Exxon plans to warn investors about the risk that limits on carbon might pose to its business. FirstEnergy and Peabody Energy have made similar promises of transparency about climate risk following pressure from investors, according to the New York Times. These are examples of how corporations can make sustainability a core part of managing strategic, operational, financial, and compliance risks.
Peter Bakker, president of the World Business Council for Sustainable Development, in a conversation with Yale Insights, described this approach to risk management as a promising development: “By better managing the risks, the impact of things that go wrong will not be as harsh as it will otherwise be, and once you manage your risks, you will also find solutions and you will see these solutions become opportunities for companies to implement and innovate. And that’s what business is best at.”
Technology company Philips provides one example of how this kind of thinking about sustainability can lead to business innovation. CEO Frans van Houten explained to McKinsey that his company has started working in a “circular economy.” The company’s motivation, he said, is “the conviction that companies solving the problem of resource constraints will have an advantage.”
“We can’t think in terms of designing products that we throw over the wall to customers, but instead we need to design products that are upgradable and maintainable and that can be mined for materials and components that can be reused,” van Houten said. “Our mind-set needs to be 15 years out—not just ‘now’—and it requires us to think in an end-to-end way, involving our suppliers and sales force.”
For Philips, the shift in perspective led to an innovative line of business. With lighting technology changing rapidly, many large companies and municipalities have been reluctant to invest in products that would soon be outdated, so Philips has started to sell lighting as a service, and in so doing, increased its own incentive to create products that can be reused.
The role of sustainability in risk management is not yet widely accepted, however. Deloitte surveyed 300 major companies around the world on risk management. Reputational risk was cited as the area of highest concern; sustainability didn’t make the list. Nor are sustainability concerns seen as a threat to disrupt business models. Rather, companies see technological change, including social media, big data, mobile, cloud, and cyber security, as the most potentially disruptive force.
As in any discussion involving climate change, views differ about the relative urgency of the problem and its optimal solution. Some argue that businesses should not take any steps that would compromise their economic performance. For example, Robert P. Murphy, an economist with the Institute for Energy Research, which is backed by the energy industry, argues that an emphasis on technological solutions to climate change, such as geoengineering, makes economic sense. “A wait-and-see strategy is probably optimal because immediate cutbacks in fossil fuel make economic sense only in worst-case climate scenarios.”
Bakker, on the other hand, advocates for businesses to be forward-thinking and to take part in the bigger conversation about how to address sustainability challenges. “We believe that business has a crucial role to play in taking the lead to come up with solutions to the sustainability challenge.”
Q: What's the role for global business in addressing sustainability problems?
Bakker: I represent the World Business Council. We believe that business has a crucial role to play in taking the lead to come up with solutions for the sustainability challenges. But that doesn't mean that business can do these things on their own.
Only if we are moving to a world where solutions will be thought about in an integrated fashion—meaning business together with governments together with civil society—will we find the solutions and the scale for these solutions that the world needs.
I think there are a number of challenges where, indeed, we need to look for global solutions. If you think about climate change, that does not really care about national borders. It doesn't matter whether it's America who emits the CO2 or China or Europe. It's one atmosphere and that atmosphere cannot handle these emissions.
So, at some points we will need global solutions and global agreements around the solutions. And then we will need global businesses to take the lead to implement the solutions. However, the legislation, the regulations that will embed these solutions into how we run our societies—they will have to be implemented at the national level.
Whatever we do, we need a global conversation and an organization like the World Business Council for Sustainable Development can be really instrumental to bring the business voice to that, but we also need the national legislation and the national discussions therefore to implement them.
Lastly, I would argue we need city governments. At this point in time, we see, in the world of sustainability, that in cities where mayors take the lead in implementing solutions in their towns, we have very fertile ground for accelerated implementation of solutions.
Because we are the forward-thinking voice of business, we are pro-change. We believe that society needs a transformative change. That change will mean that business models and sectors and companies will sometimes see opportunity and sometimes see threats in that change.
We cannot please everybody and still make that change, so time will tell where that ends up, but so far we think we have a good agenda set out. That is Action 2020.
Q: Why work with so many companies?
Bakker: In the past, and this was not just WBCSD, many sustainability-related organizations or NGOs would take a theme, would run with it, and would think they could save the world by just implementing it at scale.
I don't think that's possible, not for any organization. So if we now look at, for instance, climate change, we are working closely together with the World Economic Forum, with the U.N. secretary-general's office, with the World Bank, with the World Resources Institute, with scientists like the Stockholm Resilience Center to bring collective pools of convening power, of knowledge, of implementation, of member companies together to really get scale into these activities. I think collaboration is going to be a crucial word to measure and manage and improve the impact of what we do.
