Week 45: Bold Innovations, Sustainable Solutions, and the Path Forward

Dear all,

This will be my first contribution to ESG on Sunday. For those of you who subscribed to Sasja Beslik’s ESG on a Sunday newsletter, it might feel a little awkward: not the same tone of voice, sometimes different topics, or another perspective. The good news is that, at least to my knowledge, we agree on most of the topics.

We are in a world that is burning, we need systems change and in the meantime, we see too little action (especially in the financial sector). So, what you can expect on your Sunday morning, most of the times: news, analysis and calls to action.

My version of the newsletter will consist of different elements: opinion, overviews of interesting reads and background stories. For my first ESG on Sunday, I kick off with a reflection on useful and useless innovation.

Bold innovations

Innovation represents one of the remarkable abilities of human nature: our capacity to conceive of something that does not yet exist and to subsequently invent and create it. That’s why so many people believe that innovation and technological progress will solve our urgent sustainability problems.

When innovation is exclusively harnessed to perpetuate our unsustainable present system, however, it leads us nowhere. Genuine, audacious innovation lies in our pursuit to downsize our economy, thereby enhancing the well-being of future generations. It also depends on the primary actor of innovations. Should and can it always be business?

Technology to the rescue

I've engaged in the same conversation countless times. It typically starts with unanimous acknowledgment: indeed, we are facing significant challenges posed by the climate crisis, the biodiversity crisis, and the water crisis. There's no denying or evading these issues. And we also always agree that we must be prepared to take bold measures to render our economy more sustainable.

So far the agreement. The disparity often begins with our understanding of the term ’bold’. Many people tend to believe that technology will be our savior. They argue that with the implementation of the right policies, such as pricing externalities (currently only at a global 23% level ), we will gradually shift from polluting production and consumption towards a cleaner economy.

These believers cite evidence like the absolute decoupling of carbon emissions from economic activity, which (supposedly) is occurring in various countries. Technological solutions, including renewable energy, energy efficiency, circular design and genetic modification are seen as the key to our salvation. The International Energy Agency publishes reports illustrating the potential of technology. And yes, I concur, it is truly impressive what humanity can achieve.

However, there is no evidence that it works. If we look at carbon decoupling, we only see it happening in some countries. For instance, the UK is one of the success stories in that sense, but even there decoupling is by far not going fast enough to reach the goals of the Paris Climate Agreement. And if we look beyond carbon emissions, there is no evidence that we can decouple economic activity from resource use and pressure on our planet. As a recent scientific article states: our ecosystems are entering unchartered territory, and growth dependence is one of the biggest problems.

The predicament lies in the fact that techno-optimism essentially equates techno-conservatism or techno-preservation. Techno-optimists primarily champion technological solutions that uphold the existing status quo, ultimately reinforcing the current unsustainable system by merely mitigating its negative aspects. Their focus is predominantly on modifying rather than transforming the supply side of the economy. So, focusing on carbon capture and storage for example, rather than stop burning fossils.

It is also underpinned and funded by the very growth-centric rationale that has led us to this point in the first place. These are deemed as 'investment opportunities’, including the creation of new asset classes, such as nature, all in the pursuit of profit under the guise of sustainability transitions. Market-centric innovation leads to solutions, yes, but also more often to increased use of resources: that is how markets work. More efficient combustion engines led to heavier cars. More efficient electric cars lead… to bigger electric cars. This rebound is inherent to markets and negates the sustainability objective of a solution.

I am a firm believer in progress and the potential of human intelligence. However, it requires a substantial dose of optimism to assume that technology alone will provide all the solutions. It's akin to jumping from a plane and checking for a parachute just before you hit the ground.

In my thinking, true boldness in the modern era necessitates that our foremost economic goal be the preservation of our planetary boundaries, given our current overshoot. This entails acknowledging the imperative of setting limits to economic activities. In essence, this means consciously downsizing resource consumption and curbing pollution, rather than relying on the demand side of the economy to naturally adjust.

Technological or social innovation

To get there, we need innovation. In essence, according to the Oxford dictionary , innovation is nothing other than “the introduction of new things, ideas, or ways of doing something". Successful innovation creates value: individuals or society find satisfaction in its outcomes. It should be meaningful for people. And this can be anything: more efficiency that saves people time. Artificial Intelligence that can easily create knowledge and ideas from existing knowledge. But innovation can also be, for instance, new organisational or institutional structures: care cooperatives, organic food services, Uber taxis, citizen councils. Novel ideas and innovation thrive continuously, building upon the foundations of prior knowledge. This requires both technological advancement and social innovation.

On the technological front, it requires not only innovations like renewable energy, electrical vehicles or VR-glasses, but also innovations that reduce resource consumption, that make current infrastructure or products obsolete. Or innovations that create value, but not necessarily lead to higher profits. Consequently, innovation does not need to be solely driven by market forces. This underscores the importance of an expanded governmental role in developing and implementing technologies for the common good, as opposed to market-driven innovation.

