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Why the pandemic should drive sustainable business

The fallout from Covid-19 gives governments a degree of leverage over corporations. They should use it to impose the sustainability agenda, says Rotterdam School of Management’s Frank Wijen

With the ongoing rollout of vaccination campaigns, governments are now in a significantly better position to plan for our economic recovery, and hopefully a new and better future. 

There is no doubt that the spread of Covid-19 will continue to cause distress and chaos globally – in addition to the immediate impact on human health, the future continuity of millions of firms is on the line, threatening massive unemployment. Yet, although there are redundancies looming and the pandemic continues to cause havoc – amplified by constraining government measures – the fallout from Covid-19 has actually created an exceptional opportunity to change the world for the good. 

Many governments have provided massive levels of support to affected firms and their workers to stave off a tsunami of bankruptcies and job losses. This is truly laudable, since we have learned from the crisis of the 1930s that non-intervention will entail a vicious circle of further economic sliding. 

Halting economic decline is an important, yet insufficient, public policy objective on its own, because an upcoming economic crisis is likely to be followed by an even larger environmental crisis, with disastrous effects dwarfing those triggered by Covid-19. 

While many environmental issues threaten continued economic prosperity, the cost of inadequate efforts to curb climate change will be huge and will undermine future economic activities – as has been outlined by noted economist, Nicholas Stern, whose 2006 Stern Review on the economics of climate change covers the intertemporal costs and benefits of (in)action. Therefore, to best protect our economic futures, governments need to kill at least two birds with the huge stone they are throwing into the economy. 

Rethinking and reinventing

In my opinion, firms with sizeable carbon footprints should be required to vastly reduce their emissions in return for state support. In other words, governments should demand a quid pro quo, in that recipients of state aid promise to clean up their act, literally.

Energy company, Shell, for example, should be told that it will receive help for hydro, solar, and offshore wind projects, but not for traditional oil exploration, production, refining, and distribution. Similarly, airlines should only be rescued if they cease short-haul flights for which public transport alternatives are feasible, invest in highly energy-efficient aircraft, and accept substantial carbon taxes on all flights.

Farming is another sector that needs to rethink its environmental attitude. We need food, of course, but not at any cost. European farmers have been generously subsidised for decades but continue to burden society with the environmental costs from intensive farming practices, such as huge freshwater withdrawal and nitrogen oxide emissions. Construction is also a highly conservative sector in need of reinventing itself. We need homes to live in, but wooden-framed houses can be just as solid and robust as those erected from brick and concrete while involving much lower levels of carbon emissions. 

Some governments have understood the necessity to make their financial support to distressed firms contingent on environmental measures, while others keep on delaying as the ice melts. Two months after France decided to grant €7 billion EUR to airline, Air France, the Netherlands came to the rescue of KLM with €3.4 billion EUR in state aid. The French government attached green strings to its support of Air France, but the Dutch government still seemed to consider the sky the limit and asked only for symbolic environmental measures. 

Lack of leadership

The importance of attaching sustainability criteria to financial support needs to be interpreted against the backdrop of a lack of business leadership in making sustainability transitions that adversely affect their vested interests. While businesses are great at implementing practices that stimulate both environmental and financial gains (the ‘win-win’ opportunities, such as serving environmental consumers), they shy away from those that adversely affect their ongoing business. And they often focus on the short term. 

For instance, companies owning huge unexploited oil and gas fields will not voluntarily abandon these assets. Shell beats the sustainability drum, and its investments in renewables have recently taken off, but the amounts involved still dwarf those it dedicates to new fossil fuel projects.

History teaches us that huge reductions in greenhouse gas emissions have never resulted from climate change policies alone. They have often been a by-product of public policy decisions or political events, including the UK’s closure of unprofitable coal mines and privatisation of the electricity sector (with the related transition to less-carbon-intensive gas, known as the ‘dash for gas’), German reunification (and the related investments in more energy-efficient factories in Eastern Germany), and – indirectly – the German safety-driven phasing out of nuclear energy after the Fukushima disaster (and the ensuing scaling up of renewable energy, whose plummeting production costs in solar and wind power fuelled a global demand for renewables). 

