When the business case fails sustainability

The need for purposeful, ethical leadership

Over recent years a number of studies have demonstrated that companies who focus on environmental, social and governance (ESG) factors can outperform financially (e.g. see here, here, here and here), but there are also studies that challenge this view (e.g. here, here and here). It is a nuanced and contested space. It would be great if the business case for sustainability was unambiguous, but this is simply not the case. And certainly not at the moment.[1]

Figure 1 shows how for decades we have liquidated our stock of ‘natural capital’ in pursuit of ‘produced capital’. There is no indication of significant policy shifts that will radically change this long-run trend any time soon.[2] Indeed, a study of 140 countries found that no country has yet been able to uphold a minimum social foundation for its population at the same time as staying within environmental limits. The political polarisation that we are seeing globally will make it even harder to close this gap through effective policy making.

Source of chart (text added): Managi, S. and Kumar, P.? (2018) Inclusive wealth report 2018: measuring progress towards sustainability, United Nations – cited in Dasgupta, P. (2021) The economics of biodiversity: the Dasgupta review, Report for HM Treasury, UK

While many corporates and investors wait for a robust business case for sustainability to emerge, something that can only be brought about through decisive government action, the ethical case for transformative action only grows stronger. In the words of UN Secretary-General António Guterres:

“...our world needs climate action on all fronts — everything, everywhere, all at once."

The hard reality is that closing the widening gap between the depletion of natural capital on the one hand, and the accumulation of produced capital on the other, will require policy makers and corporates to make bold and difficult decisions. How are business leaders to lead change when faced with the reality that policy makers may not take the necessary steps to ensure that market incentives provide a clear business case for action – at least in the short-term? I believe that we need purposeful, ethical leadership at all levels within corporates and financial institutions.

Purposeful leadership

In his book Grow the Pie, Alex Edmans, Professor of Finance at London Business School, notes that it can be challenging to accurately calculate the net present value of an investment decision or a new innovative venture, particularly in industries that are reliant on high levels of intangible value (according to one recent study, 90% of the S&P 500 is comprised of intangible value). He uses his book – and this insightful TED talk – to set out how purpose, rightly conceived, can help unlock corporate decision making when the answer cannot be found in a spreadsheet.

Organisations that are guided by a clear sense of purpose and that can find innovative ways of deploying their core capabilities are, according to Edmans, far more likely to make investments into activities that ultimately “grow the pie” for both stakeholders and shareholders, thereby enabling a company to deliver both purpose and profit by creating financial as well as social value over the longer-term.

Ethical leadership

In order for a corporate purpose to be fit for purpose it needs to respect environmental and social limits and help colleagues to navigate difficult decisions in an increasingly polarised world where businesses continue to generate profits by externalising costs.[3] Making decisions in this context often requires the balancing of difficult trade-offs and dilemmas.

We must find appropriate and just solutions that consider the needs of multiple stakeholders in a resource constrained world, where the needs of current generations often trump those of future generations and lead us to ignore injustices of the past. Weighing up financial, social and environmental considerations will require business leaders to have a much stronger grasp of frameworks and approaches to decision making and engagement that can help them understand what is ‘right’ using a much broader perspective than has often been the case in the past.

Figure 2 shows how different schools of philosophical thought view the underpinnings of ethical behaviour:

• Consequentialist ethics is concerned simply with the outcomes/consequences that are generated by our actions and give little weight to the underlying motives or principles that led to those actions being taken (utilitarianism being the most widely known and adopted approach here).
• Non-consequentialist ethics asks that we make our decisions and act on clear and consistent underlying motivations/principles, irrespective of what the final outcomes may be (e.g. the UN universal declaration of human rights and Immanuel Kant’s categorical imperative).???????

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Adapted from: Crane, A. and Matten, D. (2010) Business ethics, 3rd edition, Oxford University Press

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At times we may be concerned about collective wellbeing (i.e. utilitarianism) and generating positive outcomes for society at large, even if the rights/livelihoods of smaller groups may have to be compromised in the process. For example, the closing of coal mines in vulnerable communities to protect the planet and its eight billion inhabitants from the intensifying impacts of climate change. Even if we were to follow just transition principles it would be hard not to infringe in some way on the rights of these communities. At other times we may take decisions to uphold the rights of minority groups irrespective of the costs that this may pose on wider society. This was the case with the abolition of the slave trade which caused the price of sugar in the UK to rise by 48%. It is now widely agreed that upholding human rights within supply chains, even if this means that thousands or millions of consumers must pay higher prices for products, is the right thing to do.

