Business and sustainability: the imperative to act
Like many people working in corporate sustainability and sustainable finance today (well, those of a certain vintage at least), I did not start my career in this space. My own background is traditional capital markets, in sell-side financial analysis and corporate investor relations. At some point along the way, we made a switch… an imperceptible and yet profound change in our thinking–or mindset–to embrace sustainability. Now, sustainability may evoke different things to different people. In a way, sustainability means to maintain, and ideally improve, our wellbeing — everything from our health, to making a decent living, accessing the products and services we need and want, being able to do the things that bring us joy and fulfillment. A somewhat more serious – but entirely accurate – definition of sustainability is our ability to thrive as a species on this planet, which is our only home.
A tipping point of mindset change?
I believe this change in mindset to sustainability is gaining more attention and more traction for two reasons. The first is that some of the very conditions necessary to human life are threatening to disappear; climate change is finally on everyone’s lips (if not mind) with the most recent Intergovernmental Panel on Climate Change assessment report being dubbed a “code red for humanity”. But there are other systemic issues that threaten our wellbeing, chief among them nature and biodiversity loss, pollution, and ever-increasing social inequalities. At the Conference of Parties on Biodiversity in 2022, one hundred countries signed the Kunming Declaration acknowledging that “the interrelated crises of biodiversity loss, climate change, land and ocean degradation, pollution, and increasing risks to human health and food security, pose an existential threat to our society, our culture, our prosperity, and our planet”.
“The interrelated crises of biodiversity loss, climate change, land and ocean degradation, pollution, and increasing risks to human health and food security, pose an existential threat to our society, our culture, our prosperity, and our planet.”
Heads of global corporations feel the same way. The top (long-term) risks in terms of both likelihood and impact identified by the World Economic Forum’s Global Risks Report 2023 were failure to mitigate and to adapt to climate change, natural disasters and extreme weather events, biodiversity loss and ecosystems collapse, and large scale involuntary migration.
The second reason for the change in mindset to sustainability is the recognition that we are responsible for the situation we’re in today. This is not someone else’s problem, nor is it a particular constituent’s sole responsibility – nor will it fix itself. In other words, by our decisions and actions, governments, capital providers, companies, and consumers are contributing to climate change, biodiversity loss, pollution, wealth inequalities and growing social unrest, human rights violations, and discrimination.
The change in mindset to sustainability is manifested by the growing convergence toward a common understanding of what it means and what we need to do to achieve it. We are collectively becoming aware that the issues we face are not only global in nature, but that the three dimensions of sustainability–our economic, social, and environmental wellbeing–are both interconnected and concurrent. Interconnected, because we can’t really isolate the economic, social, and environmental dimensions of human activity. And concurrent, because we can’t hope to address these dimensions one at a time, or one after the other.
The pandemic provided a great empirical example of this. This was of course a crisis not only of people’s health, but many people also suffered from very difficult working conditions while others lost their livelihoods altogether. Many businesses closed, and supply chain disruptions we felt for months. We also learned that the source of the viral pandemic very likely traces back to the loss of biodiversity, due to years of deforestation and poorly planned urban development. Finally, the unequal distribution of vaccines across the globe only exacerbated social and wealth inequalities, despite jeopardizing our own self-interest. Surely, we can do better.
The global community is also converging on a common definition of sustainable development. By now, you’ve probably heard it defined as development that meets the needs of the present without compromising the ability of future generations to meet their own needs. This is the definition of the Brundtland report produced in 1987 by the World Commission on Environment and Development.
This very high-level definition has been made more concrete by the 17 Sustainable Development Goals – or SDGs – adopted unanimously by all members of the United Nations in 2015. They have been called “the closest thing the world has to a sustainability strategy.” Very simply, they aim to end poverty, protect the planet, and ensure peace and prosperity around the globe by 2030, and to “leave no one behind”. Somewhat less simply, the 17 goals break down into 169 targets and 232 performance indicators. Countless organizations, including governments, providers of capital, companies, and non-profit organizations have embraced the SDGs. The UN Principles for Responsible Investment provides research and resources for investors to align their responsible investment practices with the broader sustainable objectives of society, which in their view are best defined by the SDGs. And according to KPMG research on global corporate sustainability reporting practices, almost three-quarters of the largest companies in 49 different countries report their sustainability practices against the SDGs.
But what does this convergence of awareness and understanding of sustainability actually mean?
- The solution to these global, systemic issues must be global and holistic, in other words all constituents must participate: governments, capital providers, companies, NGOs, and individuals. We must work together, at the same time, on solving the same problems, with the same goals. In other words: all hands on deck.
- We must measure and manage the positive and negative social and environmental impacts of our economic activities, including those considered externalities, which the OECD defines as “situations when the effect of production or consumption of goods and services imposes costs or benefits on others which are not reflected in the prices charged for the goods and services being provided”. One way to include externalities in what we measure and manage is to properly value the commons – in other words the resources, capitals, inputs, and ecosystems that are necessary to so much of what we produce and consume, but belong to and affect the whole of our communities. These are not free, they are not limitless, and we all have a responsibility to take care of them. It is estimated that as much as half of global GDP is dependent on ecosystems and 13 of the 18 sectors that comprise the FTSE 100 are associated with production processes that have high or very high material dependence on nature.
