Given the general meltdown in the economy, some people archly are suggesting that the time has come to forget about “secondary” issues like sustainability. Since some of these same critics didn’t want to pay attention when markets were riding high, we shouldn’t be surprised.
So this might time for a quick review of Sustainability 101.
First, let’s sort out the mishmash of terms that entangle the field – strategy, responsibility, citizenship, and sustainability, and the newest and most popular contendor, “ESG” factors (for “environment, social, and governance”)
In one sense, these approaches share a fundamental concern: they all ask: what are the ingredients or pathways for lasting value for a firm?
“Corporate strategy” is about picking goals and then reverse-engineering the steps to get there. It has traditionally encompassed all the traditional areas of business – marketing, production, finance, innovation, human resources, and so on. Most firms – driven by stale accounting rules, quarterly earnings expectations, and compensation structures – focus their strategies on the short to medium term.
“Sustainability” is about understanding the long term structural evolution in the interactions of markets, societies, and the physical world.
This raises a few questions.
1) Is it primarily a question of short-term vs. long-term?
No. Time is an important element. But it also a question of where leaders are focusing their attention.
Let me use an analogy. Traditional business strategy is like a group of people playing certain kinds of competitions — musical chairs, shuffleboard, ping pong – on the deck of an ocean liner. As long as the ocean liner plows steadily forward in a calm sea, people can afford to concentrate on the immediate challenge of winning the game and advancing in the tournament.
But let’s say the ocean liner runs out of fuel, enters a storm, strikes an iceberg, or come under attack by pirates. At that point, the conditions of play on the deck change, either slowly or abruptly. Some of the skills that could lead one to succeed at winning tournaments may be less helpful in coping with these more systemic assaults.
Indeed, one could argue that the more one concentrates on the short term goals of winning a particular game, the less one is inclined to look up and notice where the ship as a whole is headed.
So, one way to look at the difference in terms is that traditional business strategy is about mastering the skills to win games on deck. Sustainability is about reacting to the conditions that surround the ship. Both are important.
Following this analogy, in the short-term people can do quite well and win a string of victories on deck without paying attention to where the ship is headed.
But lasting success – and in some cases, survival — for the firm, the economy, or the planet means also cultivating an awareness of what is happening in the greater surroundings.
2) So then what is “corporate responsibility” or “corporate citizenship”?
People employ these terms loosely to suit their own purposes, and this often creates confusion. Sometimes the terms are used superficially, sometimes more profoundly.
To go back to the ocean liner image, CSR or citizenship can mean everything from insisting that people obey the rules of shuffleboard or wear dress whites to more comprehensive ideas such as making sure that everyone has the chance to play. It can mean obeying the law or rethinking every aspect of business practice.
“Sustainability” is a far more comprehensive idea than citizenship or responsibility, because it focuses on interdependence and on the future. Sustainability analyzes the underlying structural conditions that advance or hinder the creation of lasting value in ways that won’t ultimately sink the ship.
3) What are some recent examples?
Let me offer three that are on people’s minds right now: the subprime mortgage collapse, the US auto industry’s strategic failures, and the transition to clean technology investment because of climate change.
Take the subprime mortgage crisis. As we know, too many people focused on technical financial innovations such securitization, leveraging, and hedging. It was very exciting and for some people very profitable in the short term. But as people became more excited about the games on Wall Street, forgot to ask very basic questions about the long-term health and sustainability – in both senses of the world – of their assumptions. Was the ship leaking? Where was it headed? This is the classic problem with any bubble; one forgets the fundamentals. Thinking about sustainability rigorously is another way of looking more deeply at the fundamentals of wealth creation and distribution in a society.
Or take the American auto companies. The auto companies, despite their global operations, lived in an insular and self-reinforcing mental world.
• They chose to build their profit structure off of high margin SUVs that appealed to the US market and they ignored the clear global signals about energy and product development.
• They tried to bend the American and global consumer back towards what had worked in the mid-20th century rather than accepting what was coming in the 21st.
• They also ignored a major social dimension to their cost structure, which is our exclusionary system of employer based health care. Every other country that makes cars relies on a more equitable distribution of health care risks and costs through national health insurance. The irony is that because of their narrow world view of the auto leaders, they could not even perceive their own corporate interest, so their cost structures required them to build in employer based health insurance costs into every car. If they had cooperated with the labor movement as a whole, which had been asking for national health insurance for 50 years, their cost structure would have been more competitive.
Finally, let’s look at climate change. The evidence has been growing for more than twenty years that this was a serious, potentially devastating structural problem that would affect virtually every industry, region, and investment portfolio in some way.
Yet up until very recently for years leaders on Wall Street took the position that said, in effect, “if this were an important question we would already have thought of it.” That’s the self-defeating aspects of the proponents of efficient market theory; because they assume that all relevant information is already known, they can actually be reluctant to accept new ideas and new realities.
It took outside groups like Ceres and the Investor Network on Climate Risk — huge institutional investors, activist and environmental groups — to point out that the both the physical and financial assumptions had changed.
Now we are seeing the realities of carbon pricing and clean technology are reshaping the technological and financial world. By looking at the emerging structural conditions revealed by sustainability, some companies – many of them European and Japanese companies – were able to get the jump on innovation.
Many Americans still haven’t absorbed the message. Scientists have agreed that we have to return to the level of 350 parts per million of CO2 in the atmosphere. To do trillions of dollars are going to flow from old to new practices. Many venture capitalists feel that such a transition is going to be more significant in terms of the realignment of wealth and productivity than the computer or the Internet.
So what lies ahead?
Of course right now everyone’s focus – in government, in business, in investment, and in communities in the US and around the world – is on the urgent task of trying to stop the damage cause by the false assumptions of the past. That will take awhile. The real question is whether, as we come out of this, we will be able to draw any lasting lessons.
The normal human tendency will be to think “now that we come through that awful period, we finally have everything right.” But that’s not going to be the case. The underlying structural conditions will continue to evolve, in some instances even more rapidly, which means that paying attention to sustainability will be even more important.
For business leaders, managers, directors, and fiduciaries, this means, to go back to the analogy of the ship, that board members will need to stop paying so much attention to the games on deck and start watching for icebergs. They will need to spend more time looking out at the horizon and offering what may be disturbing advice, rather than falling into groupthink. More and more directors realize that this is fundamental duty that they owe to shareholders, beneficiaries, employees, and other stakeholders. A recent study showed that more than 70% of corporate board members agree that they need to be paying attention to these long-term questions. But they don’t yet have all the tools for doing so.
One tool, of course, is long-term scenario planning. Another that is being widely adopted is that of trying to set goals and measure sustainability performance through generally accepted indicators like the Global Reporting Initiative. This helps everyone — directors, managers, investors, customers, and public officials. Such reporting is now becoming widespread; a recent study by KPMG said that three quarters of the world’s 250 largest corporations have not introduced this practice. I think eventually it will be integrated into traditional financial reporting and required of all publicly traded firms. That would be very helpful for everyone, though I am sure some people will complain that they don’t see any reason to do this because they never had to do it before.
At the same time, we are still in the early stages of understanding the connections between the interdependent evolution of structural conditions on the planet — which includes topics as diverse as population growth, biodiversity, water use, income disparity, and energy – to the prosperity of firms, industries, nations and humanity as a whole.
But we need to do so, and quickly. If we are only paying attention to the games on the deck, our global ship is likely to hit a rock or an iceberg at some point. And then we will be battling to get into the lifeboats and trying to figure out how, with all our skills and technology, we could have been so blind.