A casual reader of the popular press cannot help but notice that Business Week is beginning to look more like Sierra magazine. Conferences once reserved for environmental engineers and scientists are now populated by business executives proudly expounding on such themes as environmental stewardship and sustainable development. It would be easy-and incorrect-to dismiss many of these public pronouncements as corporate rhetoric chasing “green” consumers. In fact, industry has developed, and is applying, a set of managerial approaches and technical tools to create the next generation of environmental improvements.

Unfortunately, policymakers will probably either miss or misunderstand these changes. Having spent the last 25 years focused on the cheaters and laggards, we are ill-prepared to understand the motivations and the methods of the industry leaders. But policymakers who are willing to leave some cherished beliefs behind and journey into the strategic core of innovative corporations will discover the most radical restructuring of production since Henry Ford-one with far-reaching implications for the environment.

First, industry is moving into a world where many products will be designed, built, and tested before they physically exist. Whether it is chemicals or a Boeing 777, a new generation of virtual prototyping systems is allowing companies to engage in what Gary Pisano at the Harvard Business School calls “learning before doing.” This practice opens up new opportunities for environmental improvement by moving decision making upstream, before the manufacturing process, before any waste or harmful pollutants reach the air, water, or landfills.

Second, having exploited many existing opportunities for environmental improvements within the firm, more and more companies are expanding their search to encompass the entire “value chain”-from raw materials producers to suppliers to manufacturers to customers. For example, 3M and the Netherlands-based chemical company Akzo Nobel developed an environmental guide for the furniture industry-one of their major customers-to help ensure that their products were being used in an environmentally responsible manner. Motorola, when faced with the challenge of eliminating chlorofluorocarbons from its production processes, moved technical expertise upstream to its suppliers-the same strategy the company used to great advantage in its earlier efforts to raise product quality. In industries that have “outsourced” much of their production, disseminating technical expertise and environmental management skills up and down the value chain becomes the strategy of choice for making more environmentally sound products.

Finally, as customers demand more environmental information and value from producers, businesses are angling to position themselves and their products as the green choice. A recent study showed that Arm & Hammer, by providing better environmental information on its laundry detergent, was able to realize an additional $10 million in annual revenue for that product. People gravitated to the Arm & Hammer brand out of loyalty to a company whose detergent they believed would not foul the environment. The bottom line is that many companies no longer view environmental concerns as a cost of doing business but as a profit driver.

Will corporate environmental sensitivity make government’s protective role pass? Hardly. Government will play an important role in disseminating information on best environmental practices, setting “baseline” standards for environmental performance, and in measuring and reporting on the state of the environment. And as in the past, government regulations will provide incentives to gently nudge the less enlightened companies to clean up their acts. But numerous interviews with managers in innovative U.S. firms have convinced me that companies want from government something more. They are looking for attributes that characterize any good business partner: predictability, cohesiveness, and speed.

Predictability. A steady public policy is critical to corporate decision making-particularly at small companies, which often lack comfortable financial cushions. Unpredictable variations in governmental regulations and programs suppress innovation, discourage investment, and produce market uncertainties. The recent budget battles between Congress and the Clinton administration created a climate of uncertainty among those in business charged with conforming to environmental laws and responding to environmental incentives. Industry’s decision making was paralyzed for months as companies waited for the dust to settle in the Washington tug of war between those who would maintain and improve upon our existing regulatory system and those who sought to reverse many of the environmental gains made over the past 25 years.

Cohesiveness. Even if stability is maintained, the existing mosaic of policies, programs, and regulations slows the ability of many U.S. businesses to turn environmental innovation into profits and competitive advantage. A better integration of policies across government agencies and among federal, state, and local decision makers would facilitate environmental leadership in industry by creating a clearer path for the commercialization of new ideas.

The multibillion-dollar market in the United States for environmental goods and services ought to encourage technology developers. But because regulatory and permitting policies differ from state to state, and even from county to county, this market is broken up into many, smaller pieces. Both the New England and Western Governors’ Associations have developed reciprocity agreements among states to begin to address this problem. An example of program integration at the federal level is the new Rapid Commercialization Initiative (RCI), in which four agencies-the Environmental Protection Agency and the departments of Commerce, Defense, and Energy-work together to accelerate the introduction of environmental technologies into the marketplace. RCI helps companies find appropriate sites for demonstrating innovative ways of monitoring and controlling pollution, assists in verifying the technologies’ performance and cost, and expedites permits.

Speed. Finally, public policymakers need to understand that time matters. In six to eight months-the half-life of many government permit and grant applications-entire new product lines can be developed and launched. Without significant increases in speed, the public sector risks becoming a drag on private-sector innovation. In one helpful step, the new Pollution Prevention Permits Program in Title V of the Clean Air Act allows companies to switch to environmentally superior processes without automatically triggering expensive and time-consuming modifications to their plant-operating permits. For companies making process changes every 18 to 24 months, such flexibility is critical in reducing time to market.

We will probably always need a system of environmental policies to deal with “bad actors.” But ensuring that policymaking is predictable, cohesive, and time-sensitive will allow innovative and well-intentioned companies-the good actors-to focus a new generation of technical and managerial tools on environmental problems without being hamstrung by uncertainty and red tape.