Innovation isn't exclusively confined to the realm of technology. There are innovative developments in alternative ownership structures, as exemplified by steward-owned businesses, cooperatives, and social enterprises. There is potential for innovation in sharing models that facilitate more efficient resource utilisation. A genuinely circular economy, where products have longer lifespans and where repair and refurbishment take precedence, inherently aligns with a strategy for degrowth. Additionally, we can nurture social innovation in the way we collaborate, establish and maintain trust, and collectively create value as a society.

Direction of innovation

What's intriguing is that, although innovation can be anything, it is often framed as a ‘business-thing’.

The innovation process isn't specific: the direction of innovation is often determined by those who finance research. Moreover, since 'value' is inherently subjective, there's no assurance that value equates meaningful solutions for societal problems.

If we leave innovation to markets, they will only invest innovation where the expected Net Present Value (NPV) is positive. And the only way then to direct this to societal needs, is to make sure that these innovations have a positive NPV. In the case of climate change, either by pricing carbon (where alternatives become more attractive), but even more so, with subsidies (e.g. the Inflation Reduction Act in the US or the European Green Deal). Through subsidies, governments play an important role in stimulating and directing markets to make useful innovations.

This is why most of the innovations, also in the energy transition, circular economy or food and agriculture are directed at making more profits. All solutions leading to lower demand, longer product life spans or less products sold are not viable innovations in that sense.

But there are other ways. The first one is what I call the Mazzucato-way (see for instance her book the value of everything : public investments may stimulate innovation that the market cannot deliver. These investments in for instance fundamental research, infrastructure or public services can later be the foundation on which business can build. This would be a reason to give governments a more prominent role in innovation. Maybe we need to stretch this role a little. Not only by investing, but also by setting norms or regulating markets.

Another route is that business aligns its purpose with societal needs. This Harvard Business Review article contends that innovation (by companies) is intricately linked to purpose. The best innovations reinforce a company’s purpose and create mutual value for its key constituents: the customers, employees, suppliers, communities, and investors that together have a material “stake” in the innovation’s outcome. Failed innovations, on the other hand, disappoint at least one stakeholder group, creating conflicts that can cascade to other stakeholders and to other products, potentially endangering the entire company.

A last direction I want to mention here is a difficult one for investors: a lower return on investments might sometimes lead to – in the long run – more useful innovations for society. At least, lower required returns gives more space for experiments (here of course every investor would contend that we need more risky capital like venture capital or public de-risking. But my claim is that if we reduce overall the profit incentive from maximum to sufficient, that might help the world).

Innovation for the common good is what we truly require. Innovation in ideas, processes, technology, etc. to bring our economy back to within planetary boundaries. Sometimes it manifests as technological progress, at other times as social innovation. However, it should consistently serve the common good, without the primary goal of preserving the status quo of perpetual growth and profit maximalisation. This is what we, in our optimism, should focus on.

What is new(s)

A few things to mention from a lot of news.

• Another record warming month : Last month was the hottest October since recording began, with average global temperatures thought to be 1.7?C above late-1800s levels
• In the run up to COP28, the Adaptation Gap Report finds that the adaptation finance needs of developing countries are 10-18 times as big as current international public finance flows. This is over 50 per cent higher than the previous range estimate. And the negotiations about an international loss and damage fund are unsuccessful so far.
• The conclusion of a nature paper published this week is crystal clear and highly uncomfortable: the remaining carbon budget to keep warming within 1.5 degrees or 2 degrees is smaller than previously thought. To be precise: keeping global warming limited to 1.5 degrees requires us to be net zero already by 2035, not 2050. For 2 degrees, it is 2050. So, we need to speed up. Big time.
• Global wealth inequality is expected to increase further in the coming years according to a report of UBS wealth management. In 2022, the world's millionaires held nearly half of the global net household wealth. The wealthiest echelon controls 45.8% of the global total (1.1% of the world's adult population). The lowest wealth segment has considerably shrunk since 2000, declining from 80.7% to 52.5% of the global population between 2000 and 2022. Although projections indicate a continued decrease, the total share of wealth controlled by this group remains at just 1.2% of the global total. In the next five years, the rich are poised to become even richer, the less affluent only a little bit more affluent.
• Tax evasion is still a global problem according to a report from the EU tax observatory. A significant amount of profits continues to be shifted to tax havens, totaling $1 trillion in 2022. The global minimum tax of 15% for multinationals, which generated high hopes in 2021, has been substantially weakened and tax evasion by companies and individuals has taken a flight, with global billionaires enjoying effective tax rates equivalent to 0% to 0.5% of their wealth (if you are Dutch like me and you read the report, you won’t be proud ??).

That’s it for this time.

Take care.

Hans