Depending on what you’re reading at the moment, you might have come to the (reasonable) conclusion that the world is on the brink. Issues like climate change, ocean acidification and habitat destruction continue to worsen and make headlines around the globe.
The good news is that business leaders are paying attention, and are increasingly focused on being part of the solution. In a recent Accenture survey, 99 percent of CEOs state that sustainability is important to their company’s success. Almost 70 percent of business school students want to incorporate environmental sustainability into their future jobs. But we’re running out of time to find solutions to our biggest challenges, and in many ways we are looking in the wrong places. Instead of making incremental progress by tinkering around the edges of the market with new products and services, business must now transform it.
After all, if business can’t fix these problems, who will? Solutions to these challenges can only come from the market, the most powerful institution on earth, and from business, which is the most powerful entity within it. Business transcends national boundaries and has more resources than many nations. Business is responsible for producing the buildings that we live and work in, the food we eat, the clothes we wear, the cars we drive, and the energy that propels them.
Business is best positioned to bring the change we need at the scale we need it. So what does that change – and the leadership needed to drive it – look like?
Market Transformation: A New Way of Doing Business
The first phase of business sustainability, which has been in place since the 1990s, is what we call “enterprise integration.” This is about companies responding to sustainability risks and opportunities brought on by market shifts with the goal of increasing competitive positioning. Typical outcomes include sustainability strategies, sustainable products and services, chief sustainability officer positions, and sustainability reports.
The next phase of business sustainability, which is now emerging, is what we call “market transformation.” This is about companies looking beyond the simple integration of sustainable practices or products and towards actively transforming the market to make it more sustainable overall. It’s about creating sustainability at the heart of our economy, not just reducing unsustainability within individual businesses.
Changing the way we do business is essential to addressing our environmental challenges. After all, climate change is not an environmental issue; it’s a system failure. Corporate decision makers have a key role to play in facilitating the transition to a appropriately systemic response within the economy.
Four Transformative Ideas for Business Leaders
Think about it this way – carbon reductions focus our attention on building, mobility or operational efficiency at the unit scale. But creating carbon neutrality – which we need to achieve if we’re going to preserve the planet for future generations – refocuses our attention on systemic collaboration towards broad scale changes in how we think about both problems and solutions. Or to put it another way, it is not unlike the lessons learned in Iraq; while we may have stopped the war, that is not the same thing as creating the peace. Producing systemic change takes a different way of thinking. This includes re-imagining our approach on a number of key business issues.
- Operations that are circular by design. Supply chains are at risk of being disrupted due to increased storm severity caused by climate change; current and future resource availability and price volatility; accelerating emissions and concerns for public health and the environment; and the future resilience of business and civil society. To better manage and protect these systems, companies are moving away from linear models in which items are created, used, and disposed of once they reach their end of serviceable life, and toward circular models, where items are created, used, and then either restored or reprocessed to recover energy or materials that can be used again. This new vision of a circular economy is regenerative by design; it is organized to keep products, components, and materials at their highest utility and value at all times.
- Partnerships that drive whole-of-economy collaboration. Business leaders at the vanguard of the new economy are building new kinds of partnerships with non-profit organizations, the government, competitors and seemingly unrelated companies. For example, as Ford increased its research and development in hybrid and electric drivetrains, it saw an opportunity in how customers would live more electrified lifestyles overall. Together with Infineon, SunPower, Whirlpool, and Eaton, Ford experimented with the MyEnergi Lifestyle program, exploring ways in which hybrid electric vehicles, solar power systems, energy-efficient appliances, and home design can be integrated to reduce the total carbon footprint. We need more of this kind of leadership, operating across sectors and traditional boundaries, to drive transformational change.
- Radical transparency. The only way that market transformation will be successful is through trust, and trust can be gained only through greater transparency. Companies are already disclosing numerous sustainability indicators through established standards, such as The Climate Registry’s GHG reporting program, Global Reporting Initiative or Carbon Disclosure Project. This is an important foundation. But companies face increasing demands for data under the watchful eye of activists, investors, suppliers, buyers, employees, and customers. These groups want to know more about inputs, operations and outputs of supply chains and increasingly they want to know more about political influence that may hinder government action on our critical challenges. And the risks of burying “negative” data – usually at the behest of the general counsel – are increasing as stakeholders become more savvy in uncovering the truth. Nestle is an example of a new kind of leadership: following an internal investigation in 2015, they admitted to forced labour in its seafood supply chain in Thailand and vowed to address it.
- A re-defined corporate purpose. The idea that a corporation’s purpose is simply to make money for its shareholders took hold within business in the 1970s and 1980s. But the narrow pursuit of shareholder value leads to excessively short time horizons for investment planning and measures of success. New ideas of corporate purpose are emerging in business practice and education, most recently by the Business Roundtable. These ideas are not entirely new; in the 1950s, Peter Drucker argued that “the purpose of a company is to create a customer.” Profits are one metric of how well the company performs this purpose but ultimately, he argued, “the business enterprise…exists for the sake of the contribution which it makes to the welfare of society as a whole.” This is not unlike the message in Blackrock CEO Larry Fink’s 2019 letter to CEOs. Recent innovations are trying to bring these kinds of ideas back into vogue. For example, Benefit corporations are one type of innovation that seeks to integrate a broader array of objectives than simply profits into its forms of organizing, governance, and legal statement of purpose.
It may be disheartening to watch the news these days as the effects of climate change unfold around the world, and recent reports from the IPCC sound the alarm. But as a species we have an amazing capacity to adapt and defy the odds, and I see in the next generation of business leaders, my students, an inspiring drive to fix the problems that they have inherited. Human ingenuity has proved itself time and time again, and the conditions are ripe for change: there is an increasing sense of urgency around climate action, as well as a vocabulary around solutions. The market is shifting with or without the US government, as other national governments as well as many US state and city governments continue to set policies and, with a broader view than the next election cycle, many companies see for themselves the market transformation that is under way and want to anticipate, and even hasten, its arrival.
This is the time for business leaders to show their mettle. Without business, the solutions will remain elusive. And without visionary leaders, business will never even try to find them. My challenge to the business community is to think bigger, to think on the systems scale. Question taken for granted assumptions and the status quo. Look beyond eco-efficiency to more holistic, out-of-the-box solutions. Take a role in creating a systemic shift in the market that is commensurate to the systemic shifts taking place within the environment. The time for transformation is now.
Andrew J. Hoffman is the Holcim (US) Professor of Sustainable Enterprise at the University of Michigan, with joint appointments in the Ross School of Business and the School for Environment and Sustainability. He will be a featured speaker at the Climate Leadership Conference, March 4-6, 2020, in Detroit.