In the business world, we have allowed ourselves to slip into a comfortable delusion; that we can become sustainable, through incremental change, built on eco-efficiency initiatives, set within our current framing of business-as-usual strategies.
With our growing penchant for storytelling, perhaps we are starting to believe in our own publicity – slipping an illusory comfort that we are doing enough, that deeper actions are not required, or can be put-off for another day. Our current narrative isn’t working.
While we continue to chase growth, in conventional terms, we’re also driving a corresponding acceleration in adverse impacts on our Earth systems. When it comes to true decoupling, not only do we need to think about greenhouse gas emissions, we also need to consider how we manage within all our planetary boundaries.
According to the Stockholm Resilience Centre, we have already crossed four out of nine planetary boundaries – defined as safe operating conditions for the planet – as a direct result of human activity. We are in the danger zone, when it comes to climate change, loss of biosphere integrity, land system change, and altered biogeochemical flows (our phosphorus and nitrogen cycles).
Two of these thresholds – climate change and biosphere integrity – are considered to be ‘core’ boundaries. If we adversely affect these dimensions, we drive our planet into a new and more dangerous state. As we know, this process is already underway. As global temperatures continue to rise, there is a greater than 99% chance that 2016 will be the hottest year on record.
The problem is, we are currently nowhere near even appreciating our planetary boundaries, let alone managing within them – as vital new research from Danish Technical University (DTU) indicates.
The research – based on a comprehensive analysis of 40,000 CSR reports from around the world – demonstrates that less than 5% of organisations are making reference to planetary or ecological limits. Furthermore, a staggeringly small number, only 31 of these organisations, have actually defined science-based performance targets and strategies, to help inspire changes in their product portfolios or business models.
Of the few companies that do mention ecological limits, it is usually in the context of meeting the 2oc limit for climate change. Other planetary boundaries don’t really get a look in. Nobody – not even the best in class – is reporting on actual progress towards changes planned as a result of their appreciation of planetary boundaries.
In light of these insights, our CSR reports appear to offer little more than marketing puffery – with little real substance in relation to the real challenge of how we deliver sustainable prosperity within planetary boundaries. No wonder the efficacy of CSR is increasingly critiqued.
It is not possible to overstate the importance of this research; every business leader should read this work, reflect on the implications, and consider an effective response.
Coming to terms with planetary boundaries is mission critical. Our ability to generate long-term value and continued prosperity will require all businesses to take this challenge right to the heart of our business strategies, as well as our operations.
The risk of becoming a stranded asset – where the value of our share capital tends towards zero – is not just a threat for fossil fuel companies; they are clearly first in line to face this very real and present eco-financial danger, but all our businesses will need to work within the full range of planetary boundaries and resource constraints, to avoid becoming the next stranded asset.
Peabody – the world’s largest private coal producer – was worth billions, until recently, but has now filed for bankruptcy. The company is no longer able to service its $10.1bn debt, due to the slump in demand and corresponding fall in the price for coal – resulting from the continued global economic slowdown, along with the shift towards renewable energies in many countries.
On one level, we can point towards the inevitable failure of an over-stretched fossil fuel business model. But, dwell a moment longer, and we realise there is a broader lesson. Peabody was errant on one key planetary boundary, namely climate change, whilst burdened with debt in a difficult economic landscape. This type of scenario could happen to almost any company.
Analysis by Trucost demonstrates how none of the world’s top industries would be profitable if they paid for the natural capital (externalities) they currently exploit. This is a dangerous place to be; when reality starts to bite, we face the true costs of doing business.
For each of our businesses, we have to ask, on how many planetary boundaries are we likely to fail on – and, what will the ultimate financial impact be? Until we engage with the science, we just don’t know. And, after last financial crisis, it is no longer good enough to say, we didn’t see it coming.
We need to find a credible way forward. The scientists have presented the information – we now need to act.
Moving the needle
There is some recognition of the need to engage with science-based targets, including the new collaboration between CDP, WRI, WWF and UN Global Compact – which already includes 157+ companies – adopting science-based targets in their commitment to save almost 800 million tonnes of CO2.
This is encouraging, as we badly need to galvanise meaningful action on climate change – but, as we now know, we need to engage with science-based targets for all our planetary boundaries. We need a broader approach.
The Stockholm Resilience Institute has produced a high-level summary of its planetary boundaries framework for business. This provides a very useful starting point, although most businesses will need to take this down a level, to establish what the boundaries will mean for their specific context – and the implications for their own strategies, products and services, operations and supply chains. We might also extend this format to include further considerations, including key resources, especially non-renewable materials, along with social impacts.
In reality there are a number of key shifts for businesses to engage with – the most fundamental being,how will we manage responsible growth within planetary boundaries? Very few of the current sustainable business frameworks get anywhere near dealing with this challenge – the biggest elephant in the room.
1) Responsible growth – our primary goal
For each business we need to establish what our effective growth allowance will be – based on the overall rate of growth that we will be able to sustain, without causing further degradation; mindful of the planetary limits and the resource constraints we need to work within. This is where science-based action will need to get to, and fast.
