Are we capable of learning?
“The world is on a downhill path towards more disruption, poverty and danger.” This is how Martin Wolf of the Financial Times recently assessed the global state of affairs after analyzing how the war in Europe has been multiplying fragilities. The uncertain outlook ranges from more state rivalry, financial instability, stagflation, further supply shocks to an increase in hunger and poverty, especially in developing countries. Sadly, the list is not complete. The level of heat-trapping gases in the atmosphere has reached a new record – 420 ppm, essentially showing that efforts to deal with the climate crisis have so far not bent the curve. Climate- and nature-related disruptions will compound uncertainties ahead of us.
What does this mean for the modern corporate sustainability movement and its financial equivalent, the ESG movement, which started to emerge about two decades ago? Voices claiming that these movements are doomed to become a footnote in history are already starting to be heard. Some of those who are making the case for the backlash against corporate sustainability and ESG are clearly motivated by the desire to protect established interests. They now see an opportunity to cast the movement as ideologically motivated, thereby relegating it to political divisiveness. Others are willing agents of the backlash for personal gain. But all share a surprisingly superficial way of reasoning, failing to take into account the broader context of the sustainability movement. And much of the popular press and media is happily playing along with the noise without probing relevant questions.
The modern corporate sustainability movement was premised on conditions that no longer hold in today’s world. A rules-based system and multilateral cooperation provided a predictable framework, including access to markets and natural resources. Low transportation costs and scale-and-efficiency effects led to the development of vast supply chains and ultimately helped hundreds of millions of people to escape poverty while creating enormous wealth for shareholders and skilled professionals. Universal values backed by UN conventions in areas such as human rights, labor rights, environmental stewardship and anti-corruption were respected everywhere, at least in principle. In a globally integrated marketplace, corporations all over the world were part of a race to the top, willing to improve environmental and social standards in order to be able to compete anywhere. As the influence of corporations grew, civil society rightly argued that power and responsibility cannot be separated and put pressure on corporations to improve their ESG performance.
Today, we face an entirely different world. Market supremacy and multilateralism are retreating while protectionism is back. Security issues and the ancient game of state power are reshaping framework conditions for markets in profound ways. Corporations have already started to react to the new emerging order, seeking new tradeoffs between efficiency and resilience by reconfiguring supply chains and making investment decisions that mitigate political risks. Will compliance with political regimes become the new north star for corporate survival and growth, at the expense of the corporate sustainability and ESG movement that dominated over the past two decades?
History is not necessarily a reliable guide for the future, but it is noteworthy that similar questions were asked in the aftermath of the financial crisis of 2007-2009. The argument then was that corporate sustainability would fall victim to cost cutting and to the need to focus on core business functions. The opposite turned out to be true. Corporations maintained or increased their sustainability efforts as part of their survival strategy, realizing that it was essential to rebuild trust. Shortly afterwards the financial industry discovered what many business executives had long known: good ESG performance is a necessary precondition for long-term success. Today, corporate sustainability and ESG analysis are robustly embedded in corporate boardrooms and in the valuation strategies of investors and regulators, while consumers continue to exert incentives and pressure that drive the movement.
Moreover, three megatrends driving sustainability issues show no sign of slowing down: first, the irreversible trend to price climate change-related externalities and the degradation of the natural environment are bound to intensify over time; second, technological change - in particular AI and digitalization - continue to disrupt business, improve transparency and the measurement of sustainability issues, and thereby facilitate their inclusion in decision making; third, people everywhere, especially among younger generations, are increasingly demanding faster change in order to balance profit, the planet and humanity.
How will these trends interact with the uncertainties associated with political and macroeconomic changes? And how will this influence the future of corporate sustainability and ESG?
1) Environmental Issues – a Strategic Imperative
Irrespective of political power games and economic cycles, the continued buildup of heat-trapping gases in the atmosphere and the destruction of eco systems will increasingly force our hands. Eventually, emissions will have to be priced high enough to motivate systemic change. This is bound to become a central theme for societies and markets. Business has started to anticipate these changes as is evident in the growing number of corporations that are aligning with the Science Based Targets initiative. Corporations are well advised to double down on decarbonization and environmental stewardship. For investors seeking to thrive in the long run, it is becoming ever more important to fully account for climate and natural risks and for corresponding opportunities.