Environmental strides

Since the corporate world is unlikely to adopt game-changing environmental improvements of its own accord, governments must take the lead and impose the sustainability agenda as they rescue firms damaged by the pandemic. 

Necessity is the mother of invention and change, and business will only walk its sustainability talk when forced to do so by ineluctable government requirements. The sustainability transition will only materialise, therefore, through targeted government support, in which economic and environmental recovery operate in lockstep. 

Since governments virtually always prioritise economic stakes over environmental interests, the sustainability agenda will need to piggyback on economic interventions. The exceptionally large amounts of public funding that are about to be poured into the economy provide a unique opportunity to make significant environmental strides while also propping up the economy. In this context, the EU is showing leadership by publicly pledging 30% of its €750 billion EUR post-coronavirus restructuring emergency fund will be financed by the issuance of sustainable bonds. 

Governments can save work, without necessarily saving existing jobs. A significant number of positions will almost certainly cease to exist over the next few years and others that we cannot yet even imagine will emerge. For example, new jobs in developing circular business and managing smart grids. 

One of the key challenges for sustainable growth is to help people and firms adjust to this series of dramatic changes. Business Schools and universities will become vitally important in ensuring a smooth transition here. 

A major threat is that governments will take short-term measures as they give in to powerful business lobbies and eschew measures that might displease their electorates. Unfortunately, unconditional business support is a short-term remedy that fills one hole by deepening another one. The failure to address major environmental problems head-on could well drive the next global disruption, such as a climate crisis of an even larger magnitude. The actions of governments in the next few months will clearly have important implications for the long run. As the French dictum goes: ‘To govern is to anticipate’. Governments with foresight must therefore ensure they attach solid environmental strings when pouring public money into distressed businesses.

What can Business Schools do?

Senior Business School leaders need to recognise the impact climate change will have on businesses and their personal lives, and should work together with their students and the wider business community to help find solutions. 

Companies can provide a powerful incentive for greater Business School focus on sustainability. When executive education directors and careers service directors see this is a serious issue for business clients, action will follow.

Business Schools are training the leaders of tomorrow and have to take responsibility for that. Systemic thinking is about considering the wider and indirect effects of business actions, beyond the direct cause-effects we are used to. These effects are not just financial, and we need to teach good metrics that comprehensively capture socio-environmental outcomes.  Business actions need to go beyond the upcoming quarterly earnings, implying that the mindsets of students need to be adjusted to consider the longer-term implications as well. 

Furthermore, Business Schools with course materials that are predominantly based on North American and European ideas and practices need to develop the openness of mind to understand and support other managerial styles. This includes appreciating that eastern and southern businesses may be run differently while working towards the same sustainability goals. Finally, corporate responsibility needs to be duly incorporated into existing mainstream courses, rather than relegated to standalone ethics courses. In short, Business Schools will need to embrace a much more integrative approach, in which students develop the mindset and skills of systemic, longer-term, and open-minded thinking, acting, and measuring. 

Frank Wijen is an Associate Professor at the Department of Strategic Management and Entrepreneurship, Rotterdam School of Management (RSM), Erasmus University, Netherlands. 

This article was originally published in Ambition (the magazine of BGA’s sister organisation, AMBA).

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The importance of purpose-led behaviour in tackling climate change

Archaic perceptions of climate change are dwindling and now is the time for leaders to role model purpose-led behaviour and lift the curtain on bad practices, says Chris Bowden, HBS graduate and Founder of a B2B marketplace for clean energy

For c-suite executives, environmental, social and governance (ESG) issues have traditionally played second fiddle. Some have been hamstrung by board members and shareholders, who can often be blinkered by the lure of short-term results or bound to the archaic belief that companies which focus on ESG issues experience a drag on value creation. Concerningly, PwC’s 2020 Annual Corporate Directors Survey found that only 38% of board members think ESG issues have a financial impact on a company.

