and what we really need to do along that because for a company like ours that has to travel to clients we cannot just you know sit in our own offices by definition we can't reduce our footprint all the way to zero we have to remove as well as reduce and if we're going to remove we have to remove in a really credible way. So we ended up making big financial commitments that those removals by 2030 would average $80 a ton. I mean obviously there's been inflation since then so that number will probably go up but in 2020 that was quite unusual. People make a statement about climate neutral or net zero but you had no idea what they were really talking about doing to be able to make that claim. And we tried to put our money where our mouth was to say these were real activities that would have real impact. So step one was walk the walk and be credible ourselves that we were serious. Step two was help our clients. You know we work across many sectors of the economy. Some higher emitting, some lower emitting but even the lower emitting ones like a bank scope one and two is very low. But financial firms are lending and providing equity capital to others throughout the economy. That in virtually every sector we worked in and in virtually every functional topic, how you design a product in our marketing and sales practice to how you run an operations or do procurement in our ops practice, we could really support clients around the world. And of course, that's the core of who BCG is and what we do. And we put enormous effort into building our own capabilities to do that. And then the third was where could we make a difference in the world? Like what are the kind of groups we could lend our muscle to that either couldn't pay at all or would only pay you know a fraction of our normal fees but we could team up together and really supercharge what they were trying to do. Whether that was the World Economic Forum, CDP, who tried to help SBTI in some ways over the years, a huge investment, probably biggest in the history of the firm around these last three COPs in Glasgow, Egypt, and Dubai. Like in many ways, we said, you know, if we're going to lean in, we have to contribute to society, not just, you know, support our clients, even though of course our first responsibility is to help our clients through these journeys. So those have been the three fronts of work I think including our social impact and climate and sustainability work. We're talking about investing $2 billion of BCG combination of cash and professional time over this decade. So that's like a serious amount of investment that probably climate is the single biggest part of that. But we do work on nature and of course we do education and health and some of the other topics that I mentioned earlier also.

Well, first I learn so much to talk to people across sectors about what are the real issues. It's so easy to talk at a high level positive optimistic way, you know, to leaders and then you get down to well, how much progress are you really making? What's getting in the way? Do the economics work for you? Like can you make it work? You know, what role is government really playing to make it easier or frankly to make it harder sometimes? And so I feel very privileged actually that I feel like the relatively few people who work in the climate space who get to have as many authentic conversations across society, business, government and around the world as I do. And I try to use that learning as best I can to be helpful in the other direction and to really be, you know, not trying to pretend stuff that isn't real, not trying to sugarcoat, but also to show how many things people can do that they may not be thinking they can do, where the economics can work, where the customers will value it, and how to make that happen. So now that's at a high level. Let's start with an honest reflection. Until relatively recently, I feel like the global climate dialogue has centered on 1.5 degrees. And in terms of reducing the risk of these really bad events that would trigger, you know, major changes in the atmosphere or sea level rises or other things, I'm a complete believer. We want to get to 1.5°. But I think particularly since the last COP was able to put a more authentic understanding of where we are on the table, people are realizing just how far off we are. If you look at the actual things already being implemented, we're heading to roughly 3°, which is better than where we were pre Paris. So I don't want to minimize that the world's not made any progress. We were probably well north of four degrees when that Paris Accord was signed in 2015. But let's be honest, 3 degrees is a long way from 1.5. And then if you say, well, people have made commitments that they haven't yet implemented. If they deliver all those commitments, where are we? Then we're probably at 2.4°. So that's better, but it's still not where we need to be. And I'd say reality, the base case right now is probably we won't make all those commitments deliver in the way that they should. So probably the fairest thing is to say we're probably between 2 and a half and 3 degrees right now. And yet I think people aren't getting their arms around how huge the impacts are on lives, on nature, on health, on economics, global GDP impacts, and on individual businesses if we really are on a 2 and a half to 3 degree pathway, not a one and a half or even a two degree pathway. So part of what I'm trying to share is first we have to deal with the world as it is and not pretend we're in a better place. And second, we have to recognize the single best economic investment we can make. Though of course we shouldn't just take on climate because of economics. We should take it on because it's the right thing to do for people all around the world, vulnerable populations, nature and diversity of nature around the world. Like there's so many important reasons to take this on. But if one just took a pure economic, you know, HBS finance class math, the cheapest investment we make is to mitigate is to find ways to reduce 80% of the carbon footprint and remove the last 20. I don't think we can