The Next Phase of Business Sustainability

(Illustration by James O’Brien) 

Business sustainability has come a long
way. From the dawn of the modern environmental movement and
the establishment of environmental regulations in the 1970s, it has
become a strategic concern driven by market forces. Today, more
than 90 percent of CEOs state that sustainability is important to
their company’s success, and companies develop sustainability
strategies, market sustainable products and services, create positions
such as chief sustainability officer, and publish sustainability
reports for consumers, investors, activists, and the public at large.

This trend will not abate anytime soon. Surveys show that 88 percent
of business school students think that learning about social and
environmental issues in business is a priority, and 67 percent want
to incorporate environmental sustainability into their future jobs. To
meet this demand, the percentage of business schools that require
students to take a course dedicated to business and society increased
from 34 percent in 2001 to 79 percent in 2011, and specific academic
programs on business sustainability can now be found in 46 percent
of the top 100 US master of business administration (MBA) programs.

For all this interest, we should expect the world to become more
sustainable. But problems such as climate change, water scarcity,
species extinction, and many others continue to worsen. Sustainable
business is reaching the limits of what it can accomplish in its
present form. It is slowing the velocity at which we are approaching
a crisis, but we are not changing course. Instead of tinkering
around the edges of the market with new products and services,
business must now transform it. That is the focus of the next phase
of business sustainability, and we can see signs that it is emerging.

The first phase of business sustainability, what we at the University
of Michigan’s Erb Institute call “enterprise integration,” is founded on a model of business responding to market shifts to increase competitive
positioning by integrating sustainability into preexisting business
considerations. By contrast, the next phase of business sustainability,
what we call “market transformation,” is founded on a model of business
transforming the market. Instead of waiting for a market shift
to create incentives for sustainable practices, companies are creating
those shifts to enable new forms of business sustainability.

Enterprise integration is geared toward present-day measures of
success; market transformation will help companies create tomorrow’s
measures. The first is focused on reducing unsustainability;
the second is focused on creating sustainability.1 The first attends to
symptoms; the second attends to causes. The first focuses primarily
inward toward the health and vitality of the organization; the second
expands that focus to look outward toward the health and vitality
of the market and society in which the organization operates. The
first will help future leaders get a job in today’s marketplace; the
second will help them develop a target for a lifelong career. The first
is incremental, the second transformational.

Changing the way we do business is essential to addressing the
challenges of environmental degradation. The market is the most
powerful institution on earth, and business is the most powerful
entity within it. Business transcends national boundaries, and it
possesses resources that exceed those of many nation-states. Business
is responsible for producing the buildings we live and work in,
the food we eat, the clothes we wear, the automobiles we drive, the
energy that propels them, and the next form of mobility that will
replace them. This does not mean that only business can generate
solutions, but with its unmatched powers of ideation, production,
and distribution, business is best positioned to bring the change we
need at the scale we need it.

Sustainable Business 1.0: Enterprise Integration

In its first incarnation, business sustainability represents a market
shift. Market pressures bring sustainability to business attention through core management channels and functions. This began with
Nixon-era government regulation and grew to include insurance
companies, investors, consumers, suppliers, buyers, and others
through the 1980s and 1990s.2 Such market pressures can emerge
from numerous sources: coercive drivers—from domestic and international
regulations and the courts; resource drivers—from suppliers,
buyers, shareholders, investors, banks, and insurance companies;
market drivers—from consumers, trade associations, competitors,
and consultants; and social drivers—from nonprofit organizations,
activist groups, the press, religious institutions, and academia.3

While corporate social responsibility (CSR) is one response to such
pressures, companies have sought to improve competitive positioning by
linking sustainability and corporate strategy. This involves translating
the issue into the core language of business management: operational
efficiency, capital acquisition, strategic direction, and market growth.
In each case, the firm has an established model that it can use to conceptualize
the issue and formulate a response. In this way, sustainability
becomes much like any other business threat, where market expectations
change and technological developments advance, leaving certain
industries to adapt or face demise while others rise to fill their place.

For example, when insurance companies apply sustainability
pressures on the firm, the issue becomes one of risk management.
When competitors apply such pressures, it becomes an issue of strategic
direction. When investors and banks do so, it becomes an issue
of capital acquisition and cost of capital. When suppliers and buyers
do so, it becomes an issue of supply-chain logistics. When consumers
do so, it becomes an issue of market demand. Framed in such terms,
much of the specific language of sustainability recedes and is replaced
by standard business logic. Therefore, companies can remain agnostic
about the science of particular issues (such as climate change) but
still recognize their importance as business concerns. The successful
company can perform this translation process and integrate sustainability
into its existing structures and strategies.

