Here’s how Ikea is fighting climate change reads the headline in Time. As reported by the BBC, the story is Ikea to spend €1bn to tackle climate change. The Telegraph puts this in a broader context: Ikea commits €1bn to sustainability and leads a roster of green companies trying to change the world.
Companies do not spend sums like this for no good reason. They either expect to gain short-term competitive advantage or are adapting their business model to be successful in a changing market place. IKEA is still in private hands (owned through a number of not-for-profit foundations in the Netherlands, Luxembourg and Lichtenstein, despite its Swedish origins) and therefore has the luxury of being able to take a longer-term view without having to keep an eye on the share price.
The company is the world’s largest furniture retailer, with a turnover last year of nearly €30bn and net income of over €3bn. A 2011 article in the Economist (The secret of IKEA’s success) includes this passage: “IKEA presents itself as a green company with a social mission. Mr Ohlsson [the then chief executive] boasts of its charitable work and its aim to use only renewable energy. He says he wants his “co-workers” to be happy, honest and inclined to think for themselves.”
As an aside, it is also true that the company has been criticised for its complex and opaque governance, its tax avoidance practices and its relatively low rate of charitable giving. But companies are big because they are successful, and cost minimisation is an important part of this success. IKEA can hardly be criticised for being a very efficient company, although this could be a problem if it was seen to be at odds with the image it is trying to project.
But back to the reported €1bn to tackle climate change. The sum will be spread over five years so, although significant, it is only about 7% of current annual profits, which presumably will rise over coming years. About half of the total will be spent on wind energy, and a further €100m on solar, with the balance of €400m going to adaptation funds for poorer countries.
To put this in context, the company has already invested €1.5bn in wind and solar energy since 2009, so this is very much more of the same. But the timing is significant, as preparations for the Paris climate change conference are reaching a crucial stage. As Roger Harrabin says in his BBC piece “This [€1bn] is far more than many countries are doing, and Ikea says if other firms follow suit, they can force down the price of energy from renewables…. Ikea believes businesses must take a lead while politicians delay.”
The company aims to use only renewable energy in its buildings, installing solar panel roofs and on-site wind turbines (plus operating other off-site ones). Given the generous feed-in tariffs offered, this probably makes sound business sense, as well as burnishing the green credentials. Any on-site solar or wind energy generated both reduces the need for grid electricity and receives a subsidy.
At the same time, the company is to stop the sale of conventional filament lamps next year and stock only low-energy bulbs, hoping to ‘force down’ their price. Undoubtedly a company this size will have a part to play as economies of scale make LED lamps – a much better alternative to the previous generation of low-energy bulbs – increasingly popular and they become the mainstream choice. If we really want to reduce carbon dioxide emissions in a cost-effective way with good public acceptance, reducing the energy consumed by lighting is an obvious option.
IKEA is not the only large company to advertise its green credentials. Unilever is widely regarded as a leader in sustainability, that ill-defined but all-pervasive word which encompasses energy efficiency, among other things. As reported in the Telegraph, it has, for example, reduced its energy consumption by 20% since 2008, making savings of €244m. This makes excellent business sense, but we have to remember that emissions even from such a large multinational are a tiny fraction of even a small nation’s total.
Overall, there are a number of reasons why companies invest in green energy and other ‘sustainability’ projects. Some, such as energy saving, are simply good business sense. Others, such as renewable energy, make equal sense, but in most cases only because they are subsidised with public (i.e. taxpayers’) money. Remove that and the business case goes out the window.
Which is why IKEA’s statement of intent to ‘force down the price of energy from renewables’ is important. At first sight, bringing the cost of solar or wind energy down to the same price as grid electricity means job done: renewables become dominant and fossil fuel power stations begin to close.
Except, of course, that the nominal price of a unit of electricity from a wind turbine is only part of the equation. Their intermittency means businesses are still dependent on coal, gas or nuclear energy to provide continuity of supply, as are domestic consumers. Neither the cost of this backup (in increasingly large amounts as the nominal contribution of renewables grows) nor of the new power lines or grid strengthening needed to feed the distribution network and make it capable of dealing with large, short-term fluctuations, are taken account of. The nominal price per kilowatt-hour may decline, but the overall system cost remains higher than with no renewable electricity.
All of which makes the claims to be ‘tackling climate change’ somewhat fatuous, more a matter of public relations than anything. But successful businesses do not survive by wasting money, and smart CEOs will only let sustainability projects proceed if they help the long-term bottom line. There will still be plenty of opportunities to cut energy use and improve overall efficiency, which are to be applauded, but running an efficient business with subsidy-free renewable energy looks like pie in the sky for the foreseeable future. Claims about fighting climate change should be taken with a large pinch of salt.
Martin Livermore
The Scientific Alliance
St John’s Innovation Centre
Cowley Road
Cambridge CB4 0WS
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