Q: What is the "global sustainability agenda" and what are the forces shaping it?
Bakker: Back in 2010 WBCSD published a piece of work which is called Vision 2050. For the first time in 2010—I think in those days there were 29 companies—we put together a piece of analysis saying that the world, as we currently know it, is not sustainable. If we want to make the world sustainable we need a transformative change and that change was then designed in a number of pathways to 2050.
Vision 2050 basically said that we're going to move to a world where we have nine billion people on our planet. We want all of these people to live well. And we want, altogether, to live within the boundaries of the planet.
It's a gross statement—from seven to nine billion. It's a social statement—we want all people to live well. And, it's an environmental statement—we want to stay within the boundaries of the planet rather than overshoot those boundaries, as we currently do.
That's a great piece of work, but it's a piece of work that says 2050. Today we live in a world where the economic crisis has put the agendas on a much shorter horizon. In universities like Yale I'm sure there are still professors thinking about 2050; most business people think about the next quarter or next year. So what we have said in the last year is we really need to turn Vision 2050 into an actionable agenda. So we've created Action 2020.
We've worked with 800 scientists around the world. We've asked them, what are the planetary stress points and what are societal stress points? That has led to these nine priority areas. Again, five natural capital and four social capital priority areas—climate change, water stress, ecosystem degradation, then on the social side, inclusive growth, jobs, sustainable lifestyles are examples of the areas.
That agenda, these priority areas have now been agreed with all 200 companies. The societal goals for each of these areas have been agreed. So, for climate change, we've now agreed, inclusive of the energy companies that are members, that the world should not warm up more than two degrees.
That's something that the political system had agreed already since Copenhagen, but now also the large businesses have agreed to it. But they've gone a step beyond that; they've said two degrees—while we will give access to the 1.8 billion people who do not have access today, while we recognize we cannot put more than a trillion tons of carbon in the atmosphere, and while we must make the current infrastructures that the world has more resilient—so very specific targets for climate change. Out of these goals we have now selected what are business solutions that can deliver these goals.
Now we are working with companies and clusters of companies to say what are you going do to deliver this goal? So, in climate change, one of the goals is massive reforestation. We have 28 member companies in the forestry sphere, either in forest management or in the paper and pulp business; that cluster of companies is now looking at how could we make massive reforestation the solution?
We have other companies that work in cities and city solutions. They are looking at, what can we do to electrify cities? And again, across the whole board of solutions, these clusters of companies are now working at the solutions.
Eventually we will bring that to meetings like the World Economic Forum in Davos in January and other meetings later in the year in the U.N.to confront that with what can policymakers do to incentivize the scaling up of these solutions? And then we finally get into a dialog where business comes with very concrete solutions; policymakers can see if they can give the incentives to implement them; and that together will deliver the scale that the world needs.
So, it's an agenda that starts with the facts of science, with agreed common goals, and now it's business in a dialog with policymakers that is going to implement to the scale we need.
Q: What do business leaders need to know to understand how sustainability issues are going to affect their organizations?
Bakker: I think business leaders today and tomorrow will really need to rethink the way they think about the risks and the risk management of their organizations. I think it’s no longer good enough that a business manages only its financial capital.
Business must recognize that in order for it to perform, it also uses natural and social capital. Natural capital, the environment, climate change if you want, or water stress and other situations, pose significant constraints today on your business.
To make it practical, I have talked to a number of companies who have operations in the southern part of Thailand. That has now, for two consecutive years, seen massive flooding as a result of changing rain patterns and all that stuff, mud floodings have damaged the factories and have damaged the assembled cars, in this case, that were built there. The insurance companies have now said those sites are no longer insurable.
So, all of a sudden, you see that weather-related changes are beginning to impact the risks that a company faces.
In other parts of the world where inequality is a massive issue, the unrest among the population or the unwillingness of populations to work for a large global companies poses a risk on can I get the work force that I need?
So, what we're arguing is we need to translate sustainability in the language of risk, in the risk management systems that companies have, and make that part of what leaders and businesses manage today. And when we do that, you will see by better managing the risks the impact of things that go wrong will not be as harsh as it will otherwise be. But, once you manage your risks, you will also find solutions and you will see that the solutions become opportunities for companies to implement and innovative. And that's what business is best at. You give them a challenge, they will deal with the negative side, and they will grab the positive side.
So I think we need to integrate sustainability into business. The way in is through risk management; the way out is through putting it into the valuation system. And that's where we're doing a lot of work at the moment.