This negative perception of the climate agenda has resulted in many c-suite executives making unrealistic, unconsidered, and empty pledges; pledges that will still need to be met long after they have left the company. However, creating a poisoned chalice for future leaders is neither helpful nor ethical.

CEOs see opportunity in the ESG agenda

Fortunately, refusing to accept the greatest challenge of our time, climate change, has shrunk considerably among c-suite executives and sustainability is now firmly on the boardroom agenda.

While some businesses spent the past decade committing minimum resources to token programmes, curating outlandish claims of commitment, and for a questionable few, thinking they could buy their way to a greener world, a handful of clever companies already had the wheels in motion. It was these companies who had stopped experimenting and instead prioritised the development of much needed sustainable products.

At the turn of the millennium, the idea of an electric-only carmaker seemed like an eccentric fallacy, not just to consumers but to every other auto-manufacturer too. Tesla, however, was smart and, most importantly, it understood that the transition to a low-carbon economy was inescapable. Tesla understood that although EVs look the same as petrol cars from the outside and perform a similar function for consumers, they are completely different on the inside and require the fusion of software, electronics and manufacturing. They developed a product to meet the needs of social expectations, regulatory demands, investment and technology trends, while other industry titans put on their blinkers, kept their heads down and plugged on, business as usual. It was a dangerous strategy and one that’s left an entire industry desperately playing catch-up.

In more recent years, CEOs across all industry sectors have awoken to the power of ESG strategies in building resilience and securing commercial success. By way of example, a recent PwC survey showed that more than 50% of UK CEOs plan to increase their investment in sustainability and, according to a new report called Taking Stock: A global assessment of net zero targets, at least one fifth (21%) of the world’s 2,000 largest public companies have committed to meet net zero targets. Together, these companies represent sales of nearly $14 trillion USD. This is a victory of many years in the making.

So, what is the catalyst behind this shift? Study upon study has noted that today’s consumers will spend their money with brands that align with their moral beliefs and have no hesitation in snubbing companies which they believe are not pulling their weight. As I type this, Spotify tells me it has collaborated with O2 to launch the first sustainable audio campaign as part of the mobile operator’s commitment to be net zero by 2025. Spotify and O2 are to invest together in nature-based solutions to offset all carbon emissions from O2’s audio activity on its platform for the next 12 months. It’s a welcome reminder that change is afoot.

Employees have an important hand at the table, too; pushing the companies they work for to follow a moral imperative and punishing those which fail to speak out by taking their talent elsewhere.

The reality is that if you have waited for someone to tell you to prepare for climate change, you’re putting your business at risk. This is not only evident in the growing maturity of the ESG movement in capital markets and financial services but also with the improvement in the returns on stock for companies with higher ESG ratings. There is much potential in climate risk mitigation, but it requires a shift in perspective from being triggered by fear to planning for opportunity, and that is no mean feat.

The CEO as the role model for purpose-led behaviours

In the UK, a flood of government legislation has provided more certainty, more focus and more precedent. Sustainability professionals have long banged the drum for climate change with little audience. But there is no time left to explain the need to act to the naysayers, and no amount of peer-reviewed research will help either. Business leaders have been called up to join the cavalry and it is down to the CEO to lead the charge. They need to not only make it a priority, but then need to make it the norm.

Purpose-led behaviours are key to this transition and the unique position of the CEO can make this happen. It is this individual who can raise the ambition of its employees, reflect honestly on challenges and shortfalls, as well as to set a definition of responsible leadership. These purpose-led behaviours will then trickle down through middle management. After all, these are not only the people who split budget, develop products, and lead teams, but they are also our future leaders who will carry this weight of responsibility far beyond our days.

Disruptor brands have already proven the return on initiating such leadership. Scottish brewery, BrewDog, and New Zealand-American footwear company, Allbirds, for example, were cited as inspiring organisations that have used product and services to create a deeper and meaningful connection to the planet and communities, in a recent report by media company, edie, in association with UK energy supplier, Centrica.

