Redefining business success for a net-zero future
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The planet鈥檚 ecosystems are nearing critical tipping points, with extinction rates 100-1,000 times higher than they were a century ago. Our current economic system has put natural resources under ever-increasing pressure. As the recent UK Treasury-commissioned Dasgupta Review of the Economics of Biodiversity puts it, our economies 鈥渁re embedded within Nature 鈥 not external to it.鈥 The task now is to embed this recognition in our 鈥渃ontemporary conceptions of economic possibilities.鈥
Many businesses, recognizing the perils facing the planet, are changing the way they operate. But they can鈥檛 do it all alone, and the current rules of our financial and economic system must change if we are to build an equitable, nature-positive, net-zero future.
Such changes make economic sense. Firms that take a long-term view and meet the needs of all stakeholders by prioritizing environmental and social risks and opportunities over short-term gains and profitability outperform their peers in terms of revenue, earnings, investment, and job growth. Similarly, companies with strong environmental, social, and governance (ESG) policies perform better and have higher credit ratings.
According to the World Economic Forum鈥檚 2021 Global Risks Report, four of the top five risks to our economies are environmental鈥娾 including climate change and biodiversity loss. Human-driven nature loss, its links to the spread of diseases such as COVID-19, and the estimated US$300 billion annual cost of natural disasters caused by ecosystem disruption and climate change highlight the risks of unbridled economic growth. Thinking beyond GDP and short-term profit is therefore essential in order to restore our relationship with the planet and transform our system into a viable one.
The true risks arising from nature loss and climate change often are not accounted for or understood, including by investors. The economic cost of land degradation amounts to more than 10 percent of annual gross world product, and human-caused declines in ocean health are projected to cost the global economy US$428 billion per year by 2050. The flip side is that shifting toward a nature-positive economy could generate US$10 trillion of business opportunities and create nearly 400 million jobs.
Thriving companies supporting this transition are in a true leadership position. But if a sustainably-oriented firm鈥檚 profits dip, reality hits. Investors often chase short-term profits instead of using ESG indicators as a credible proxy 鈥 alongside financial performance鈥 鈥 鈥妕o measure a company鈥檚 value. This definition of business success must change.
Purpose-driven
Consider the case of consumer goods multinational Danone. In 2020, Danone became the first listed French company to adopt the model of an entreprise 脿 mission, or purpose-driven company, when 99 percent of shareholders agreed to embed sustainability into the firm鈥檚 governance structure. This year, the company came under increasing pressure from activist shareholders鈥 owing to what they regard as the firm鈥檚 鈥減rolonged period of underperformance.鈥 While Danone鈥檚 share price has underperformed those of its rivals, the company is not in the red. Nonetheless, in March it announced the departure of Chairman and CEO Emmanuel Faber, who had championed the firm鈥檚 sustainable business model.
It is fair to say that not all shareholders value the same things, and the fact that investors are questioning companies鈥 ESG efforts can only be positive. But that should not stop advocates of a purpose-driven strategy that considers a wider range of stakeholders and their interests from seeking ways to strengthen the rules and bolster non-financial performance further. As the Dasgupta Review argued, we must 鈥渃hange our measures of economic success to help guide us on a more sustainable path.鈥
First, we need meaningful and credible ESG data alongside traditional financial reporting in order to counter accusations of greenwashing. Corporate performance indicators must embed the true value of natural, social, and human capital to reveal the full state of health of the planet, people, and profits. To that end, efforts are underway to develop a globally accepted system for corporate disclosure of both financial and sustainability information.
Second, all investors should stop investing in activities that have a highly negative impact on the climate and biodiversity, and they should call for companies in their portfolios to issue reports aligned with the Task Force on Climate-Related Financial Disclosures and the more recently established Task Force on Nature-Related Financial Disclosures. BlackRock, the world鈥檚 largest asset manager, has asked all firms in its portfolio to do this by the end of 2020, and a group of major investors worth US$4.7 trillion鈥娾奾as committed to making their portfolios zero-carbon by 2050.
Lastly, and perhaps most important, governments must implement ambitious policies that reflect a vision of the sustainable economy to which we aspire. Such measures could not only unlock new business opportunities but also create a level playing field and stable operating environment. In the run-up to the United Nations Biodiversity Conference (COP15) scheduled to take place in China in October, more than 700 companies are urging governments to adopt policies now to reverse nature loss by 2030. And just recently, the UN adopted a landmark framework to integrate natural capital into economic reporting.
The coming post-pandemic recovery gives the world a chance to embrace such reforms. We must rewire our economic system and reward sustainable, long-term performance that goes beyond financial returns.
Paul Polman, Co-Founder and Chair of IMAGINE, is Chair of the Food and Land Use Coalition. Eva Zabey is Executive Director of Business for Nature. Copyright: Project Syndicate, 2021. www.project-syndicate.org
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