- This convergence of awareness and understanding of sustainability means rethinking how we measure development beyond Gross Domestic Product to include measures of social and environmental wellbeing, or better yet circumscribing our economic development within social boundaries on the downside and ecological or planetary boundaries on the upside.
And what does it mean for companies?
For businesses, the growing collective awareness of the interconnection and concurrency of economic, environmental, and social considerations has spurred an evolution towards a more holistic approach to managing risks and opportunities, first to include issues of an environmental, social, and governance nature into their business strategy, risk management, and performance measurement, and second to include not only those issues that affect organizations, but also those issues that organizations can affect. These issues are multidimensional and complex, ranging from product safety to energy efficiency, water consumption, and waste management, from employee health and safety, to talent attraction and retention, and diversity and inclusion, from human rights, to cybersecurity, ethics and corruption, and responsible taxes. Indeed, ESG is an acronym designating a multitude of very different issues, which reside in very different places throughout an organization’s value chain, and are measured by very different performance indicators.
To be clear, not all sustainability issues affect all companies, and proper integration of sustainability rests on the proper identification of material issues, which can be defined as those that substantively affect the organization’s ability to create value over the short, medium and long term. Defining one’s material issues inevitably requires taking into account one’s stakeholders, including investors, but also bankers, insurers, customers, and employees, each of whom are themselves taking sustainability into account when making decisions that can directly affect companies’ operating performance and financial condition. There is indeed a direct connection between how well a company manages its material environmental, social, and governance risks and opportunities and its ability to generate cash flows — or value for itself — as well as its ability to reduce its negative impacts and increase its positive impacts — or value for the environment and society. Today, this is best encapsulated in the definition of corporate purpose, which the British Academy defines as profitably solving problems of people and planet and not profiting from creating them.
The urgency to act
Perhaps most importantly, the convergence of awareness and understanding of sustainability is igniting–many would say finally–a sense of urgency to act.
In the face of global warming, nature and biodiversity loss, worsening pollution, and pervasive social inequality, if we do nothing, we are, collectively, running into a wall.
A case in point is climate change. The world now agrees that i) climate change is real and caused by human activity, as demonstrated by 97% of the world’s scientists, ii) that it’s an “existential threat”, as stated by the US Treasury Secretary and many other high-level decision-makers, and iii) that there is an urgency to act, with science telling us we have less than ten years to reduce emissions enough to limit global warming to 1.5 degree Celsius and avoid the most catastrophic consequences of climate change.
If identifying the problem is good, having a solution is better. The world has started to rally around a common, global solution inspired by the commitments of the Paris Agreement. We are aligned on the science-based objectives of Net zero CO2 emissions by 2050, with interim goals of a 50% reduction in emissions by 2030 from 2010 levels. We are aligned on modelling, with the publicly-available scenarios of the Network for Greening the Financial System, which represents 91 central banks and financial supervisors. We are aligned on a strategy and roadmap, with the International Energy Agency’s Net Zero by 2050 plan. We are aligned on performance expectations for companies with the Climate Action 100+ Net Zero Company Benchmark, the Climate Transition Pathways Accreditation framework, and the Science-Based Targets Initiative’s Net Zero Standard, and we’re aligned on performance expectations for investors, with the Glasgow Financial Alliance for Net Zero and the PCAF’s Global Carbon Accounting Standard for the Financial Industry. We are aligned on performance indicators, with scope 1, 2, and 3 emissions, as calculated using the GHG Protocol. And finally, we are aligned on how to hold ourselves accountable, with reporting that follows the recommendations of the Task force on Climate-related Financial Disclosures (TCFD) now fully embedded in major reporting standards and regulations. In the face of this “code red for humanity”, there is still much work to be done. But the path is pretty clear.
I often refer to climate change as the sustainability issue that will open the door to all other issues, cutting a path on what to do and how to do it. So it’s encouraging to see the speed at which governments, capital providers, and companies are mobilizing in a concerted way to address nature biodiversity loss, with global targets set by the Convention on Biological Diversity of “no net loss” of biodiversity by 2030 and a “net gain” by 2050, with the recent release of the Task force on Nature-related Financial Disclosures (TNFD) action and reporting framework.
Three ingredients and two conditions for mindset change
Underpinning these global mobilization efforts is indeed the change in mindset to sustainability described earlier. I believe there are three essential ingredients to embracing the concept of sustainability:
- A much wider lens through which to assess risks, including those previously thought too uncertain to predict or too unlikely to consider;
- A much longer term assessment horizon, one that goes beyond our own lifespan and allows us to make the right decisions even when we are not the ones who will enjoy their benefits;
- A much broader embracement of the collective “we” to include all human beings, those who are present today and those of the future.
To these essential ingredients I would add two necessary conditions. The maturity to accept that this is not someone else’s problem, it’s ours. And the courage to change, not just incrementally but radically, what we value and therefore what we measure and manage.
There are encouraging signs of the shift in mindset to sustainability in all spheres of our ecosystem–governments, regulators, think tanks, researchers, capital providers, companies, non-profits, and individuals. It’s hard, it’s long, and it’s messy. It requires us to work together, at the same time, on the same objectives. And to do more, faster. Each one of us has a role to play, to put our shoulder to the wheel that’s already in motion.