Take Whirlpool, for example: It has improved appliance energy
efficiency because it has watched energy efficiency move from
number 12 in consumer priorities in the 1980s to number three, just
behind cost and performance, today. Whirlpool and others expect
those concerns to continue to grow.4 One signal of this growth is
the LOHAS consumers (Lifestyles of Health and Sustainability),
a segment that considers environmental attributes in purchasing
decisions and was estimated to be a $355 billion market in the United
States in 2016 and a $546 billion market worldwide.

Another signal comes from impact investors, who consider environmental,
social, and governance (ESG) factors in their investment
criteria. The sector reached $8.72 trillion of professionally managed
assets in the United States in 2016, or one-fifth of all investment
under professional management. But it is not just a specialized sector;
this past May, financial advisory firms BlackRock, Vanguard, and
State Street cast votes in opposition to ExxonMobil management
and called for the company to disclose its climate change impacts.

These are all signs that the market has shifted and continues to
shift. Today, consumers can buy sustainable products, stay in sustainable
hotels, eat sustainable foods, and use sustainable cleaning
products. While this greening of the market is a good thing, it is
not actually solving the root problems it was meant to address. Our
world continues to become less, not more, sustainable.

Sustainable Business 2.0: Market Transformation

While business sustainability has been going mainstream, the world
has witnessed unprecedented human impacts on the natural environment
that threaten the viability of life on Earth. To mark this
shift, scientists have proposed that we have left the Holocene and
are now entering the Anthropocene, a new geologic epoch that
acknowledges the enormous influence of the world’s 7.5 billion people
(to be nearly 10 billion by 2050) on the planet.5

To measure that influence, they have identified nine “planetary
boundaries” that represent “thresholds below which humanity can
safely operate and beyond which the stability of planetary-scale systems
cannot be relied upon.”6 These are what Lancaster University
management professor Gail Whiteman has called the “key performance
indicators” (KPIs) of the planet, many of which are not doing
so well. While one (ozone depletion) is on the mend, scientists believe
we have overshot the boundaries of three: climate change, biodiversity
loss, and biogeochemical flows (nitrogen and phosphorus cycles).
Further indicators are also blinking red, such as ocean acidification,
freshwater use, and deforestation. The remaining two boundaries—chemical pollution and atmospheric particle pollution—require more
data to assess. All of these disruptions are the result of system failures
created largely by our market institutions. They will have to be
remedied by those institutions.

Fortunately, capitalism can be quite malleable. It is designed
by human beings in the service of human beings, and it can evolve
to meet the changing needs of human beings. This has happened
throughout its history to address issues such as monopoly power,
collusion, and price-fixing. Today’s pressing need is sustainability—particularly to address climate change—and legislators are not the
only ones who can shift course. Many companies recognize this challenge
and are pushing for new market models. In the words of Unilever
CEO Paul Polman, “We are entering a very interesting period
of history where the responsible business world is running ahead
of the politicians” and taking on a broader role to “serve society.”

The next phase of business sustainability calls for a transformation
of the market, discarding such outdated notions as treating the environment
as a limitless source of materials and sink for waste, seeing
economic value as the only measure of nature’s worth, encouraging
unbridled consumption, and considering perpetual economic growth
as even possible. Corporate decision makers have a key role to play in
facilitating this transition. Instead of accepting the rules of the market
as given, they must change them to incorporate the planet’s KPIs.
For example, to turn around the KPI of climate change, the market
must go carbon neutral and eventually go carbon negative. We don’t
yet know how to do that, but we know that it cannot be done by one
company or one product. It requires a change in the overall market.

Real sustainability is a property of a system.7 For example, the
notion of an energy company installing a wind farm and calling itself
sustainable makes no empirical sense. A more sustainable energy
system incorporates the whole grid, encompassing generation, transmission, distribution, use, and mobility. We can already see signals
of this change happening as new energy sources, distributed energy,
demand-side management, smart appliances, and smart meters are
beginning to transform our conceptions of energy. Already, jobs in
the clean energy sector have exceeded those in oil drilling.

But the energy renaissance goes further. Electric vehicles have the
potential to change the grid, leveling the electricity demand curve by
charging at night and providing storage capacity during the day for
intermittent energy sources like wind and solar. Already, a Nissan
Leaf automobile owner in Japan can buy a transformer to power
the house off the battery pack during a power failure. Research is
under way to scale this concept and allow consumers to rent their
batteries to utilities while their car is parked. Electric vehicles are
also transforming the auto industry. Who could have predicted 20
years ago that new entrants like Tesla would enjoy a larger market
capitalization than General Motors?

