Forget about the business case for sustainability
The climate crisis requires us to challenge our taken-for-granted assumptions, including the need to make the business case for sustainability. In this article, I explain why we should start asking instead: What’s the sustainability case of business? This is part of a series of articles highlighting issues I discuss in my upcoming book “Rethinking Corporate Sustainability in the Era of Climate Crisis — A Strategic Design Approach” (July 2021).
In an online event on the circular economy organized by the New York Times last week, Andrew Ross Sorkin asked Matt Dwyer, VP of Product Impact & Innovation at Patagonia about the expensive price of Patagonia products. Dwyer replied: “it is expensive and for a good reason…it’s not just about using recycled materials, it’s things like fair trade, it’s carving a path towards regenerative organic agriculture, and proving that we can run a very healthy sustainable business at the same time.”
Patagonia is indeed a healthy sustainable business with annual sales of over $1 billion. Earlier this month it was also rated as the most reputable company in the U.S. Overall, the company has managed to show how sustainability practices could help generate strong financial results. In other words, Patagonia exemplifies the business case for sustainability.
While Patagonia has managed to figure out how taking sustainability seriously could benefit the bottom line, many companies are not there yet. They are often struggling with the investment necessary to reduce the emissions in their supply chain or to improve the working conditions in the company, as well as with the fact that many sustainable practices are still more costly than non-sustainable practices.
The main struggle, nevertheless, is possibly more a question of a mindset than of math. After all, the business case for sustainability has been proved time and again (see here and here, as well as Andrew Winston’s excellent presentation on this topic). As Harvard Professor Rebecca Henderson suggests in her book Reimagining Capitalism in a World on Fire, while some changes could be expensive, companies should not forget about the benefits of these changes. She writes: “Is there evidence that there is a business case for creating shared value or for treating people well and reducing environmental damage? Definitely.” And Andrew Winston adds: “sustainability creates business value. Some things we do will pay back more quickly than others, but yes, it’s about business value — lower costs and risks, more innovation and enhanced brand value. It’s about building better companies.”
At the same time, as Winston notes executives have a hard time accepting that there is a business case for sustainability. They consider sustainability in terms of costs rather than investments aiming to create long-term value for the organization, similarly to marketing and R&D, he explains. Another reason could be that executives just do not consider the return on investments in sustainability to be quick enough. It may also be the case that, as London Business School Professor Ioannis Ioannou notes, environmental and social issues (in terms of risks in particular) “do not neatly fall into excel sheets that gave us company valuations.” Last but not least, some key benefits sustainability creates for companies are in the realm of intangibles, such as an increase in employee retention and customer loyalty, which could be more difficult for companies to recognize (in terms of connecting the dots to sustainability efforts).
Now, one question could be how do we get more executives to recognize the business case for sustainability, which will probably lead to a more aggressive adoption of sustainable practices and strategies. Given the growing pressures on companies to adjust to a net-zero economy the task of getting executives to see the value in seriously addressing their environmental and social impacts should actually become somewhat easier. And for those who still struggle to figure it out, there is even a Harvard Business School online course with Prof. Rebecca Henderson, where participants can learn to “Identify strategic opportunities and articulate the business case for sustainability to achieve corporate social responsibility (CSR) goals within your or your clients’ organization.” Sounds good, right?
Not necessarily. The key problem is that the concept of the business case for sustainability is grounded in a mental model in which companies’ economic considerations of profit maximization transcend those of sustainability. Because of this mental model companies need to figure out how pursuing sustainable strategies and practices can benefit their bottom line. In this “game”, sustainability cannot win, at least not in the short-term — as long as unsustainable practices and strategies are still doing the job, i.e. contributing their fair share to the bottom line (or at least are perceived as doing so) they are unlikely to disappear so fast.
The main issue is time, or more accurately the little time we have to move the needle on climate. As David Wallace-Wells wrote earlier this week: “When it comes to avoiding once-terrifying levels of warming, there can be no more delay; if you take these temperature goals seriously, there is simply no more slack in the timeline.” We need to accept that the challenges we face, first and foremost the climate crisis, require a bold and quick response. Fatih Birol, the IEA Executive Director reiterated this point last week in his comments following the latest IEA report on net-zero goals: “The scale and speed of the efforts demanded by this critical and formidable goal — our best chance of tackling climate change and limiting global warming to 1.5 °C — make this perhaps the greatest challenge humankind has ever faced.”
