These Are the Real Obstacles to Sustainability
Companies are experimenting with sustainability extensively, but despite good intentions, fundamental steps forward are mostly lacking. What levers can ensure that the sustainable transition is really set in motion? Two economists and a political scientist address that question for De Raad of Management Scope. Sandra Phlippen is Chief Economist at ABN Amro. Rick van der Ploeg is professor of economics at Oxford University and the University of Amsterdam. The political scientist in the discussion, Frank Biermann, is professor of global sustainability governance at Utrecht University. Discussion leader Marc-Jan Reumers, managing partner Benelux at strategic consulting firm Kearney, wants their advice on best practices to get companies moving (quickly) in the right direction.
1. Stop subsidizing fossil
Sandra Phlippen: ‘That's really step zero, even before you start talking about CO2 pricing. If the government stops subsidizing fossil, certain economic activities that are not future proof will go bankrupt. That has the added advantage of making people available who can work where they are needed, for example in the energy transition.’
Rick van der Ploeg: 'The implicit and direct subsidies on fossil fuels amount to about 7 percent of GDP worldwide. In the Netherlands this amounts to billions of euros. The biggest polluters enjoy energy tax rebates and exemption from excise taxes on kerosene, among other things. So, it is a no-brainer to start here. It is not even necessary to implement policies to do so. The government should simply not heed the sirens of the lobbyists.'
Frank Biermann: ‘Both in abolishing subsidies and in CO2 pricing, though, it is essential to always include the interests of the poorest people. The protests by the "yellow shirts" against rising fuel prices in France initially had everything to do with the fact that the low income group in particular was affected. People who could not afford housing in Paris were forced to drive into Paris by car for work. The higher energy prices were not accepted. Similarly, people will never accept restrictions on air travel through pricing, while at the same time there is a group of people who still and continuously travel the world in private jets. The same thing plays out at the international level. The "yellow jackets" at the climate conference in Sharm-el-Sheikh were India and Africa who rightly said: without compensation we won't participate.’
Sandra Phlippen: ‘We should indeed consider that moral fairness. The "polluter pays" principle is also problematic in that CO2 pricing trickles down into the consumer's shopping basket and particularly affects those with little income and savings, even when trying to alleviate it through a dividend to their bank account. Moreover, if carbon pricing is not accepted by the electorate, governments should be allowed to create green debt extensively. It is currently often argued that future generations should not be burdened with these extra debts, as they did not cause the problem. Yet I think those future generations would rather have green public debt than facing even greater climate damage than is already the case.’
Rick van der Ploeg: ‘I find the concept of “the polluter pays” dangerous as it can easily evolve into a cash cow. The aim is not to rake in money, but to create sensitivity which would initiate fundamental change. Other interventions are better suited for that.’
2. Create positive tipping points
Rick van der Ploeg: ’I would like the government to try to avoid negative tipping points – such as irreversible warming of the oceans – by actually putting positive tipping points into action. First, with technology. For every doubling of the number of solar panels, the cost falls by 30 percent. For every doubling of the number of wind turbines or the number of batteries in use, the cost of the next wind turbine drops by 20 to 40 percent. The government, as launching customer, needs to start example projects so that costs decrease and cost reduction in the market accelerates.
In addition, political tipping points are needed. It is currently expensive and inefficient to convert a city or neighborhood from gas to heat pumps, but it needs to happen. In the long run, costs decrease and it becomes interesting for local politicians to take action as well. Finally, there is the Greta Thunberg tipping point. If you see your neighbor doing green, the social peer effect causes you to become greener as well. In short, there needs to be a government-driven big push technologically, socially, politically and psychologically to change the negative equilibrium we are in now to a positive equilibrium.’
Frank Biermann: ‘An equitable transition in subsidies and technology can also be such a tipping point. For example, a solar energy association in India is going to advocate for the temporary use of coal, because they do not have enough capacity now to expand into solar energy and without coal they will not make fast enough progress in providing energy to poor people. If they get the necessary financial and technological support from governments in rich Western countries, that could be a decisive turning point. Business in the West can then respond. If all of India and Africa go into solar, that will be a huge and fast-growing market. There really is a role there for companies to actively take ownership, for example through industry associations with shareholder and supervisory support.’
Sandra Phlippen: ’The hundreds of billions going into green subsidies in the United States may also contribute to the turnaround. Yet in Europe the discussion is mostly on protectionism and the impact on business. From a global perspective, it is of paramount importance that we make a giant leap forward technologically. What this does to the competitive position of European industry is of secondary interest: if we do not change direction, it will also have an enormous impact on economic growth which will hurt industry. It is far more important that the technology does become available.
I am moreover also positive about the European Carbon Border Adjustment Mechanism. The carbon border tax conserves the level playing field between countries and incentivizes multinationals from other countries to reduce CO2 if they want to enter the European market as otherwise their products will become too expensive. Many multinationals use European laws, regulations and standardization as a standard because it enables them to roll out their products in the rest of the world simultaneously. The knock-on effects can be immense. That, too, is positive.’
