One of the more frustrating aspects of working the sustainability field is that every problem is mind-bogglingly complex, and can be framed at multiple levels.  Take, for example, the heated debates and accusations about the causes and consequences of the Macondo well explosion in the Gulf of Mexico.

Some commentators argue that the explosion was the result of shoddy engineering, reckless decisions, or mismanagement from multiple contractors involved with the well’s operations.  They stress that operating deep sea wells are generally safe, and that the Macondo disaster was an anomaly that should have been avoided, and can be fixed.

Others point out that the lack of proper regulation and/or effective enforcement allowed the for breakdowns and shortcuts that ultimately resulted in an accident.  This diagnosis suggests a deeper, systemic problem, and calls mostly for regulatory reform.

Another strand of the conversation points to the fact that we are moving into an era of “extreme energy,”  where conventional and easy-to-reach energy sources are largely depleted, forcing exploitation of inherently riskier sources.  Indeed, our energy system is being transformed by our increasing reliance on deep sea drilling for oil, hydraulic fracturing for natural gas, and a host of other unconventional sources – and these will inevitably make accidents like Macondo more likely.

Each of these interpretations holds a kernel of truth, but none seems to address the most fundamental question – why are we taking these risks in the first place?  Not only in the energy arena, but also on Wall Street and the Pentagon, we seem to be embracing increasingly risky choices, where the consequences of failure are very costly, in lives as well as dollars.

In Naomi Klein’s compelling TED talk, she skillfully pulls back the layers of these arguments to reveal the fundamental cultural narratives that underlie many of our most vexing challenges.  Especially in America, we remain in the grip of powerful narratives about the origin of our country and the sources of our prosperity.  We believe that we live in a world with endless frontiers and boundless resources.  We have confidence that our uniquely American mixture of God-given natural assets, courage, and ingenuity are able to overcome any perceived limits.  We are proud of the fact that we have subdued nature to enrich our lives, and are certain that this process can go on infinitely.  This is our manifest destiny.

This confidence leads us to hurtle into ever-greater risks to secure our energy resources, meet our consumption needs, and support our way of life.  Many players in our society are willing to raise the stakes because the potential rewards are so great – whether it is chasing an economic bubble, defeating terrorism, or opening up a new energy source.  And the costs of failure are usually not sustained by those players, but are distributed widely across society.  When rewards are potentially high and consequences for failure proportionally low, the risk taker can’t pass up the odds.

However, this faith in infinite possibility may be beginning to falter, according to Klein.  Despite frenzied chants for war, the boom and bust of global markets, and the calls for “drill baby drill,” Klein argues that there is a creeping anxiety in our society generated by the dawning awareness of our limits.  We are at war with ourselves about whether we should double down on our traditional American virtues of conquering nature and creating new technology, or begin to face the cold hard facts that we live on a finite planet.  This is not only an intellectual or strategic challenge, but cuts to the heart of our values and identity.  This questions are profound, and the stakes could not be higher.

As Klein notes, Jared Diamond in his book “Collapse” explains how and why societies choose to succeed or fail.  In the many historical cases of collapse described by Diamond, some societies facing resource or environmental issues responded creatively to meet their challenges while others rigidly clinged to their traditional way of life.  These cultural shifts are messy, volatile, and hard to predict – but a society’s unwillingness or inability to imagine new ways of life almost certainly leads to failure.  As Klein puts it, “This is how civilizations commit suicide, by slamming their foot on the accelerator at the exact moment when they should be putting on the brake.”

Are the new forms of energy – from shale gas and oil to deep sea drilling to mega-strip mining – the latest shining examples of American ingenuity?  We certainly have beaten the Malthusian odds over and over again over the last couple centuries.  Or are they dark omens of a society that deludes itself into over-confidence that any limit is temporary, that new technologies will save us, and that the force of will can push back any barriers forever?

Klein argues that we need new stories about nature, limits, prosperity, and humility.  We need new values rooted in the precautionary principle, which states that when human health and the environment are at risk, and the potential damage is irreversible, we cannot afford to wait for perfect scientific certainty and should err on side of caution.  And finally, we need a critical consciousness about the stories we tell ourselves about ourselves and our world.  Just because a story comforts us, or resonates with our self-image does not mean that it is true or healthy.  Where will those new stories come from, and who will tell them?

Today, we are launching a new periodic series called “Gems” to highlight insights from Duke faculty publications that are relevant to management practice in the energy and environment arenas.  Duke’s world-class faculty are pursuing work on a number of topics of great interest to energy and environment-related industry practitioners.  However, those insights are not always easy to access by people who could act on them.  The purpose of the Gems series is to provide research insights in easily digested format, highlighting the relevance of the work for real world challenges and opportunities.

See the first Gem – a paper by Duke’s Aaron Chatterji and Harvard’s Michael Toffel called “How Firms Respond to Being Rated,” published in Strategic Management Journal in September 2010.

How Firms Respond to Being Rated
Strategic Management Journal, Volume 31, Issue 9, pp 917-945, Sept. 2010
Aaron Chatterji, Michael Toffel

Ratings by companies like Moody’s, Michelin, and Consumer Reports have long swayed the behavior of consumers and investors.

Ratings also influence the performance of the companies they describe, according to research  by Duke University’s Fuqua School of Business professor Aaron K. Chatterji and Harvard Business School professor Michael  W. Toffel

Corporate environmental ratings meant to guide individuals and fund managers on investing also influenced the rated firms, according to the researchers, who examined environmental performance using corporate-wide toxic pollution, a commonly used outcome metric.  Using environmental ratings from KLD Research and Analytics, Inc. (KLD), which are widely used in social investing circles, they examined how hundreds of organizations responded to being involuntarily included then the agency expanded the number of firms it rated.

