Forbes’ Environmental Conference
Washington, D.C.
April 1999
It is a pleasure for me to be here today to discuss the state of the U.S. environmental industry. The future of this industry should be of concern to all, considering the role it plays in meeting some of this nation’s key economic and social goals.
An Industry with a Record of Success
Looking back, the U.S. environmental industry has been an American success story. And it has played a vital role in our economy. In the past 25 years, the environmental industry has grown into a $181 billion industry that employs 1.3 million Americans. It is comprised of 33,000 companies in the private sector. The industry generates $16 billion in revenues from exports, with a positive trade balance of over $9 billion.
The environmental industry’s products and services have been used by every major U.S. industry. It has provided its customers the wherewithal to comply with the environmental regulations of the past 25 years. And, as a result, we have a cleaner, better environment.
An Industry in Transition
While successful in the past, today the environmental industry finds itself in a period of transition. The industry is at a critical crossroads—a time of great challenge and opportunity.
We see many changes occurring around this industry which promise to affect it in fundamental ways. These changes are explored in a comprehensive study—Meeting the Challenge: The U.S. Environmental Industry Faces the 21st Century—which was recently released by my office. More than 100 executives and environmental companies, and dozens of their customers, regulators, and financiers, contributed their expertise and insights to this report.
Where does the industry stand today? The industry is showing signs of maturing:
- Annual growth in the environmental industry has plummeted from 10 to 15 percent in 1985 to 1990, to 1 to 5 percent between 1991 and 1996.
- Median profit margins that routinely exceeded 10 percent in the late 1980s are now in the 2 to 3 percent range.
- Venture capital investments in environmental technology companies have fallen steadily from more than $200 million in 1990 to less than $30 million in 1996.
- There is over-capacity in many segments of the industry (hazardous waste management, analytical services, consulting and engineering, and air pollution control equipment).
- With supply now exceeding demand, it is a buyers’ market and prices are declining in real terms.
- The industry is in a period of consolidation. Many of the relatively few large environmental companies have accelerated their growth in the past few years through acquisition. Most segments are consolidating at the top, as large and mid-sized firms are merging.
- Declining demand, declining prices, and increased competition have added up to declining financial performance for the industry. Viewed through the lens of Wall Street, during the period of 1991 to 1996, the NASDAQ appreciated 22 percent annually and the Dow 16 percent annually. In contrast, the Environmental Business Journal Index of 240 environmental companies gained only 6 percent annually.
In addition, the environmental industry’s customers are becoming increasingly sophisticated. They are moving away from regulatory compliance toward integrating business and environmental concerns. And customer expectations are shifting demand from compliance to solutions that turn environmental costs into productive investments.
The market for environmental products and services is increasingly a global one. In 1996, the global environmental market was worth $452 billion, with $280 billion of that represented by overseas markets. Yet, only 9 percent of the U.S. environmental industry’s revenues are generated outside of the United States. Few of the industry’s sectors export. Of 14 sectors, 7 contributed all of the industry’s $16 billion in exports in 1996.
Much of the U.S. environmental industry is at a competitive disadvantage in overseas markets. Most of the industry’s 30,000 private sector companies are small, generating under $10 million in annual revenues with most under $5 million. These small and medium-sized U.S. firms have little capability or inclination to export, especially compared to their Western European and Japanese counterparts, many of which are subsidiaries of large parent corporations with deep pockets.
In the face of market changes at home and abroad, it is not clear how well the U.S. environmental industry will respond. This industry cut its teeth on the “command and control” system of environmental regulation in the United States. However, the industry’s dependence on government regulation to create customer demand has had the effect of narrowing its competitive strategies, and channeling its products and services toward environmental compliance objectives.
The industry’s leaders believe that the pace of environmental improvement is being slowed by “command and control”. This occurs in two ways. First, the environmental management system offers little incentive for technology innovation or investment to exceed acceptable environmental performance. And it offers no reward for above average or excellent environmental performance. Being in compliance is enough. Second, the system harms U.S. competitiveness by offering little encouragement to link environmental and economic decisions. Instead, environmental compliance is regarded as a cost imposed by government.
The “command and control” system also causes a lack of investment capital for the U.S. environmental industry. Sufficient capital does exist for most basic and early applied R&D. But as technologies move along the pipeline toward commercialization, the amount of capital needed increases but capital availability declines. It is only when regulatory approval is received that commercial potential can be assessed, and investors are again willing to supply capital. But this approval process can take years. And, consequently, many new environmental products and services never reach the marketplace.