And as the shift to driverless cars continues, IT companies such
as Apple and Alphabet have entered the fray, shifting success factors
in the auto sector from hardware to software, and with them our
conceptions of personal mobility. For example, as incumbents such
as Ford Motor seek to become mobility providers, they must learn to
operate like the airline industry, where profits increase when their cars
spend minimal time idling. Given that today’s personal car is parked
95 percent of the time, driverless cars can result in fewer cars on the
road (at least in urban centers) as people purchase mobility services
rather than own cars. Fewer cars on the road means repurposing
unneeded roads, parking lots, garages, and service stations.

Systemic Corporate Strategies

As we see with the energy and transportation sectors, the potential
scope of market transformation is vast. To help flesh this out, we
can conceive this sustainability revolution as proceeding from two
initial phases. First, corporations rethink their business strategies
to play a stronger role in guiding the sustainability of the systems
of which they are a part. Second, the business model itself undergoes
reconceptualization. The first phase includes at least four new
ways of conceiving their approach to operations, partnerships, government
engagement, and transparency.

New conceptions of operations | Market transformation calls for optimizing
supply-chain logistics to reduce risks from numerous factors
such as disruptions 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. These
risks can directly affect assets and operations, availability and costs of
inputs, regulation of sourcing and distribution, workforce availability
and productivity, and stakeholder reputation. For instance, Nestlé,
Coca-Cola, Cargill, and General Mills have all faced threats to supply
chains due to the decreased availability of water, a once-plentiful resource
now scarcer because of climate change and overconsumption.

To better manage such operational 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. One key to this new vision of a circular economy is that it is regenerative by design; it is organized to keep products, components,
and materials at their highest utility and value at all times.

For example, industrial and consumer products company Ricoh
has concluded that by 2050, there will be an insufficient supply of
many reasonably priced raw materials to support its manufacturing
needs. As a result, the company is revising its business model using
life-cycle analysis as the basis for decision making and establishing
a series of what it calls “Resource Smart Solutions” for product
design and manufacturing, reuse, collection, maintenance, and
materials recovery. To change the system around it, the company is
also helping its customers reduce energy use, carbon footprint, and
virgin material use while also expanding its own opportunities for
product refurbishing, recycling, and new designs. Targets include
reducing virgin resource use by 25 percent by 2020 and 87.5 percent
by 2050. In adopting circular economy thinking, Ricoh is striving to
move beyond incremental efficiency goals to more ambitious “net
zero impact” business operations.8

New conceptions of partnerships | Going beyond the supply chain,
companies also look to novel partnerships outside standard modes
of shifting the market, including nonprofit 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 developed 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.
Similarly, Toyota Motor is seeking a broad array of partnerships
to achieve its goal of going “beyond zero environmental impact”
by eventually eliminating CO2 emissions from vehicle operation,
manufacturing, materials production, and energy sources by 2050.

New conceptions of government engagement | Very few business
schools offer courses on collaborative and constructive lobbying.
Indeed, the public perceptions of lobbying are generally negative.
But lobbying is basic to democratic politics as governments seek
guidance on how to set the rules of the market and usher reforms
as needed. Forward-thinking companies are looking for ways to
participate constructively in policy formation.

For example, Intel was instrumental in calling attention to
the horrors of tin, tantalum, tungsten, and gold mining in the
Democratic Republic of Congo. While the company could have
simply stopped sourcing such conflict minerals from the region, it
did not want to create additional hardship for legal mining operations.
Instead, it helped create provisions in the Dodd-Frank Act
that require the tracking and disclosure of such mineral sourcing
within the broader electronics industry.

This is not unusual. Companies are also working with governments
to phase out heat-trapping HFC chemicals and setting new
efficiency standards on trucks. The Paris Agreement on climate
change would not have been possible without the powerful business
interests that helped broker a deal. In each of these examples,
business took a responsible position in bringing about a sustainable
shift in the market through policy.

New conceptions of transparency | The only way that market transformation
will be successful is through trust, and trust can be gained only through greater transparency. The expansion of corporate influence
in society, particularly as it relates to government, will make
some justifiably uneasy. But robust reporting mechanisms can help
allay those fears and also help protect companies from the effects
of misconduct, including legal liability and penalties. To be sure,
companies are already disclosing numerous sustainability indicators
through established standards, such as the globally recognized Global
Reporting Initiative or Carbon Disclosure Project. But transparency
goes further as companies face increasing demands for data, for both
internal management and external validation, under the watchful
eye of activists, investors, suppliers, buyers, employees, and customers.
The gathering and dissemination of such information can
open up new awareness of supply-chain risks and opportunities.

