Business has been battered and bruised in the past 12 months, but how much can sustainability be a path through economic crises?
It was the year of uncertainty. During 2011, business was battered by economic storms, buffeted by social protest and unsettled by political disarray.
And uncertainty seems to be here to stay. The planet’s seven billionth person was born in 2011, while indicators of the health of the global environment continued on their downward path. The restoration of economic growth within sustainable limits will be an exceptionally tough task.
Fortunately, there is some evidence that companies are starting to tackle the grand challenges. A vanguard of corporations distinguished themselves during 2011 with innovative planning and ambitious target-setting, which could be the start of a new model of broader business engagement.
However, perhaps more than ever before, what companies do has to be credible. During 2011, scrutiny of the actions of corporations intensified. This is unlikely to change in 2012.
It’s the stupid economy
The immediate concerns in 2011 were economic. Companies grappled with big questions. Will growth return to indebted western economies? Will the euro survive? Can the United States move beyond stagnation? Will emerging nations be economic saviours? Does western-style capitalism still have legitimacy?
Many cash-strapped European governments spent 2011 foisting austerity on their people, but failed to offset it by restoring growth. Indicators of confidence have been “going down everywhere”, says Zsolt Darvas, an economist at Bruegel, a Brussels thinktank.
For the European economy, “there is one single factor: the euro-area crisis”, says Darvas. The structural mismatch between eurozone economies, and the inability of individual countries to manage their debts within the euro’s constraints, were not adequately addressed by politicians during 2011.
Business and markets consequently have adopted a wait-and-see attitude. If the crisis is not resolved, “banks will not lend, people will not consume and companies will not invest”, says Darvas. A collapse of the euro would be “dramatic”, leading to bank runs as people try to secure their savings, and to bank defaults. British banks, which have loaned funds to their counterparts in the most affected countries, such as Italy, would be severely stretched.
Nevertheless, the euro is likely to survive, Darvas says. “There is a very last resort, which is European Central Bank intervention.” The bank could support Greece, Italy and other troubled economies. This would imply much more centralised governance of the eurozone and a surrender of some national sovereignty, but it is a price that governments might have to pay.
Europe was not the only economically challenged region in 2011. Stagnation in the US and Japan also coloured the economic picture, while growth in emerging economies was held back by lack of rich-world demand. The depressing outlook was confirmed by Germany’s respected Ifo Institute in its World Economic Survey for the last quarter of 2011. Across the globe, “lack of confidence in the economic policies of their own country” was the main problem for business and individuals, Ifo says.
Confidence crisis
This crisis of confidence was expressed in different ways. Many countries, including the UK, saw major strikes. In Athens, the cradle of the European debt crisis, there were riots in response to government austerity measures. The Greek government fell in November, though it is unclear if its replacement will fare any better in 2012.
In Spain, the “indignados” movement developed during 2011 in protest against government economic policies and, in particular, extremely high youth unemployment. Spain’s socialist government was crushed in elections in November. The indignados claimed inspiration from the Arab Spring in the countries around the southern shore of the Mediterranean, though in Europe concerns are mainly economic, while in Arab countries they are more fundamentally about political freedom. High youth unemployment was also a factor in the Arab Spring.
Economic turmoil poses fundamental questions for companies. Business, especially the financial sector, has been blamed for the crisis. During 2011, accusations flew and companies had to confront some inconvenient truths about their role in society. The issues – such as tax avoidance, excessive executive pay, or business behaviour in poorer countries – were not new, but they have returned to the fore with new strength.
Ultimately, the model of capitalism is in question. The Occupy Wall Street movement, inspired by the indignados, crystallised the debate. Occupy Wall Street started as a sit-down protest in front of the New York Stock Exchange, but led to encampments in many cities around the world.
David Grayson, director of the Doughty Centre for Corporate Responsibility at Cranfield School of Management, says Occupy Wall Street is “a negative for business as we now know it, but a positive for business as we know it could one day be”. Because of the movement, 2011 could come to be seen as “a defining moment in the history of capitalism as well as corporate responsibility”.
Boardroom impact
Companies are paying attention. Peter Lacy, head of Accenture’s sustainability services, says that Occupy Wall Street is important “not for the demonstration or demonstrators themselves, but for the public sympathy that they have received and the collective sense that the system of liberal democracy and capitalism isn’t working. It may or may not prove to be defining, but it is certainly having an impact in corporate boardrooms.”
One sign of this impact was a speech given by Bob Diamond, chief executive of Barclays, in November. Diamond admitted that trust in business, especially banks, had been “decimated”. “Rebuilding trust requires banks to be better citizens,” he said.