Perhaps the biggest challenge facing CEOs is the need to dig deep to unearth bad practices, seek clarity on myths and ensure any claims they make are indeed true to what they say they are. Only when the CEO holds up a mirror to see its true reflection will this important practice become the norm in all levels of a business.

Unfortunately, bad practices are not uncommon in the supply chain and that includes the renewable energy market. Some suppliers in the UK, for example, source energy from fossil fuels and then buy REGOS (Renewable Energy Guarantees of Origin) or even worse, European GOs (Guarantees of Origin) and then package this up as ‘renewable energy’ for their clients. Imagine claiming that your company has committed to green energy, publicised this to your employees and customers in the media, only to find that you’re buying fossil fuel energy. This is just one of the many bad practices we need to lift the curtain on.

Decades of tiptoeing around, ignoring the unequivocal science and embracing the type of box-ticking culture that encourages only standardised ESG issues has left everyone scrambling to avoid the irreversible impact of climate change.

Unless green-thinking, purpose-led behaviours and action runs through the veins of businesses, we will fail to prevent the catastrophic impact of climate change. This is not the time to experiment, this is the time to act. Titans of business may exist as a small collective, but remember, positive change has always been driven by the movement of the minority.

Chris Bowden is the Founder of Squeaky, a B2B marketplace for clean energy. He holds an MBA from Harvard Business School and has also attended Singularity University, the Business School at City, University of London, and the University of Manchester.

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Management education’s approach to sustainability is broken – here’s how to fix it

The true meaning of sustainability has been distorted and Business Schools are as much to blame as big business. Lars Moratis and Frans Melissen offer a three-pronged path towards a better approach for those in management education 

Over the past decades, Business Schools have been heavily criticised for neglecting their societal role – both from within the institution and by outside stakeholders. Often-heard critiques have targeted Business Schools as pursuing a too narrow and rigid scientific model of management, teaching capitalism as the only form of organisation to their students, and surrendering to rankings and the market. 

Others have accused Business Schools of being complicit in the wave of corporate fraud scandals that took place around the tum of the century and have pointed at their role in the 2007-2011 financial crisis. One 2009 research paper from Temple University’s Robert Giacalone [now at John Carroll University] and Donald Wargo even posited that Business Schools were at the roots of the global financial crisis because they promulgated theories, such as profit maximisation and materialism, that made it easy for business managers to eschew ethical behaviour in favour of short-term profits. 

Dubbed ‘academies of the apocalypse’, Business Schools suffered an existential crisis and were urged to reflect on their societal role. An important outcome of the resulting soul-searching efforts was that Business Schools across the board increased their attention to business ethics, CSR, and sustainable business. Their efforts to integrate these topics into management education have ranged from offering electives and mandatory standalone modules to making these topics part and parcel of foundational strategy, marketing, and management courses. 

The next crisis: conveying the wrong message

Now, Business Schools do not seem to be critics’ target of choice when looking for the causes of, and culprit behind, the Covid-19 pandemic – perhaps because the pandemic has manifested itself primarily as a health crisis and, by implication, it has been governments’ handling of the spreading virus that has been the news of the day since March 2020. While, at first, it may appear that all this has little to do with educating managers and business leaders, in reality it does – albeit not so much in terms of rapidly switching to online modes of delivering management education. 

This becomes clear when reviewing Business School faculty’s discipline-oriented interpretations of the business consequences of Covid-19, or the way they are overhauling curricula by emphasising the importance of risk management and changing their business models to demonstrate their relevance. In fact, the Covid-19 pandemic has catapulted Business Schools into an existential crisis yet again, and the silence about it is deafening, both by critics and Business Schools themselves. Moreover, sustainability is not part of the solution for this crisis – it is part of the problem.

The problem with management education’s provision of sustainability is that it has tended to convey the wrong message to students. For one, management students have been taught that corporate responsibility for sustainability is supra-legal, implying that what is not against the law, is neither unsustainable nor unethical behaviour. In addition, students are being taught that being profitable is a social responsibility in itself, if not the primary responsibility of business. 