Effectively, we will need to synthesise how our current improvement trajectories coincide with, and hopefully offset, our expected growth curves. We can then establish whether eco-efficiency and circular economy initiatives will be enough, or whether we might need to go further and explore alternative pathways to optimise our growth strategies. This could involve new business model options – including the sharing economy, product-take-back, and so on.
We could reasonably foresee regulation to support this type of approach, as we get used to the idea of embedding carbon targets. Allowances for growth will become the next logical step, effectively placing a duty of care on all businesses, to prove that our growth plans are deliverable. This is, of course, important for shareholders, too. Any business that will be constrained by poor performance on planetary and resource limits, will ultimately fail to deliver economically. The investor question becomes, is your business a ‘safe bet’ for growth – or is it likely to become a stranded asset?
Need broader definition of growth which encompasses quality not just quantity.Peaceful inclusive & respectful of resources #collectiveaction — Paul Polman (@PaulPolman) May 16, 2016
Environmental, Social & Governance (ESG) metrics are transforming the mainstream investment landscape – becoming increasingly important for business executives and investors alike – helping to identify where financial risks and opportunities may lie. As such, ESG metrics can be used to drive our performance towards managing within planetary boundaries, resource constraints, and societal impacts.
Morningstar has recently introduced the investment industry’s first sustainability rating for 20,000 funds globally, providing investors with a simple rating system, to evaluate investments based on ESG metrics – to help investors avoid the risk of stranded assets, and to generate the best long-term returns.
For business leaders, the real value of ESG metrics is that they help us to drive change. As we review our ESG performance, we can seek to close the gap on sustainability performance, and find the route towards long-term value generation. As the latest research from Harvard Business School shows us, companies that undertake true sustainability efforts outperform competitors who don’t – generating up to twice the value of investment performance, over time.
3) The SDGs – our big pivot
Arguably, the UN Sustainable Development Goals (SDGs) provide the greatest opportunity and catalyst for business and economic transformation, this generation will see.
It is possible for businesses to pivot off the SDGs for a number of business advantages. A focus on SDG8 – for sustained, inclusive and sustainable economic growth – provides a strong catalyst for our plans to deliver growth within all planetary boundaries.
In a broader sense all SDGs present a wealth of opportunities for business, as we seek worthy income streams from contributing towards the great challenges of our time. For any business leaders, we need to ask, which of the SDGs could our businesses make an active contribution towards? Exploring this question also drives us towards finding, or re-finding, our real purpose in business, too.
For Novozymes, the SDGs are seen as a positive driver for sound business, rather than an obligation. Novozymes’ groundbreaking technologies are now being exploited to help achieve SDGs relating to food security, sustainable consumption and sustainable agriculture and energy.
The SDGs also provide an opportunity to join up the dots. Mondi, the international packaging and paper group, appears to be doing some great work in joining up strategies between its material impacts, and achievement of SDGs, all within its ‘responsible growth’ model.
If we are serious about generating sustainable prosperity – and this is what the SDGs are about – we should seriously consider making the SDGs our business goals, too. In taking the first step, we might commit to the #Businessworthy mission.
4) Real board commitment – our key enabler
We need to avoid what Andrew Bailey calls “hubris risk”, the tendency for blinding over-confidence. Bailey refers to the big banks, but all our boards need to be more thoughtful and open to challenge. If we have the wrong strategy – if we’re not managing within planetary boundaries – we need to be open to change course.
Volkswagen’s emissions scandal – estimated to have cost the company around $18bn – underlines the impact of reputational risks, from an inauthentic approach to working within planetary boundaries. The Board stands accused of not listening – now criticised for executive rewards way out of proportion with current financial performance.
In the boardroom, we need to make a real commitment, for which we will be held accountable. Swedish manufacturing company Atlas Copco points the way.
As Harvard Professor, Bob Eccles, recently shared – this is the first company to issue a concise board statement of commitment, based on an assessment of significant audiences and materiality: “Integrating sustainability creates long-term value for all stakeholders, which is in the best interest of the company, the shareholders and society”. Atlas Copco follows through, exploring its material impacts on ESG metrics – indicating a preparedness to take tough choices on issues like bribery & corruption, human rights, and so on. Eccles calls for all companies to publish “The Statement.”
Commitment also means deploying resources and budgets – to enable the real job of business transformation. Current levels of investment are barely scratching the surface. It’s time to invest, or die.
Failure is a hard word to bear, in any walk of life – but failing we are. On our current course, we are not managing within our planetary boundaries, and we will not deliver sustainable prosperity.
It is time for us to cut through the present-day delusions – challenge our thinking – and get on with the real business of change. After all, science-based targets beget science-based action.
There are strategies available, if we are prepared to make necessary shifts. We can find the pathway to responsible growth, aligning with ESG metrics, pivoting off the SDGs, and with genuine commitment from the boardroom. Joining up the dots on these strategies, we can deliver long-term prosperity, within all our planetary boundaries.
Will we make it – can we turn things around? From our vantage point, today, I’m not so sure. But, go ahead, make my day – I will be mightily relieved if you prove me wrong!
Mike Townsend is founder and CEO of business consultancy/thinktank Earthshine, and author of The Quiet Revolution (Greenleaf, forthcoming). This article was reprinted with permission from the author.
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