3. Do not stare blindly at ESG. CAPEX needs to move in the right direction.
Rick van der Ploeg: 'The capital assets of many companies are polluting and carbon intensive. That is why companies should be judged on what they themselves - that is, without government money - invest in new, green activities. My question to CEO's would therefore be: what part of your CAPEX is green? If you really want to make the transition, the percentage of your new CAPEX should not be two or 10 percent, but 90 to 100 percent. At the moment it is challenging to know these figures, as it is damn hard to tease it from data or the annual reports. We need better reporting at the company level, because to measure is to know. Now we have built a whole ESG circuit around measuring is knowing, but it is rubbish. Companies with the best ESG scores often also have the highest emissions. It feels virtuous and sends a good message when investors will accept lower returns if it has an ESG label on it, but actually companies are fooling themselves and investors. ESG labels are vague; a green CAPEX can be measured. You cannot tamper with it.'
Sandra Phlippen: 'I agree that ESG is almost a smokescreen for a positive image, but is it not mainly because the E, S and G are bundled together? If you isolate the environmental E, CO2 emissions can be clearly reported.'
Rick van der Ploeg: 'That only confirms that you should not be blinded by ESG. Multiple studies have now shown that there is no correlation between ESG targets and companies' emissions.'
Sandra Phlippen: ’Shareholders play a crucial role in sustainability. At present more and more shareholders first maximize their profits. Then they spend part of that profit on their social mandate, such as a NGO. That NGO uses the money thus obtained to lobby the government for laws and regulations, so that all companies will, on a level playing field, need to comply with these new rules . This level playing field is of course important as the extent to which a company can take unprecedented measures in a competitive market, is limited.
According to groundbreaking work from 2017 by economists Oliver Hart and Luigi Zingales, there is, however, a faster and more expedient way. Their alternative is to not maximize profits first, but to, at the outset, accept lower profits for the sake of those social returns. This would in practice mean shareholders ensure that polluting economic activities by companies do not even get off the ground. This would limit profit as long as there is no proper carbon price, but because the shareholder accepts this as its social mandate, the company does not lose competitiveness. By doing so, their research shows, the result is that companies take production decisions whereby highly polluting activities decrease and the green percentage of Capex grows, while the level playing field is maintained. This makes the detour via the NGOs redundant. Yet, disappointingly, some Dutch companies with state shareholding as well as some of the pension funds, still prioritize profit maximization.’
4. Realize how deep the crisis is
Discussion leader Marc-Jan Reumers poses the question: 'You mainly refer to levers where government needs to play a significant role. How do we get business itself, i.e. without government intervention, to act?'
Frank Biermann: 'Awareness plays a role in this. That we really are in a deep planetary crisis has apparently not yet dawned on the people in business who make the decisions. The 20th century is over. We are really entering the 21st century and it demands fundamentally different actions from both government and business. For example, there is a strong trend toward eating less or no meat. What will that mean for all those branches of business that do something with meat? What does climate change mean for insurers? Can you still grant mortgages for a house built outside the dikes or ignoring the shoreline setback off the Florida coast?
Significant recent changes for the business context include social trends such as the degrowth movement and the targeted and reasonably successful lobbying by social actors against big polluters; but one of the most substantial challenges might be stranded assets. Companies owning coal mines may no longer use some of them. Many of the oil fields will never be exploited again. The value of these ‘assets’ will no longer increase, and at some future time this reduction of asset value will be significant. This will have a huge impact not only on the companies involved, but also on the financial world, think of banks and insurers.’
Rick van der Ploeg: 'If you set the total reserves of oil and gas fields and coal against the CO2 budget that is allowed to be emitted in the coming years, we are talking about a factor of 8 times too much. So either those companies will soon be bankrupt or the environmental policy is totally implausible. And even worse: billions are still being invested every year - including by our pension funds - in new operations. That is not future proof. Continuing to invest in the technology of the past instead of the technology of the future, is scoring an own goal. We should no longer want to invest in future stranded assets, similar to how we do not want to invest in weapons or child labor. It is good to involve science in these kinds of questions. Scientists are happy to provide thorough information to Directors, Supervisory Directors and shareholders.’
5. Stop the backlash
Marc-Jan Reumers: 'How can corporate Executives - if they even want to - help the government move in this direction?'
Frank Biermann: 'By not lobbying against it. That is where it starts.'
Sandra Phlippen: 'If it is really clear to entrepreneurs that they have to be CO2-neutral by 2030 in order to maintain or increase their market share, they will embrace it - also because it releases more energy in themselves and within their organizations to be part of such a positive tipping point rather than to keep blocking measures and defending yourself. The problem is that there is still ambivalence hanging over the market: are we going that way or not?'
Marc-Jan Reumers: 'Who should create that clarity?'
Frank Biermann: 'In the Netherlands it should be prime minister Rutte. As in the COVID period, he should, dressed in a solemn black suit, tell the nation that a real change is imminent. Although the government enforced a strict course during COVID, up to and including a lockdown, social acceptance was fairly high. To get the sustainable transition done, including from a financial-economic perspective, we now need firm and sweeping climate policies. Tough measures are as inevitable now as they were during the pandemic.'
This article was published in Management Scope 02 2023.
This article was last changed on 07-02-2023