For example, IBM and partner companies are experimenting with
blockchain technology to transform visibility and traceability in complex,
often opaque, global supply chains. In 2017, IBM piloted supplychain
blockchain with Walmart to address food safety in its global supply
and distribution network and plans to roll it out further with nine
global agricultural companies. In another example, Nestlé conducted
an internal investigation of its Thai fish supply chains in 2014 and found
forced labor and brutal treatment of workers. But in a dramatic shift
from standard practices of privacy and nondisclosure, the company
posted the report online, imposed new requirements on suppliers,
and commissioned outside auditors to assure compliance. This public
disclosure compelled other companies that source fish in Thailand to
follow suit, shifting the competitive dynamics of supply-chain logistics.

New Ways of Doing Business

Market transformation not only compels more systemic business
strategies but also challenges traditional ways of conceiving business
itself. It demands new conceptions of corporate purpose, notions of
consumption, and models and metrics of business success.

New conceptions of the corporation’s purpose | The dominant idea of the
purpose of the corporation as 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. It also leads to a
focus on only the type of shareholder who is less interested in sustainability
efforts and, in the words of Cornell Law School professor
Lynn Stout, is “shortsighted, opportunistic, willing to impose external
costs, and indifferent to ethics and others’ welfare.”9

New ideas of corporate purpose are beginning to grow within
business practice and education. 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. And other companies
are watching closely, sometime mimicking them. This
trend has caught on among MBA students who challenge conventional
thinking around capitalism and corporate purpose. At the
Harvard Business School, an immensely popular course called
“Reexamining Capitalism” explores “the evolution, power, and
limitations of our current capitalist systems” and “how the ‘rules
of the game’ by which capitalism is structured should change” to
address the social and environmental issues of our day.

New conceptions of consumption | Is “sustainable consumption” an
oxymoron? The World Business Council for Sustainable Development
doesn’t think so, calling on businesses to “abandon the existing consumption
paradigm” and move toward “transformations in mainstream
lifestyles and consumption patterns.”10 Several businesses and activists
have sought to put such an idea into practical use.

For example, Patagonia, through its Common Threads Initiative,
encourages people to buy used Patagonia products on eBay before
going to the store to buy them new. Adbusters has long promoted its
“Buy Nothing Day,” what it calls a “24-hour moratorium on consumer
spending” as a counterpoint to the Black Friday spending spree
that traditionally follows the holiday of Thanksgiving. The outdoor
lifestyle retailer and co-op Recreational Equipment (REI) closes its
149 stores on Black Friday as part of its “#OptOutside” program. In
2016, Subaru, Google, Meetup, Upworthy, and competing outdoor
brands such as Burton, Keen, Yeti, and Prana chose to partner with
the effort. In the end, resource use must be reduced at the source,
and that means developing new models of consumption.

New conceptions of business models and metrics | Market transformation
requires a compelling new business model to replace traditional
ones that dominate business thinking. For example, neoclassical
economics and agency theory employ dismally simplified
models of human beings as driven primarily by selfishness, where
those running the company (agents) will shirk or even steal from the
owner (principal) if they do the work and the owner gets the profits.

But behavioral economists have argued that real humans don’t
behave as neoclassical economics suggests we do, and legal scholars
argue that managerial motivations are far more complex than a
simple principal/agent relationship and instead involve thousands of
shareholders, executives, and directors with more socially positive
motivations. And new models have arisen, such as positive organizational
scholarship and appreciative inquiry, that move beyond
standard cynical conceptions of human behavior to understand how
and why people are motivated to devote their work toward improving
the world around them and learn how to create the organizational
conditions that will foster that activity. These models are gaining
increasing interest in business teaching, research, and practice as a
way to create a more committed and effective organization.

Other models are also beginning to gain recognition. Doughnut
economics11 is a model of economic growth that links social justice
to efforts to stay within the planetary boundaries of the Anthropocene
epoch. Shared value is aimed at redefining capitalism by arguing
that the competitiveness of a company is closely tied to the health of
the communities in which it is embedded.12 Conscious capitalism is
a model of business that serves the interests of all major stakeholders—customers, employees, investors, communities, suppliers, and
the environment. And regenerative capitalism reimagines capitalism in
terms that are self-organizing, naturally self-maintaining, and highly
adaptive to produce lasting social and economic vitality for global civilization
as a whole. Each of these models is seeking an amended form
of capitalism that is sensitive to the constraints of the Anthropocene.