This balancing act between non-consequentialist and consequentialist viewpoints is what makes the social dimensions of sustainability much harder to navigate compared to environmental and governance issues where there is more agreement on what ‘good’ looks like (e.g. science based targets for companies wishing to make a fair contribution to tackling climate change and the loss of nature, or international standards on good governance). We need a new generation of business leaders who are better equipped – and willing to dedicate the necessary time, effort and resources – to navigate and respond to some of the more nuanced and difficult sustainability-related trade-offs and synergies that impact multiple stakeholders across time and space. This will be key to ensuring a just transition for all.

Leadership amidst complexity

It has been argued that we have entered a BANI world – that is, a world that is brittle, anxious, non-linear and incomprehensible (this is an advancement on the US Army’s idea of a VUCA world – volatile, uncertain, complex and ambiguous – that was popularised in the 1980s/90s). Businesses such as IKEA have started to switch from traditional forecasting to scenario planning as a way of navigating this growing level of complexity and uncertainty, where future outcomes are increasingly hard, if not impossible, to predict. At the same time we will need business leaders to be comfortable with using multiple ethical approaches and viewpoints to help their teams navigate this complexity and achieve “long-term wellbeing for all people and planet”, which can be seen as the overarching goal of sustainability.[4]?

Guided by a clear sense of purpose and robust ethical frameworks we need those working in business and financial institutions to transparently advocate for policies that create a clear business case for action on sustainability by changing market incentives. Changing the economic, political and legal systems within which businesses operate is complex, contested and takes time, but it will be essential to ensuring market incentives actively encourage businesses “to solve the problems of people and planet profitably, and not profit from causing problems”. We all have a role to play in ensuring we have the right policies in place to tackle pressing environmental and social issues.

Taking action on sustainability is complex and requires action on all fronts. But that has always been the challenge of leadership and business leaders should be up for the task. We cannot sit back and wait for a clear business case for action to miraculously emerge… we need to co-create the future we want. Purposeful, ethical leadership will be key to this.

[1] I’ve argued elsewhere that the erosion of government revenues from income taxes and social security contributions over the coming years may force governments to shift their taxation to tackling pressing environmental and social issues. In 2020, 24% of total government revenues across OECD countries came from taxes on income (40% in the USA) and a further 26% came from social security contributions. It is likely that these important government revenue streams will be eroded in places like the EU, USA and China as working age populations fall and as we see disruptions to job markets due to the exploding capabilities of AI. Governments will likely have to resort to a range of alternative taxes – including environmental taxes – to plug already historically high fiscal deficits. This could change the business case for action on sustainability considerably, but it remains uncertain given the globalised nature of supply chains and the political feasibility of adjusting tax structures in different parts of the world.??

[2] The UN Inclusive Wealth Index incorporates natural, human and physical capital into a holistic measure of wealth. Natural capital = natural resources and ecosystem services (including air quality, biodiversity and climate systems). Human capital = human health, skills and education levels. Produced capital = physical infrastructure (e.g. transport, housing, utilities and information and communications technologies).

[3] Economists talk of ‘externalities’ in situations where products do not bear the full social and environmental costs of their production, or when a cost or benefit produced by one party is passed on to a third party.

[4] In their widely used textbook, The Elements of Moral Philosophy, James and Stuart Rachels argue for an ethical approach that they call Multiple-Strategies Utilitarianism. “The ultimate end”, they note, “is the general welfare [of society], but diverse strategies may be endorsed as means of achieving that end.” This is aligned to the idea of long-term wellbeing for all people and planet. James and Stuart Rachels also provide a ‘minimum definition’ of morality that offers a helpful starting point for considering how we make decisions: “Morality is, at the very least, the effort to guide one’s conduct by reason – that is, to do what there are best reasons for doing – while giving equal weight to the interest of each individual who will be affected by what one does.”