Pandemic parasitism

It may hence come as no surprise that online reservation platform, Booking.com, which has boasted billions in profits over the past few years and has brought back some $4.5 billion USD in stock in 2019, requested and received financial support from the Dutch government as part of the latter’s Covid-19 emergency stimulus package. In a similar vein, large companies in the fashion sector decided to cancel their summer collections, all in line with the contracts they have with factories in low-income countries that produce them, burdening the latter with the costs of massive numbers of unsold products. Within such narrow interpretations of responsible and sustainable corporate conduct, not behaving irresponsibly quickly becomes outright pandemic parasitism.

A second example can be found with Amazon. While launching a US$2 billion USD Climate Pledge Fund in June 2020, Amazon apparently failed to provide for adequate protective measures for its warehouse employees to ensure safe and sanitary working conditions during the pandemic. In the same period, according to a Financial Times report, the company boasted over US$400 billion USD in additional market cap and hired some 175,000 new employees to keep up with spiking online shopping. 

For reputational reasons, companies may be keen to jump on board the climate bandwagon in order to prevent being labelled a laggard on today’s most challenging societal issue, but a healthy workforce and good employee relations (the ‘inner’ side of sustainability) are part of the same course – even though this may be far less visible to the public and not nearly
as mediagenic.

A more nuanced instance of pandemic parasitism is the online campaign that Unilever ran for its beauty brand, Dove, over the past months. The company used iconic images of worn-out nurses and doctors, marked by the protective equipment they had worn for hours and hours while treating Covid-19 patients – arguably intended to demonstrate that the company cares for these healthcare workers and to support the message that they provided free products for the pandemic’s heroes. Whereas this could easily qualify as opportunistic corporate behaviour and one could question why such an engagement would need to manifest itself as a brand campaign, management students are familiarised with such behaviour under the sustainable guise of cause-related marketing.

Teaching all too shallow conceptions of the roles and responsibilities of companies with regards to sustainability implies that Business Schools should share in taking the blame for such examples of corporate behaviour in times of social upheaval.

A deeper crisis: a culture of institutionalised exploitation

The existential crisis for Business Schools that the Covid-19 pandemic reveals runs considerably deeper than these examples, though. This becomes clear when Covid-19 is seen for what it is: a symptom of a systemic crisis. Essentially, the pandemic boils down to a deeply disturbed and unsustainable relationship between humans and nature that is fuelled by an obsession with growth and short-term economic gain, firmly rooted in a neoliberal worldview. 

Central to this worldview is colonising nature, depleting natural resources, seeing human beings as production factors, reducing animals to raw materials, and seeing society as serving corporate interests. It is a worldview that propagates a culture of institutionalised exploitation. Privatising profits and socialising costs are the name of the game. Societal challenges are, first and foremost, business opportunities. Climate change, biodiversity loss, and poverty are inevitable collateral damage. This worldview has become so normalised and pervasive in contemporary business culture – and reproduced by Business Schools – that it has distorted the true meaning of sustainability: ‘sustainability’ is no longer a form of social criticism or a notion that exemplifies the importance of building an ecologically sound and equitable society for current and future generations alike, but is framed within a political ideology that essentially runs counter to it. 

No wonder that this has led Business Schools to adopt and create a language of popular sustainability newspeak that includes concepts such as ‘environmental profit and loss accounts’, ‘true pricing’, ‘ecosystem services’, ‘the business case for sustainability’, and ‘nature-positive economic recovery’. In fact, sustainability only seems to be acceptable when it has a business case, hence protecting the regime’s vested interests, be they: reducing operational costs; the ability to attract and retain talent; developing new markets; and/or building or restoring corporate reputation. This has given rise to an obsession with the concept of ‘green growth’ in business, government and NGO circles – a fallacy which revolves around ever-growing economies without fundamentally changing business models and economic models.