Closely related to models of business behavior are the metrics
used to define success, many of which lead to unsustainable outcomes.
For example, discount rates are used to capture the time
value of money—the fact that a dollar today is worth more than a
dollar tomorrow. But a common discount rate of 5 percent leads to
a conclusion that everything 20 years out and beyond is worthless.
When gauging the response to climate change, is that an outcome that anyone—particularly anyone with children or grandchildren—would consider ethical? London School of Economics professor
Nicholas Stern answered no with an argument that used an unusually
low discount rate when calculating the future costs and benefits of
climate change mitigation and adaptation.13

Another problematic metric is gross domestic product (GDP). This
measure of national economic health fails to distinguish between financial
transactions that add to the well-being of a country and those that
diminish it. Any activity in which money changes hands will register
as GDP growth, even money spent on recovery from natural disasters
and pollution cleanup. To examine alternatives, former French
president Nicolas Sarkozy created a commission, headed by Nobel
laureates Joseph Stiglitz and Amartya Sen. Their 2010 report recommended
a shift in economic emphasis from the production of goods to
a broader measure of overall well-being that would include measures
for categories such as health, education, security, and sustainability.14

Reshaping Politics to Reshape the Market

A discussion of market transformation and the corporation’s shifting
role in society cannot be complete without a discussion of the
current political and social climate and what impact it has on this
agenda going forward. The Trump administration denies the science
of climate change and has embarked on an agenda of loosening the
regulatory environment to stimulate economic growth. This is a
similar script to that employed by President Ronald Reagan more
than 35 years ago when he appointed Ann Gorsuch Burford to lead
the US Environmental Protection Agency, James Watt to head the
US Department of the Interior, and Rita Lavelle to run Superfund,
the program for cleaning up the country’s most polluted sites.

Reagan’s appointments set about slowing or stopping environmental
enforcement, but they ultimately led to scandals and created
a critical public backlash: In 1983, all three were removed from
office, and in subsequent years, Congress went on to strengthen
numerous environmental regulations, and environmental groups
increased membership and budgets. In the words of former Sierra
Club executive director Carl Pope, Reagan “reinvented the environmental
movement by his contempt for it.”

While President Trump’s approach to the environment bears
similarities to Reagan’s attempts to roll back environmental regulations
and likely faces a similar backlash, there are several key
differences. First, some of the backlash this time will come from
businesses that are leading on greenhouse gas reductions and not
fighting government-led environmental policies, as they did in the
1980s. Indeed, recent surveys show that 85 percent of business executives
believe that climate change is real (well above the national
average of 64 percent), and many see the associated market risks and
benefits. General Mills CEO Ken Powell was not alone when he told
the Associated Press, “We think that human-caused greenhouse gas
causes climate change and climate volatility, and that’s going to stress
the agricultural supply chain.” Cargill executive director Greg Page
warns of food shortages if we do not act. Such concerns represent a
strong and growing perspective within the corporate sector that we
have a problem and government inaction will only make it worse.

While those who lose in a carbon-constrained world (such as fossil
fuel interests) will continue to resist acknowledging climate change,
most companies see the long-term trajectory of this issue and do not
see the current administration’s position as the long-term future.
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. Many companies are part of global markets
and see the US withdrawal from the Paris Agreement as ceding US
leadership but not stopping the market transformation that is under
way. Some markets may slow, but some may just move to other parts
of the globe, such as Germany, India, and China, where heavy investments
in renewable energy and alternative drivetrains (such as electric
and hybrid) are viewed as the future of the energy and mobility sectors.

The public is also moving in favor of sustainability. Already,
public opinion polls show that an increasing number of Americans
believe climate change is real. Some even show that a majority of
Republicans—including 54 percent of self-described conservative
Republicans—now believe that the world’s climate is changing and
that human beings play some role in the change. This is a marked
shift from 2009, when just 35 percent of Republicans believed that
climate change was real. The truth is that many Republican politicians,
congressional aides, lobbyists, and staff believe in the science
of climate change as well but are waiting for the right political cover
to voice their views.

Concern for the environment is a long-term interest of the
American public, one that is more latent than urgent and top of
mind. While surveys show that it ranks low on election issue topics—number 12 in one poll, behind the economy, terrorism, foreign
policy, and health care—it is also driven by saliency, and it will
awaken when threatened. That awakening can be triggered by any
number of levers. If history is any indication, smart business leadership
will read these signs, anticipate the market shift, and seek
to take advantage.

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Read more stories by Andrew J. Hoffman.