The current supply chain disruptions and the rising raw material prices are also opening up new opportunities for closed-loop material flows and new business models. “Cradle to grave” concepts have been around for decades. But they have had little impact, as it has been more cost-effective to “extract, process, use and throw away”. A mixture of market-induced price increases and new regulation in areas such as plastics may now prepare the ground for new process designs that will ultimately lead to closed-loop material flows.
2) Bridging the Divisiveness of Social Issues
As governments take on a greater role, one might expect that social issues will become less important for corporations and investors. However, rising inequality, political divisiveness within countries and social movements that challenge established norms will continue to require corporations and investors to continue to adapt. So do changing workplace practices and the race to attract and retain talents. Cultural changes are not slowing down. No doubt, the social agenda will play an ever-greater role.
In addition, system rivalry between big powers is instrumentalizing human rights. Corporations and investors are easily caught between a rock and a hard place. For businesses to retain a license to operate, they need to navigate conflicting signals while ensuring that their human rights policies and practices are state of the art and that their own operations do not infringe on human rights. In a more divisive world with competing agendas and less willingness to collaborate, business may explore opportunities to rediscover the importance of universal principles as advocated by the UN Global Compact. Searching for a new balance between efficiency and scale on the one hand and less exposure to political risks on the other will require corporations to better adapt to local conditions. But going more local can only succeed if the same high standards and values are upheld everywhere.
3) Leveraging Technology to Drive Sustainability
Uncertainty about the future is not slowing down technological change. On the contrary, crises and disruptions lower barriers against change and increased the willingness to experiment with new approaches. We are entering a new era where a range of technological breakthroughs are redefining the capabilities of human ingenuity. The nexus between technology and sustainability is becoming the new sweet spot for forward-looking corporations. New forms of collaboration in a number of sectors of the economy can already be observed, including energy, transport, and material processing, where sustainability imperatives, such as decarbonization, are met with innovative business concepts that leverage technology.
The advance of artificial intelligence and data-driven business models will also disrupt finance and help to firmly embed sustainability goals in analysis and decision making. Digital platforms and smart analytics as advanced by ESG Book will greatly facilitate the utility of ESG data and thus overcome the current shortcomings of ESG ratings, improve dialogue with investors and ensure that ESG data is publicly accessible and comparable. Advances in ESG data will also help to overcome the current backlash. ESG-related information will grow in relevance for corporations and investors alike. In times of uncertainty, the availability of ESG information is even more important to better assess risks and opportunities which are not (yet) part of the market price. The prospect of regulatory requirements to disclose relevant information and recent efforts to establish a global base line as spearheaded by the International Sustainability Standards Board (ISSB) will add further momentum.
4) Rediscovering Corporate Citizenship
Sadly, the world is utterly off target to meet the UN Sustainable Development Goals. As political and environmental risks and disruptions are bound to lead to more humanitarian emergency situations, corporations and investors with a global footprint will be challenged to adapt their “corporate citizenship” activities. Philanthropy and community engagement are only a tiny fraction of the corporate economic footprint but can make a huge difference in the lives of people in need and can greatly nurture a purpose-driven corporate culture. Supporting trusted humanitarian global organizations which are not tools of power politics or an extended arm of narrow national interests can not only save the lives of innocent children but also help to rebuild a sense of humanity that connects and nurtures.
The world is moving in the wrong direction. Corporations and investors have no choice but to adapt to changing framework conditions, comply with sanctions and hedge political risks. The prospect of inflation, further supply chain disruptions and slowing growth will all require adjustments to ensure survival. At the same time, the irreversible forces of technological change and destruction of the natural environment not only pose new threats but also new opportunities. Corporate sustainability and ESG will not only survive, but increasingly become integral to strategy and decision making powered by technological advances and driven by the imperative to cope with a messy world.
The movement will evolve and adapt, but it is in search of an updated narrative. The nexus between technology and sustainability offers a solid basis on which strategies and operations can be built. And in the broader context of human co-existence beyond the narrow confines of historical coincidences, such as where we are born or what kind of culture we are exposed to, there is now an opportunity to revive the universal values of respect, decency, and good stewardship, as advocated by the UN Global Compact. Moreover, the climate agenda offers opportunities to collaborate beyond political divides which hopefully will inspire governments to rediscover that the enemy is not “them” but us.