However, as Professor Steve Keen of University College of London’s Institute for Strategy, Resilience and Security has recently argued, the neoclassical economics of climate change are appallingly bad, with economists being overly optimistic about the economic damage from climate change. As he writes in a 2020 paper in Globalizations: ‘If climate change does lead to the catastrophic outcomes that some scientists now openly contemplate, then these neoclassical economists will be complicit in causing the greatest crisis, not merely in the history of capitalism, but potentially in the history of life on Earth’. Speaking about catastrophic outcomes, the 2020 report, Fatal calculations: How economics has underestimated climate damage and encouraged inaction, concluded that ‘the economic damages by not acting may be so large as to be unquantifiable’. When that is the situation, why worry about building a business case? Additionally, despite policy rhetoric, there is no empirical evidence on resource use and carbon emissions that supports green growth theory.

How Business Schools can step away from current approaches to sustainability

With Business Schools being part and parcel of the factors that have caused the systemic crisis producing the Covid-19 pandemic and some of the pernicious corporate behaviour that emerged amid it, management education needs to take a radical step away from the dominant way it approaches sustainability. There are three courses of action in this direction that Business Schools should take:

1. Management education should make ‘critical studies’ a central part of its curricula

Through critical studies, students can scrutinise the assumptions that underpin what is considered to be ‘normal’ corporate conduct, successful business models, and contemporary business and society relationships. Critical scrutiny of these assumptions will also strengthen students’ understanding of existing power structures in economy and society and the political nature of sustainable development. 

This may include studying degrowth – defined by economic anthropologist, Jason Hickel, in the book Less Is More – as a socioeconomic approach towards restoring the balance between the global economy and the living world in a way that reduces inequality and improves human wellbeing. Engaging in critical studies would also include a thorough reflection on the roles and responsibilities of Business Schools, the worldviews that govern their knowledge production and dissemination activities, and what direct and indirect impacts Business Schools have on society.

2. Management educators should stimulate their students’ moral imagination in order to envision new ways to address moral problems and find solutions for our world’s grand challenges

Moral imagination challenges us to build empathy and solidarity with those who might not be considered parts of our community – for instance, precarious workers, future generations, and natural ecosystems. This resonates with what philosopher, Mark Johnson, writes in his book, Moral Imagination, that we, ‘must be able to imagine new dimensions for our character, new directions for our relationships with others, and even new forms of social organisation’. 

To develop this ability, creating and experimenting with new narratives about the role of business and society to ignite novel courses of action is crucial. Management educators should neither refrain from confronting their students with controversial opinions and stances, including those from other scientific disciplines, nor from initiating debate. Art can play an important role here, as it possesses the capacity to create meaning and stimulates us, ‘to see more, to hear more and to feel more of what is going on within us and around us. Art is shocking, provoking and inspiring’, as former MIT Sloan management professor, Edgar Schein wrote. Based on such insights, Slovenia’s IEDC-Bled School of Management has set out to integrate the arts into management research and teaching, exploring an arts-based pedagogy and artistic business learning inspired by poets, philosophers, architects, and dancers.

3. Business Schools should engage in systemic activism

Systemic activism, as opposed to issue-based activism, recognises the complex and interconnected nature of modem problems and assumes that change is necessary on many levels. The way the Covid-19 pandemic has unfolded, touching virtually all realms of life, is a vivid illustration of this. As is the climate crisis, which has impacts on poverty, which affects gender equality, which affects education, which affects decent work, and so on. Moreover, research shows that the global north has contributed 92% of CO2 emissions in excess of planetary boundaries, while the global south, that will experience the worst consequences of climate breakdown, has only contributed 8%.

Systemic problems eschew single-issue solutions – they require a rethinking of economic, political, social, judicial, and cultural systems. Business Schools should embrace the moral and political agenda that underpins the transition to a sustainable economic model and make campaigning for furthering that agenda their priority.

A deeply moral question

Of course, one could argue that Business Schools should take a neutral position towards challenges of a moral and political nature as ‘independent’ institutions that produce and convey management knowledge. It should be recognised, however, that taking a neutral position is also enacting a political agenda, particularly in the face of the rampant ecological and social breakdown, in which business plays an important role. 