Hence, when “sustainability is speed” as Alex Steffen puts it, the business case for sustainability as a guiding concept is just not good enough and is unlikely to generate the type of radical change we need to see in business. It certainly did not seem to work so far — take for example how far companies are in terms of meeting the Paris Agreement goals — according to the 2021 State of Green Business Report, the current stated targets for global companies are “72 percent short of required emissions reductions to achieve the Paris Agreement.” Adding to it the need to advance equitable and just climate solutions, which is more challenging for companies, you can see why I am skeptical about the likelihood that pursuing the business case of sustainability is a viable path for transformation.
One might suggest that the relative ineffectiveness of the business case for sustainability as a driving force of change is the lack of supporting policies/regulation and too little pressure from investors, customers, and other stakeholders. While it is certainly true that a more supportive environment could be helpful, it is unlikely to help generate the necessary outcomes as long as the mental model of sustainability-as-usual (which I describe as “shareholder capitalism 2.0”) is in place. From my perspective, ignoring the dominant mental model echoes the false notion that we can address climate change as a technical problem rather than an adaptive challenge (e.g., all we need carbon tax). This approach, as Professor Karen O’Brien suggests doesn’t work.
What we need instead is a new mental model, which reverses the dynamics between sustainability and profits, assuming that sustainability considerations top everything else (aka “sustainability first”). As a result, rather than making the business case of sustainability, companies will start making the sustainability case of business. Let me be clear — this is not about the elimination of profitmaking as an important element in corporations, but about changing priorities. In other words, while sustainability will be prioritized, the pursuit of profits will remain a required condition for companies to succeed, but it will no longer be the key element for which they are optimized. Rebecca Henderson provides a good metaphor to consider this change in priorities: “..profits are always important but that doesn’t mean they have to be the goal of the enterprise. We all need to breathe to live but that doesn’t mean that breathing is our goal. You can have a firm that has broader goals than simply making money and it can be very profitable.”
It is important to clarify that changing the priorities is not the same as giving equal footing to environmental and social considerations (e.g. in a triple-bottom-line framework) because “sustainability first” establishes a clear hierarchy, where environmental and social considerations come first and profits second. It is also not similar to creating shared value (CSV), where companies are encouraged to address social and environmental issues to generate both social impact and profits. The difference here is that the win-win strategy of CSV still leaves room for companies to “continue to do bad when that is the best way for them to do well”, as Joel Bakan explains in his book The New Corporation. By contrast, considering sustainability as the first priority means that the option of “doing bad” is just no longer on the table.
There is already a number of voices suggesting to seriously consider the imperative of “sustainability first” in business. One example is Kate Fletcher and Mathilda Tham’s call in their book Earth Logic to “place earth first, before profit”. Another is Ergene et al.’s call to pursue a more radical research agenda “that takes us beyond traditional theories, models, and frameworks”, including a shift from the business case for sustainability to the ecological case for business. My sense is that with the growing urgency on climate and understanding of the shortcomings of the current mental model in business we will see more calls to shift from the pursuit of the business case for sustainability to pursuing the sustainable case of business.
At the end of the day, putting profits before sustainability is not a law of physics, but a choice we make because we believe in the story behind it (shareholder capitalism). Now that the circumstances have changed we need to make new choices to ensure our future. We thought that “the business case for sustainability” could be a pathway for transformation, but we need to accept that it is apparently not the case given the structural flaws of the current mental model. It is time to make new choices and write new stories that fit this moment and the challenges it brings with it.
Figuring out how to move to a new mental model of “sustainability first, NOW” (I add NOW to emphasize the need for immediate action) is going in my opinion one of the key tasks of the 2020s (in my book I get into the questions of how we can do it). For thousands of years, humans invented fictional stories that allowed them to cooperate. Now, it’s our time to create a new compelling story about “sustainability first” or otherwise, to quote Greta Thunberg “if we don’t change, we are f***ed”.
Raz Godelnik is an Assistant Professor of Strategic Design & Management at Parsons School of Design — The New School in NY, where he serves as an Associate Director of the Strategic Design & Management BBA Program. His new book “Rethinking Corporate Sustainability in the Era of Climate Crisis — A Strategic Design Approach” will be published by Palgrave Macmillan in July 2021. For more information on his work see Sandbox Zero. Feel free to connect on Twitter and LinkedIn.
