~- --
For People and
Planet
By AI Gore
And David Blood
Capitalism
and sustainability are deeply and increasingly interrelated. After all, our economic
activity is based on the use of natural and "human resources. Not until we
more broadly "price in" the external costs of investment decisions across
all sectors will we have a sustainable economy and society.
The
industrial revolution brought enormous prosperity, but it also introduced unsustainable
business practices. Our current system for accounting was principally
established in the 1930s by Lord Keynes and the creation of "national
accounts" (the backbone of today's gross domestic product). While this
system was precise in its ability to account for capital goods, it was
imprecise in its ability to account for natural and human resources because it
assumed them to be limitless. This, in part, explains why our current model of economic development is hard-wired to externalize
as many costs as possible.
Externalities are costs created by
industry but paid for by society. For example, pollution is. an externality which is sometimes taxed by government in
order to make the entity responsible "internalize" the full costs of
production. Over the past century, companies have been rewarded financially for
maximizing externalities in order to minimize costs
"Today,
the global context for business is clearly changing "Capitalism is at a
crossroads," says Stuart Hart, professor of management at
The
interests of shareholders, over time, will be best served by companies that
maximize their financial performance by strategically
managing their economic, social, environmental and ethical performance. This is
increasingly true as we confront the limits of our ecological system to hold up
under current patterns of use. "License". to operate" can no longer be taken for granted by
business as challenges such as climate change, HIV / AIDS, water scarcity and
poverty have reached a point where civil society is demanding a response from
business and government. The "polluter pays" principle is just one
example of how companies can be held accountable for the full costs of doing business.
Now, more than ever, factors beyond the scope of Keynes's national accounts are
directly affecting a company's ability to generate revenues, manage risks, and
sustain competitive advantage. There are many examples of the growing
acceptance of this view.
In the
corporate sector, companies like General Electric are designing products to
enable their clients to compete in a carbon-constrained world. Novo Nordisk is taking a holistic view of combating diabetes not
only through treatment but also through prevention. And Whole Foods and others
are addressing the demand for quality food by sourcing local and organic
produce. Importantly, the business response is about making money for
shareholders, not altruism.
In the
nongovernmental sector, organizations such as World Resources Institute,
Transparency International, the Coalition for Environmentally ResponsibIe Economies (Ceres) and Accountability are
helping companies explore how best to align corporate responsibility with
business strategy.
Over the
past five years we have seen markets begin to incorporate the external cost of
carbon dioxide emissions. This is happening through pricing mechanisms (price
per ton of carbon dioxide) and government-supported trading platforms such as
the European Union Emissions Trading Scheme in
The investment
community has also started to respond. For example, the Enhanced Analytics
Initiative, an international collaboration between asset owners and managers,
encourages investment research that considers the impact of extra-financial
issues on long-term company performance. The Equator Principles, designed to
help financial institutions manage environmental and social risk in project
financing, have now been adopted by 40 banks which arrange over 75% of the
world's project loans. In addition, the rise in shareholder activism and the
growing debate on fiduciary responsibility, governance legislation and
reporting requirements (such as the Global Reporting Initiative and the EU Business Review) indicate the mainstream incorporation
of sustainability concerns.
While we
are seeing evidence of leading public companies adopting sustainable business
practices in developed markets, there is still a long way to go to make sustain
ability fully integrated and therefore truly mainstream. A short term focus
still pervades both corporate and investment communities, which hinders
long-term value creation.
As some have said, "We are operating the Earth like it's a business in liquidation." More mechanisms to incorporate environmental and social externalities will be needed to enable capital markets to achieve their intended purpose-to consistently allocate capital to its highest and best use for the good of the people and the planet. .
Mr. Gore. a former vice president
of the