remove all 100 and maybe when we get into we can only reduce 70% or whatever, but then remove the rest and that is the best investment we can make. And if we come up short, companies better be prepared for two things. One, what they need to do in adaptation and resilience, not just for their businesses, but for their workforces, the communities they operate in, those costs are going to be very high. And second, that when people change their minds, because at some point, populations which today don't seem to care that much about, you know, what a company's climate footprint is. Young people care, employees care, but you know, when you're selling products, most businesses would say their consumers don't yet care so much that they're ready to pay a premium. When people change their minds, they change their minds quickly. It's not some linear thing over 10 years. So, you better be getting your business models ready, not for some slow change in attitudes between now and 2040, but some triggering events. Maybe it'll be around the inability to get insurance and people can't sell their homes anymore. Maybe it'll be around a devastating heat wave, a heat wave or floods that will really hurt populations enormously. Maybe it'll be other events that occur where things go faster than you think they're going to go. And I think many companies, I think there's this natural human tendency to do scenario planning around a relatively narrow range of expected outcomes. And in this space where the impacts can be so dramatic and even unexpected, people have to have much wider scenario planning horizons and prepare themselves for a much more challenging world. So goal one is step up because if we all step up, that's the best thing we can do to help all of us and many many others. Goal two is do better on adaptation and resilience. Goal three is do a much better job on scenario planning and getting ready for a world where transition risks are much higher than people perceive they're likely to be.

Right. I'm so glad to hear how you framed it because I know you get the privilege of engaging with a lot of HBSers and to talk about it. When I talk about it, I say let's start with what we need governments to do and then let's talk about how businesses contribute to that. And I have five things on each. Let me just take and I'll go fast and you can dig in. I think for governments first we need more ambition. We're about 600 gigatons off cumulatively, not per year of course, but cumulatively between what people have committed to and where we need to be. Governments need to step up. That is not a one country problem. The US has a challenge. So does China, but so do many, many other parts of the world. Second, exactly to where you're going, we need to raise the price of carbon over time. You don't have to raise it all at once, but because a lot of what you're trying to do is change long-term project planning, capital investments. So, as long as people know the price of carbon's going up, you don't have to do it all tomorrow. And we have to be sensitive to the politics of this. Personally, I don't think that raising the price of carbon for consumer facing things like gasoline is going to be acceptable in society. I think there it's more about incentives, investing in charging stations. But when it comes to the industrial economy from the front of the supply chain all the way to the end, actually it doesn't change end prices that much, much less than people expect to put a rising price of carbon over time into industrial supply chains and to do that. And it has to include imported emissions as well as domestic emissions otherwise you create unfair and offshoring of carbon basically which does no one any good. The third thing is we need to put more investment and financing into solutions and I think that has two buckets. One bucket is advanced technology which I would actually give IRA in the US quite a lot of credit for but there's some things in Europe, Japan, other places that are also quite good. We just need to create more incentives to create the next generation of technologies we need because much of the technology today we will ultimately need is still way too high in cost. And we also need financing solutions to be able to support the emerging markets all around the world. Lower and middle income countries where capital costs are higher, risks are higher, regulatory certainty is much less and how do we help solve those issues. The fourth bucket is all the obstacles. Talk to any company, they talk about permitting issues. China does the permitting stuff well on this dimension. So maybe not any country, but if you talk to US, European countries, many others, you try to get a permit signed, it can take forever for stuff that's economic to build. It's not an economics question. You talk about things like cement and steel. Governments are huge purchasers for highways, buildings, all this stuff. And what are the procurement rules they're using to make this decision? They were often written in the 1990s. There are policies that are written that are either outdated or could be updated and we need governments to do a better job. And then fifth, we need to recognize we may need to take more drastic measures. I mean, the risks are really high. And sadly, that probably includes starting to think about geoengineering and solutions like that. But even before you get to that, you know, we didn't ultimately use incentives to get people to change light bulbs. We just said you got to change light bulbs. And some people still complain about it like I wish I could have my incandescent light bulb back. But at some point there may need to be sharper regulatory policies in place to drive change faster than the way we would normally like to do it which is just change the incentives and let things occur. So those five buckets, the ambition gap, a price on carbon for at least the industrial economy, better investment in solutions and supporting emerging markets, transition obstacles and being ready for bigger stuff. That's the government agenda. Okay. So then the question is how does business contribute to that?