Time has become one of the most significant barriers to innovation in the environmental industry. There is severe incompatibility among three crucial time lines: the investment time line, the technology and product development time line, and the time it takes to promulgate and implement environmental regulations. For new technology-based products, investments are expected to mature in 3 to 5 years. However, this is shorter than the 5 to 10 years required to develop and commercialize technology-based products. Compounding the problem is the regulatory process. It can take years and years before the specific requirements of an environmental market are known. The incompatibilities mean there is no window of opportunity for technology development and commercialization in the regulatory cycle.
Moreover, single-media, source-specific regulations force environmental decision-makers to focus on the trees rather than the forest. Each requirement covering each category of environmental release must be met in an independent process and on its own schedule. And each requirement is based on the performance of a technology that was commercially available when EPA developed the rule and promulgated it. This type of regulatory strategy creates disincentives for integrating environmental and economic decision-making and discourages innovation. It pushes managers to select end-of-pipe solutions to each separate environmental problem.
The Future of the Industry
Industry leaders, and many of their customers, suggest that the industry is at a critical cross-roads in light of changing domestic market needs, growing competition for a stagnant U.S. market, and rapidly growing international environmental markets that are motivated by qualitatively different governmental policies. If the industry is to remain an essential and growing part of the U.S. economy, it must adapt to new market realities, and develop products and services that go beyond clean-up and compliance. Industry leaders believe they must emphasize both economic progress and environmental excellence in customers’ operations, while continuing to help their customers make up for past negligence.
In short, industry members must become resource managers as well as environmental managers for their customers, more fully integrating their products and services with the core business interests of their clients.
The industry must also assume a more global posture. The industrializing world—the big emerging markets—have the potential to become the big emerging polluters or, hopefully, the big emerging customers for environmental products and services.
Now changes are needed in the role of government. The Federal government has played a significant role in shaping markets for environmental products and services, and, thus the industry itself. Can the government shift its role to support the twin goals of growth and a clean environment? Can it bring environmental regulation into greater harmony with economic goals?
Industry executives and many of their customers have identified key steps government must take in three areas: reform of the regulatory mission of the EPA; reform of government’s own environmental management; and revamped government support for technology development and diffusion.
First, with respect to regulatory baseline reform, industry leaders suggest two guiding principles to ensure that polluting behavior will be penalized and excellence will be rewarded:
- Maintain a regulatory baseline—though without the barriers inherent in “command and control” and with strong enforcement—to define the “floor” for environmental progress, and
- Rely on performance-based policies (including market mechanisms) and information-based policies (like the Toxics Release inventory) to
(1) reward environmental excellence and create incentives for environmental performance above the floor, and
(2) encourage companies to integrate the environment into their core business decisions.
Second, when government agencies are the customers of the environmental industry, industry leaders suggest they should procure performance, not hours and effort. Government customers should:
- adopt performance-based procurement;
- establish procurement cycles that are in sync with private sector investment cycles;
- institutionalize rewards for contractors that save time and money (as at Hanford, Rocky Flats, and other DOE sites); and
- Improve the allocation of contract risks.
Third, industry leaders suggest that government must also reexamine its role in the development and commercialization of environmentally beneficial technologies. Government must restructure its R&D investments to facilitate private sector technology innovation, increase government-industry collaboration on new technologies, and seek the technologies of sustainability.
We are releasing this study at a critical time for the environmental industry. As a country, we have made large gains in improving our environment, but much remains to be done. The “command and control” model is weakening as a driver in environmental markets, and customers for environmental products and services are demanding new solutions that focus on the environment and economics. At the same time, U.S. markets are stagnant, key foreign markets are emerging, and foreign competitors are on the rise.
To sum it up, significant change is coming to this industry—bringing both challenges and opportunities with it. Positioned in a dramatically different business environment, the $64,000 question is: Will the U.S. environmental industry adapt?
The choices made by the industry and government over the next few years will be critical in shaping the answer. But so will the decisions made by government. That is why I strongly encourage the environmental industry to make its voice heard in Washington.
Government and industry must work together to forge the win-win situation—merging economic and environmental considerations into policies that create real incentives for environmental excellence. This, in turn, will spur demand for innovative technology and services that will make our companies more competitive and help preserve our global environment for generations to come.
Thank you.