How can business transform unsustainable economic models from within?
We are only able to enjoy our current standard of living due to economic growth. But with emissions, resource consumption and social inequality all rising under capitalism, will the economic model need to be completely overhauled to ensure a sustainable future?
That was one of the key discussion points for speakers at The Economist’s Sustainability Summit in London on Thursday (21 March), which began with a panel debate on how finance, policy and the private sector should best collaborate to produce the necessary changes needed to meet key carbon, resource and economic targets.
During the session, speakers from the European Commission, Cambridge Institute for Sustainability Leadership (CISL) and Veris Environmental Finance quickly concluded that current economic models across the globe are still fuelling linear and high-carbon models of production and consumption, adding that they were likely to continue this way without a “radical transformation” co-led by business and policymakers.
They were then quizzed as to how this transformation could be brought about, with all panellists concluding that the Paris Agreement and Sustainable Development Goals (SDGs) had already formed the right foundation for action.
“It’s very easy to be sceptical about what governments can do, cynical about what companies can do and despairing about short-termism in the financial sector – but there have been some wonderful developments so far as the result of amazing leadership,” CISL’s founder and director Polly Courtice said.
“In 2015, systemic shifts came into place as a direct [result of] individual leaders with courage and passion – from all sectors and sides of society – making a concrete commitment and standing up for what they believe in at a big system level.”
The European Commission’s director general for the environment Daniel Calleja Crespo agreed, arguing that alignment with the SDGs and Paris Agreement aims provides stakeholders across all sectors with guidelines on how to “generate prosperity in a more intelligent way”.
Specifically, he highlighted how some private sector organisations are now using the Global Goals to align sustainability with profitability for the first time.
“Companies are integrating the SDGs because they realise that they can no longer survive off their own self-interest and that, the more sustainable they are, the more competitive they can become,” Crespo said.
The triple bottom line
Crespo’s sentiments echoed the findings of a recent study by financial investment firm Trucost, which found that 13 of the largest corporate SDG adopters in the world had collectively generated $233bn of revenue through their CSR initiatives in 2017. Companies within this coalition include the likes of Walgreens Boots Alliance, HP and Ørsted.
Elsewhere, Unilever is now generating 70% of its revenue through its ‘Sustainable Living’ portfolio of brands, which grew 46% faster than the overall business in the 2016-17 financial year, while B-Corp companies in the UK are growing 28 times faster than the national rate.
But during the panel discussion, The Economist’s business editor Jan Piotrowski questioned whether all businesses could reap such rewards from sustainability and, if not, how they could be encouraged to use their leverage for positive environmental and social progress if it meant risking their bottom line.
For CISL’s Courtice, creating a policy and financial framework in which businesses are required to embed sustainability across their operations, rather than “siloing” it, are key.
“Being able to show that you are generating environmental and social value, as well as economic value, often requires tackling the biggest problems at board level,” she explained.
“Most board members are enlightened on this and can now see the writing on the wall. Whether it is regulation that will drive them there, or the fact that their supply chains are absolutely hurting, or that it’s what their consumers and investors are demanding, the mindsets of leaders are being changed to recognise that ‘business as usual’ is no longer an option. The challenge now is getting there fast enough.”
Her sentiments were echoed by Crespo, who argued that governments, financiers and policymakers should collectively work to help businesses align their “vested interests” with clean growth. This move has not yet happened, he said, because existing economic models posit financial competitiveness and environmental stewardship as a “trade-off”.
“The ‘trade-offs’ conversation is usually a signal that a wealthy person or business wants to get their own way for self-serving reasons, so it is dangerous language,” Courtice concluded.
The role of finance
The conversation then turned to how the finance sector could help encourage businesses to adopt a holistic approach to sustainability and align green action with profitability within modern capitalism and, therefore, help the private sector reshape the economic model it has historically depended on.
The question comes as early signs of a green finance transition are beginning to appear. The green bonds market, for example, grew by a staggering 78% between 2016 and 2017, with national and institutional investors funnelling more than $150bn into low-carbon projects, while investors are increasingly divesting from organisations which cannot prove their low-carbon, anti-deforestation or climate resilience credentials.
Such progress comes at a time when the next financial crash is widely predicted to be climate-related. But according to Veris Environmental Finance’s chairman James Atkins, the wider financial sector has still “not shown the guts needed” to adopt a purpose-led and holistic approach to environmental and social sustainability.
This, he argued, is largely due to an “over-focus” on risk and “failure to notice” opportunities of the low-carbon transition, compounded by an economic system which does not require corporates or their financiers to take “extended responsibility” for their negative impacts.
“At the moment, shareholders of big companies are getting a completely free risk to underwrite from the state or society, even if they are not acting in the interests of society and the environment,” Atkins said.
“If you don’t have limited liability, for any potential societal wrongdoing, you’re always thinking about the financial cost.”
In the UK, a number of financial frameworks which could force corporates to take responsibility are currently in the pipeline. The Resources and Waste Strategy, for example, will see packaging producers pay 100% of the recovery cost for their products (up from 10% now) and that such a responsibility should be extended to companies which sell and produce items such as tyres and mattresses.
For Atkin, such policies, if introduced alongside shifts from the finance sector, could help "transform" the demand curve in the short-term and, therefore, the entire economic model in the longer-term.