Diamond says he is influenced by the ideas of Michael Porter, a Harvard professor and leading business thinker. In an influential Harvard Business Review article on creating shared value, published in January 2011, Porter argued that the traditional corporation cannot fulfil modern expectations, because it is “trapped in an outdated approach to value creation”. Rather than generating profits for the community as a whole, companies are seen as profiting at the expense of communities and the environment, Porter says.
The answer, according to Porter, is for corporations to reorientate themselves so that their products genuinely meet societal needs, rather than “contrived needs”. By meeting the real needs of customers, such as for quality food rather than unhealthy processed food, companies could continue to profit.
Porter has been criticised for coming to sustainability late, and for other shortcomings. Cranfield’s David Grayson says: “Porter’s way of interpreting [shared value] only focuses on maximising positive impacts – whereas proper corporate responsibility also has to minimise negative impacts.” Nevertheless, because of Porter’s high profile, his work is seen as a boost for corporate sustainability.
But there is a long way to go. In his November speech, Bob Diamond admitted that there were questions about “how much things have actually changed in the last three years”. Bank bonuses, for example, showed little evidence of a decline in 2011 compared with previous years. Restoration of trust would be a long-term project, Diamond believes.
Just how difficult restoration of trust might be was shown by the News Corporation phone hacking scandal, which resulted in the closure of the UK tabloid News of the World. The scandal showed how deeply embedded in an organisation ethical failure can be. Kathee Rebernak, founder of corporate responsibility consultants Framework:CR, says the events highlighted how “a pervasive corporate culture of self-protection at all costs can actually destroy the very thing being protected: reputations and livelihoods”.
Environment: no good news
Many companies failed to create shared value in 2011 through their continued unsustainable depletion of nature. Ultimately, deterioration of air, water and soil will damage not just communities but companies themselves, through exhaustion of resources and the unpredictable consequences of climate change.
Legislators and the law courts made attempts in 2011 to curb corporate environmental damage. Australia adopted a carbon tax, and planned the world’s largest marine conservation zone. China’s 2011-2015 five-year plan set targets for clean energy, resource efficiency and pollution reductions. In Europe, concern grew about hydraulic fracturing, or fracking, for gas (see also p31). Oil giant Chevron suffered setbacks in its attempts to avoid reparation payments over historic pollution in Ecuador, and then had its Brazilian operations suspended after an oil leak off Rio de Janeiro state.
But the imposition of environmental controls on companies remains a struggle. Australia’s carbon tax was only adopted, as Leeora Black of the Australian Centre for Corporate Social Responsibility puts it, after a divisive debate that “scalped a prime minister and two opposition leaders”. International climate talks in Durban, South Africa, remain bogged down, even as warnings about the effects of global warming have become increasingly dire.
The International Energy Agency (IEA), for example, published a report in November that called for action to change world energy policies by 2017 if disastrous climate change is to be avoided. Fossil-fuel emissions must soon peak and then rapidly decline, the IEA says. But there is little evidence that change is happening.
A move away from fossil fuels has arguably been made harder by the catastrophic Japanese earthquake and tsunami in March, which led to the Fukushima nuclear meltdown. Subsequently, Belgium and Germany decided to phase out nuclear power in response to public concern.
Patrick ten Brink, a senior fellow at the Institute for European Environmental Policy, says companies need to be even more aware than currently about their environmental impacts. “A lot of inputs to production are unpriced or underpriced,” such as water and other natural resources, he says. To protect the environment, this will have to change. “It will start impacting on resource availability and pricing.”
At the same time, “more and more countries are asking for compensation for pollution – that’s a paradigm shift. It has become the norm that there are real liabilities for pollution,” ten Brink adds. This could have a huge impact on corporations if they are ultimately held liable for a host of environmental wrongs, from marine litter to greenhouse gas pollution.
To anticipate these issues, companies must think much more strategically, according to ten Brink. This is an area where there is a “major potential for improved corporate governance”, ten Brink says. “Proper strategic vision should look 10-20 years forward,” and would address issues such as the availability of clean water and the development of markets for environmental resources. Companies need a strategic vision about how the tide of history is turning.”
Early movers
Some early-moving companies did respond during 2011 by increasing their sustainability efforts. Notable initiatives were taken by Coca-Cola and Sainsbury’s.