Findings:

• Firms with poor KLD ratings improved their  performance more than other firms
• Difference was driven by firms in highly regulated industries and by firms with more low-cost opportunities to exploit.

Their study has policy implications for boosting the effectiveness of government information disclosure programs, according to the researchers.

The study is among the first to theorize about the impact of ratings on firms’ subsequent performance.

In Thomas Homer-Dixon’s book The Ingenuity Gap, he describes a growing chasm between the world’s knotty problems and its lagging ability to develop robust and integrated solutions.  An “ingenuity gap” emerges when a society’s ability to solve problems is outpaced by the scale, complexity, speed of change, and unpredictability of new challenges.

In the next half-century, as the world population surges to nine billion, we are entering a new reality.  Securing the resources to feed, clothe, shelter, and transport human populations is placing unprecedented stress on our societies and ecosystems.   Finding creative solutions to the problems of energy, climate change, economic development, water sustainability, and food security will require massive ingenuity, both technological and social – are we up to the task?

There is no doubt that the complexity and urgency of the challenge is growing fast.  For example, in the last month, officials battling the raging floods of the Mississippi River have had to make tough choices about whether to preserve farms or cities, power plants or infrastructure.  Multi-dimensional emergencies are taxing not only our physical systems, but also the planning and decision-making processes we rely on to operate our systems.

One promising recent trend is the growing discussion of the “Energy /Water /Agriculture nexus.”  The nexus refers to the insight that energy, water, and agriculture systems are deeply inter-connected in the real world, but are often isolated in our public policies and business strategies.  Our culture of specialization has led us to develop piecemeal approaches to problems that often fail to deliver lasting improvements.  This siloed mentality leads us to optimize solutions in one dimension while sometimes creating a cascade of negative consequences in another.

The food vs. fuel crisis of 2008 is a classic example.  In the US, government policy and its associated subsidies promoted increased ethanol production, primarily to address energy security concerns and to shift more of our energy sources toward domestic sources.  From an environmental perspective, ethanol provided limited benefit, since its production requires almost as much energy input (and associated emissions) as the fuel provides.  Additionally, the land and water resources required to grow corn placed additional demands on the environment.  Perhaps most importantly, the increased demand for corn-based fuel inadvertently may have contributed to higher food prices, resulting in the global poor struggling to feed themselves and their families.

As the ethanol example demonstrates, managing the Energy/Water/Agriculture (AWE) nexus requires a new approach.  In a world of abundant resources, it may have been possible to optimize outcomes for each system – more food output, more energy production, more water use – without explicitly considering the cascade of effects on the other systems.  For example, in places with adequate water resources, a power company could assume that there would be adequate water resources available to build and operate a new power plant.

However, over the half-century lifespan of the power plant, areas that once had adequate renewable water supply may be squeezed by increasing demand, decaying infrastructure, and climate impacts.  In a world where all systems are stretched, there are small margins for trading off benefits in one area for costs in another.  Therefore, the potential for negative impacts escalates, and the risk of getting blind-sided grows.

Managing EWA nexus issues is not only a policy priority, but also an imperative for business.  Large companies rely on global supply chains to secure reliable access to raw materials, but they have only recently begun to measure the broader impact of their procurement practices.   For every company, their required material inputs rely either directly or indirectly on energy, water, and agricultural products.   The next step of this journey will be to rigorously assess EWA interdependencies, and their implications for a business’ operations, supply chains, cost structure, investment, and business model.

For the last several decades, the agriculture/water/energy nexus has been relatively stable, providing businesses with consistent access to high quality, low cost inputs.  Energy production expanded, water use increased, and food output expanded to meet demand.  However, we are already seeing increased volatility and the risks resulting from these interactions.  For example, the World Economic Forum recently published its 2011 Global Risks report, citing the energy/water/food nexus as one of the most important challenges facing global businesses.

To better understand AWE nexus risks, we need better science that connects the dots between linked trends.    We also need better analytical tools to consider the dynamic relationships between complex variables, and to be able to play out scenarios and anticipate challenges.  In contrast to the prevailing pattern of managing supply chain, energy, and water issues independently, companies must think more systemically about their enterprise – how the nexus is evolving in their company and throughout their global supply chains.

Of course, there are also significant opportunities for companies that understand the dynamics of the EWA nexus – by framing challenges in broader, more integrated terms, we can design solutions that solve multiple problems simultaneously.   An interesting example is the recent Imagine H2O competition that sought to identify breakthrough business ideas addressing the water-energy nexus.  Approaching these challenges in a more holistic way can spur a new wave of innovation and entrepreneurship, especially in regions with rapid infrastructure development.

This kind of thinking is also evident in the sustainability strategies of industry leaders like IBM and Unilever.  IBM’s Smarter Planet approach recognizes the inherent connections between energy, water, and other resources that power urban environments.  Just as EWA nexus issues cannot be understood in isolation, IBM attempts to close the ingenuity gap by integrating technologies and designing integrated processes and institutions needed to support those technologies.

In Unilever’s new Sustainable Living Plan, the company commits to a compelling vision of an enterprise that doubles the size of their business while reducing environmental impact by 50% over the next ten years.  They also aspire to grow their portfolio of sustainable products, committing to source 100% of their agricultural inputs from sustainable sources.  Given Unilever’s central position in the EWA nexus, this goal cannot be accomplished through “business as usual” approaches to environmental stewardship.  It will require a radically new kind of business model and operational approach.  By re-inventing themselves now to face the nexus challenges of the future, Unilever provides a new model of business resilience.

The world faces complex problems – and the inter-connected issues of agriculture, water, and energy are central to that challenge.  But now, we also have truly unprecedented technological capabilities and knowledge at our disposal.  The story of the 21^st century will be about whether we have the ingenuity to harness our new tools to rise to this challenge.