Now let's go to that. So then I would say one own your supply chain. For most companies, 75 to 95% of the footprint and the products they sell are not from their own scope. They're from their upstream supply chain. But a minority of companies and in some depending on how you measure it, a really small minority of companies has really taken ownership of their supply chain and given their suppliers the right information, the right incentives, the right support, the right commitments to be able to help their suppliers go faster. I think number two is to really think about the world from your customer's point of view who aren't ready necessarily to pay more for a simply more sustainable product but will pay more for products that bring a basket of features that include sustainability. Yeah, think about cold water laundry detergent. The way Tide advertised itself now Tide isn't saying to people, oh, you're going to save the planet if you use Tide. They're saying you're going to save your electricity bill and by the way, your clothes are going to be clean. I think the third is to work together in industry. Labeling is horrible. Try to go to a supermarket and figure out what's a more sustainable product. I mean it's impossible. So how do we get some common labeling work across industries where I spent a lot of time with the First Movers Coalition which is about getting customers to make upstream advanced technology commitments and with Bill Gates' group Breakthrough Energy on how to invest in technology and advanced technology and get cross-industry participants and fifth partner better with government like be trusted be honest my quick line is we need governments to be bold and pragmatic in order to make this happen. Europe is often bold on this topic, but frankly, many would say they're not particularly pragmatic that they're trying to get better, by the way, and I really appreciate some of the recent legislation, but you know, it's a bit bureaucratic. It's hard to access the money. The US is an incredibly pragmatic place, as we all know, but it has often not been sufficiently bold. Who knows how to be bold and pragmatic? It's business leaders. Business leaders, you don't grow your business. You don't prepare for the future if you're not bold. And you don't get to have a long term unless you have a short term, which requires being pragmatic. What can you execute? What can you deliver? Business can be a great partner to government to move this, but it has to earn trust, and it has to be seen as putting society's interests really up there and not just working to further its own short-term interests in this. And so that's those conversations I have with governments and that's the one I have with businesses.

I think there's an element of truth to that but I think there's an element of ducking it. No one has been clear in calling for making it easier to get stuff built fast than the business community. Solve these permitting issues. Update your procurement rules to be making the right tradeoffs. You know, do pragmatic rule making that has the right cost benefit bound where one of the benefits is addressing climate business has been quite good in this. Actually, if you look at the number of businesses, including some of the heavy emitting, some of the oil companies asking for some form of a price on carbon, realizing you probably can't do gasoline taxes for political reasons. Now, of course, there are businesses that don't want that, and I'm not arguing. It's really dangerous. One of the things I learned as CEO of BCG, anytime you try to say business thinks this or business thinks that, you are really at risk of enraging a subset of businesses who see the world as opposite of what you say. So I always am hesitant to say that there is a single voice of business on many of these topics. But if you just take the center mass of the distribution curve, I actually think if you could have a smart form of a price on carbon, as I said, focus it on the industrial economy, phase it in over time, do it in a pragmatic way, I actually think you'd have far more support than people realize. And again maybe big businesses who live in a global world and are operating in Europe too would be a little more sophisticated around that than smaller companies that are just thinking quarter to quarter or trying to come through but there's some incredibly great small business leaders so I don't want to overstate that. So I do agree with you. I think there are voices in the business community that have been highly resistant to this. Frankly, I've had some that don't believe climate change is real. I've had people argue with me, you know, why Florida getting hotter actually makes it an even better place to live. I don't want to say business leaders are worse than the average. I probably slightly more scientifically geared than the average American on average ahead and understand this because they get more scientific voices and so forth. But it's a bell curve.