GREEN FRONTIER

Environmental pioneers can still dominate markets reluctant to reward them

 

They may be eco-friendly, but clean tech companies confront hostile markets. In order to prevail, they will need to attract customers prepared to pay more for a green product, perform better than competitors, and change the rules of the game.

 

Clean technology is an expanding business frontier as companies race to find innovative market solutions to heal and prevent environmental wounds. Yet in order to succeed clean tech companies need to do more than promote their green credentials: they have to challenge market principles that put them at a disadvantage. The keys to their survival include:

• identifying customers willing to pay a premium to save the planet;
• beating competitors in a straight fight by simply making better products;
• and taking a more radical approach to change market rules and create a level playing field for clean tech.

 

Research by professor Jan Lepoutre of Vlerick Leuven Gent Management School explores what green entrepreneurs must do to exploit opportunities in hostile markets and offers tools to help them assess what is viable. Lessons outlined in the Flanders DC Knowledge Centre report “Identifying Opportunities in Clean Technologies”, will be of great value to businesses and policymakers heralding an environmentally friendly future.

POTENTIAL: The clean tech boom

Human development poses huge challenges to the environment as our consumption and production patterns have an irreversible impact on ecosystems through pollution, the loss of biodiversity and climate change. The scale of this problem has spawned interest in clean technologies that apply new science to ecological problems while still being driven by market economics.

Clean tech products are more than just 'green': they aim to provide superior performance at lower costs while reducing or eliminating damage to the environment and using natural resources in a more responsible way. Bringing them to market requires innovative business models based on the deployment of cutting-edge technology and the ability to search out new opportunities. Such technologies are diverse and active in different sectors, ranging from alternative energy production and recycling to the development of new materials such as bioplastics. These markets are growing at rates equal to those of the computing, internet, biotech and nanotech booms between 1980 and 2000. Consultancy Clean Edge, for example, estimates revenues for the solar, wind and biofuel sectors grew by more than 50 per cent from 2007-08 to $115.9bn and are likely to triple in 10 years’ time.

MARKETS: Hostile intent

The clean tech boom is challenging standard economic theory, which suggests that green initiatives, though desirable for society, are not valued by the market. Economists have argued that there are many situations where market mechanisms do not provide the right incentives for people to take care of the environment. A principal reason for this is that environmental costs are often not included in market transactions.

Many resources, such as air and water, are 'common goods' that do not entail the property rights that market transactions can put a price on. A price gives whoever uses natural resources the information they need to understand how valuable its consumption is. As there is no price on clean air or water, producers will not include the free consumption of these limited common goods in their costs.

When markets are unable to provide incentives for people or organizations to sustain the environment in this way it is known as a 'market failure'. Three scenarios illustrating this lack of feedback and incentives show why organizations that take the environment into account are not rewarded, helping to explain why businesses find it difficult to adopt green strategies:

• Externalities: when the cost of a transaction is borne by someone else. Air pollution, for example, consumes a clean resource but those who cause it often don’t know whether or how much they pollute because there is no feedback from those affected: the market gives polluters no incentive to pay the costs they inflict on third parties.
• The tragedy of the commons: short-term consumption of a common good that threatens its long-term existence. Without limitations, economic actors lack feedback mechanisms that alert them to the over-consumption of a free common good - and so they will tend to continue consuming it until it is gone.
• Inefficiencies: since there is no cost for using common goods, there is no incentive to use them responsibly. Because air, soil and water are abundant, there is no incentive to clean polluting discharges in them voluntarily. If responsible firms do not act in such a way, they risk having to shoulder the costs of more careless businesses. So environmental strategies are often seen as creating unfavourable market positions.

 

However, although clean tech entrepreneurship is still in its infancy, lessons have been learned about branding, competition and market rules that can help green businesses overcome these challenges.

 

About Flanders DC

 

Flanders District of Creativity is the Flemish organisation for business creativity. It was founded by the Flemish Government as a non-profit organization and enjoys broad support. Flemish businesses, academics, and public institutions use Flanders DC as a platform for cooperation and for building a more creative region. Creativity is the key ingredient in making companies more successful and in helping regional governments fuel a healthy economy with more jobs.

Published on 5/09/2011