Coca-Cola published a sustainability plan that commits the company to a host of targets. These include an absolute reduction in the company’s carbon footprint of 15%, and a per-product reduction of a third, both by 2020. Coca-Cola also promises 25% less packaging by 2020, and fully recyclable cans and bottles by 2014.
Sainbury’s 20 by 20 plan also sets out multiple targets – 20 of them in fact – to be achieved by 2020. The Sainsbury’s goals include more sourcing and selling of sustainable products, halving own-brand packaging compared with 2005, a 30% absolute greenhouse gas emissions reduction, also compared to 2005, and increasing by a quarter the number of employees with Sainsbury’s shares.
But perhaps the most far-reaching sustainability plan – and the one closest to Patrick ten Brink’s idea of strategic vision – was published by German sports clothing brand Puma. The company published an environmental profit and loss account, which assessed the cost of its impacts in terms of land use, air pollution, waste, greenhouse-gas emissions and water consumption, at €145m.
Total impact
According to Puma, this was an indicator that could be used as the company attempts to reduce its environmental footprint. However, in effect, it represents the value of environmental services that Puma has received for free, and is thus an attempt to quantify a liability that the company might one day face. (See also p 50.)
Brendan May of sustainability consultants the Robertsbridge Group, says that with its environmental profit and loss account, “Puma has shown a lead and others are bound to adopt similar approaches”. Companies need to move to a broader understanding of natural resources, he argues. “It starts with putting a true value on the earth’s natural systems and biodiversity, which is ultimately the life force for most corporate activity.”
Individual company initiatives were accompanied in 2011 by broader schemes. The Carbon Disclosure Project (CDP) reported that more corporations than ever before were formulating carbon-reduction strategies with board-level oversight. The CDP also found that 57% of listed companies had water management policies and plans.
Meanwhile, in tune with Puma, an integrated reporting pilot project was started up by the International Integrated Reporting Committee. This will study how companies can make links between sustainability indicators and financial performance in their annual reports. The start of the pilot was “not necessarily high profile, but will give the corporate sustainability movement much-needed momentum,” says David Grayson.
The final report by John Ruggie, the United Nations secretary-general’s special representative on business and human rights, was also published in 2011. The report details how a framework for human rights, based on the principles of “protect, respect and remedy”, should be implemented by companies. The report is something corporations should take seriously, and respond to in 2012.
Business will have to do a lot of responding in 2012, in fact. During 2011, economic, environmental and social questions have become urgent. Corporations should contribute constructively and credibly to the search for answers.
2012: future fears
Uncertainty about the world’s prospects is likely to continue into 2012. The economic situation will continue to be grim, with a double-dip recession threatened. Unemployment will be high and there will be further social unrest. The environment will continue to be over-exploited. True sustainable business will remain an aspiration.
It is unclear if significant progress will be made to resolve the euro-area crisis. Markets hope that new governments in some of the most affected countries – Greece, Italy, Spain – will be effective, but only time will tell. Federal debt in the US will also remain a concern, especially as major issues could remain unresolved before the presidential election at the end of the year.
Zsolt Darvas of the Bruegel thinktank says the “share of advanced countries in world output has already declined, but this decline will accelerate”. However, countries such as China are not ready to take over just yet, in particular because “technological leadership is still in the west,” Darvas says.
Politically, 2012 could see significant change. As well as those in the US, there will be a clutch of parliamentary and presidential elections: Egypt, France, Iran, Mexico, Russia, South Korea, Taiwan, Turkey and Venezuela. Outcomes will range from foregone conclusions to highly unpredictable. Some presidents, such as Bashar al-Assad in Syria, may lose office without the luxury of an election.
Business is likely to come under multiple pressures in 2012, as governments attempt to continue to clean up after the economic and financial crisis. The G20 – which has taken over from the G8 as the main platform for discussions international economic cooperation – will meet in Mexico. On the agenda will be issues such as regulation of banks and other financial bodies, dealing with tax havens, streamlining energy markets and fighting corruption. All imply more, rather than less, regulation for companies.
On the environmental agenda, the United Nations Rio+20 conference, in June 2012, will stand out. The conference will look at what has happened since the Rio Earth Summit of 1992, which resulted in a number of global initiatives, including the UN Framework Convention on Climate Change and the UN Convention on Biological Diversity. The Rio Summit will be followed later in 2012 by the next UN climate summit, in Qatar, which follows on from Durban 2011.
As the economy is still very far from operating within sustainable limits, the Rio+20 delegates are unlikely to conclude that enough progress has been made since 1992. Rio+20’s stated aim is to “secure renewed political commitment for sustainable development”. If it will be forthcoming is an open question.