Dec 9, 2022
Business Must Do More To Fight Climate Change. We Expect It Will.
Fighting climate change is complicated. We are running out of time, and according to the latest update from the UN Environment Programme, we’re heading in the wrong direction.
While this situation can feel overwhelming, it is reassuring to reflect on the fact that we are not helpless. Each of us can choose to act in some way today, whether that means buying less (or at least choosing to buy from brands that prioritize sustainability) or reducing waste by finding ways to keep our things in use longer.
It is also reassuring to know that there are a lot of people working on solutions. Governments are negotiating global climate agreements and implementing domestic regulations, philanthropies are funding a myriad of projects, and researchers are developing sustainable alternatives for how products are sourced, manufactured, distributed, and disposed. But of all of these people, one group in particular stands out as having the potential to play a much larger role than it currently does. That group is business.
At first, it might seem that expecting business to voluntarily act on sustainability issues is a fool’s errand given that business has historically chosen growth and profit above all else. But, as consumers and regulators continue to reshape markets in the context of climate change, it is precisely the pursuit of growth and profit that will lead business to change. It’s a matter of survival.
Business wants growth
It is a stretch to expect that business will invest in projects that don’t directly result in growth. After all, business has historically existed to generate profit for its shareholders, and profits are generated through growth. Often that goal is pursued without consideration for other stakeholders, whether they be employees, communities, or the environment. However, when framed properly, this pursuit can be used to steer business in the right direction. Business will invest where it expects to save money or promote growth, so it is safe to conclude that business will innovate and adopt sustainable solutions whenever either of those goals can be achieved.
We already see examples of business investing in transforming operations to be more sustainable in order to save money. The adoption of solar is a great example. As the cost of solar energy plunged from $106 per Watt in 1975 to $0.20 per Watt in 2020, some of the world’s largest companies, including Target, Apple, Walmart, and Amazon, began using the technology to power their operations. There is no doubt that the cost saving over electricity generated via conventional means was a key driver in these decision. The cumulative result of these choices is a meaningful impact on the acceptance of sustainable energy sourcing, as well as on the reduction of demand for fossil-fuels. As other sustainable alternatives become cheaper — packaging, logistics, operations — these too will be adopted by business for the same reason. The more business spends on sustainable alternatives, the more competition to deliver them will emerge, which will further drive down costs and accelerate broader adoption.
But saving money is only part of the incentive; business is always looking to grow. Though the effects of climate change are dire, this situation also presents an astoundingly large growth opportunity. McKinsey & Company estimates that an investment of $275 trillion is needed to transform the global economy to achieve net-zero emissions by 2050. The race to seize this opportunity is already underway. Between 2013 and the first half of 2021, more than $222 billion was invested in climate technology according to PwC’s State of Climate Tech 2021. As of the end of 2021, PwC estimated that 14% of total venture capital investments were in climate technology. As these investments bear fruit, they will attract more investment and more competition, and as they do, prices will fall and adoption will rise. Also, as we discussed in a previous article, shoppers are looking to align themselves with brands that share their environmental and social values. Business will not overlook the growth opportunity arising from the increasing financial influence of these Gen Z and Millennial shoppers.
Business wants to stay competitive
In order to achieve its growth and profit goals, business has to stay competitive on every front, including when it comes to attracting talent and capital. Companies that want to stay competitive through the current transition to a zero emissions global economy must find their purpose and live by it. Purpose-driven companies enjoy higher market share gains, and grow three times faster, than their competitors. Their customers and employees report higher satisfaction, which leads to more sales and attracting more of the top talent. Cotopaxi, which offers sustainable and ethical outdoor clothing and apparel, is a perfect example of why purpose matters competitively. In response to a single job opening, the company received over 3,000 resumes! Cotopaxi’s CEO credits that success to the company’s focus on purpose.
Remaining attractive to investors is also an important aspect of staying competitive. Investors are beginning to consider a company’s environmental, sustainability, and governance (commonly referred to as “ESG”) policies as part of their investment strategy. A recent EY survey found that investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty. In addition, these investors also believe that these companies may have a competitive advantage. Recently, Larry Fink, the CEO of BlackRock, which manages over $10 trillion in assets, stated that he believes that companies that focus on their broader stakeholders, including employees and the environment, will be the winners in the future. Though this statement resulted in some conflicting criticism that the company is going too far and that the company is not going far enough at the same time, it sends a clear message that investors should carefully consider ESG as part of their evaluations. It’s also an important message for business to consider. It seems that the message is getting through. A recent survey by Morningstar found that 90% of companies are developing an ESG strategy as a result of “intensifying stakeholder focus on ESG issues, expanding investor expectations, and shifting approaches to climate change and regulation.”
Business wants control
Business prefers stability and visibility. Less risk makes planning easier and the outcomes more predictable. When market conditions are in flux, as they are currently with respect to sustainability, business will look to control as many variables as possible to mitigate its risk. In some cases, individual companies will choose to voluntarily adopt stricter sustainability standards in order to align themselves with customers, or to preempt stricter regulation. In others, business will form partnerships among peers to preserve a level playing field and give their industry a unified voice. In either case, the result is progress.
When a company chooses to adopt stricter sustainability standards on its own, it will likely seek to flow these standards down to its suppliers through commercial arrangements. These arrangements are a powerful form of control, and one that results in a dissemination of sustainability standards to countries that may not have otherwise considered them. Suppliers will be forced to adopt these standards, if they wish to continue to do business with these companies. Other companies who purchase from the same supplier would benefit from the new standards, even if those standards are not necessarily ones that they care to enforce themselves. The cost for these companies to adopt higher sustainability standards therefore falls, and continues to fall with each incremental company that adopts them. For their part, suppliers can use their compliance as a differentiator to attract other customers who value sustainability in their own operations, or even charge a premium for their products.
As an alternative to taking a piecemeal approach of setting standards companies can choose to collaborate with peers. These groups provide a mechanism for reducing risk through coordination, unify the industry’s position in the face of regulation, and reduce costs across the industry through standardization. We are already starting to see these types of groups being formed. The Fashion Pact, for example, is a global collaboration of companies in the fashion and textile industries focusing on stopping global warming, restoring biodiversity and protecting the oceans. Members include some of the most well-known brands in fashion, such as Kering, Adidas, Chanel, and Ralph Lauren.
When it comes to sustainability, business might opt for such self-governance as an attempt to control the level of regulation that a government may impose. These standards might include rules for ensuring that raw materials are harvested sustainably, that workers are protected and paid fairly, or even on what is to become of products after the end of their useful lives. Yes, it is likely that these standards may not be a strict as government regulation, but they would still be a step in the right direction and a starting point for industry-wide change that might come about more quickly than the regulations themselves.
Business will adapt
If business wants to continue to grow, to attract the best talent, to raise capital, and to ultimately emerge as a leader in the new global economy, it must adapt. This basic survival instinct will gradually force business into making the right decisions when it comes to sustainability. There are already companies that recognize this evolutionary fact, as we’ve discussed in this and prior articles. Those companies are making changes that have impact across their industries and beyond their home countries. Others will follow. Companies that are reluctant to change, regulation and continued pressure from customers and investors will accelerate their transition. Companies that refuse to adapt will go extinct.