Sustainability is not a concurrent perspective on corporate strategy, but a deeply moral and political question about how we want to live. In any case, who would say that teaching and research are value-free? Discussions about the hidden agenda of management education should sound all too familiar to anyone working in a Business School. Here, too, silence is violence. Business Schools should push themselves to identify the leverage points for societal change – and given the fact that they are the proverbial spiders in the web when it comes to understanding the impacts of the role of business in, and on, society, this should not be too difficult. Management educators, in turn, should recognise the potential of activism as a source of rich learning experiences.

Business Schools should acknowledge that because, as Indian novelist, Arundhati Roy wrote in 2020: ‘Historically, pandemics have forced humans to break with the past and imagine their world anew. This one is no different. It is a portal, a gateway between one world and the next.’ We should enter the new reality as soon as possible. That cannot be done in silence. The post-pandemic Business School is activist.

Lars Moratis and Frans Melissen are holders of the Chair in Management Education for Sustainability, a joint initiative of Antwerp Management School and Breda University of Applied Sciences. They are also co-creators of the concept of ‘sustainability intelligence’.  

This article was published in 2020 in Th&ma Hoger Onderwijs and was adjusted for publication in Ambition (the magazine of BGA’s sister organisation, AMBA) before its appearance here.

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In search of the new sustainability trailblazers

Programme leaders are best placed to integrate the myriad of issues around sustainability into Business School content, say ESSEC Business School’s Carina Hopper and Johanna Wagner

Chances are that you have been hearing talk of sustainability and the need for Business Schools to do more to bring forth a new generation of business leaders that are more environmentally and socially inclined than their predecessors. In the broader context of society, we might ask who is responsible for driving this change. While there are many factors at play, we would be doing a disservice to Business Schools to deny their unique influence on the minds they help form. Once set to work these minds can influence society through diverse channels as business leaders and informed citizens in positions of power. 

An initial exploration of the topic of sustainability content in management education raises many questions. What change are we looking for? Which strategy will create the greater impact – offering a specialised sustainability diploma to a minority of students, or introducing sustainability fundamentals to the majority? Is the main objective to impart knowledge, or to convince students to care? Who, within the institution, should be responsible for taking the lead on sustainability education? In this article, we propose answers to these questions in an effort to accelerate change.

The changing landscape of business and society

Among other things, Business Schools teach their students to become reliable problem solvers. They give them the techniques and the confidence to approach challenging business situations with a strategic mindset, ideally one that drives innovation and a sense of progress for the company.

These challenging situations have traditionally been about the bottom line and increasing shareholder value through return on investment. Today, however, not only is the concept of shareholder primacy under question, but also the shareholders themselves are increasingly supporting more sustainable business practices. This is due to developments in the regulatory environment at national and supranational levels as well as a search for purpose both from employees and customers. 

In turn, these transformations are creating greater demand for new skills and competencies to move organisations forward in a context of growing uncertainty and constraints. While recruiters are seeking candidates who are ready to navigate and help shape this evolving business ecosystem, millennials are breaking with previous generations by expressing an openness to accepting lower pay to work for organisations whose values align with theirs.

Introducing sustainability in management education

In reaction to these signals, the exploration of sustainability in Business Schools is currently two-dimensional. The first dimension is operational and relates to the way Business Schools are run, in terms of facilities and services as well as governance and recruitment. The second dimension, and the focus of this article, is the introduction of sustainability content, mostly emerging as dedicated electives, diplomas and chairs, or one-off activities with specialised partners.

The first issue when discussing academic content is the current practice of siloing sustainability, in which learning is restricted to a limited, interest-driven audience. In this model, a small minority is trained while the large majority remains distant from discussions on topics that are now affecting every field, industry and manager.

The second issue is related to the gap between the supply created by these specialised diplomas and corporate demand. On the one hand, master’s programmes in sustainable business train specialised managers whose profiles are very attractive for only a limited number of organisations. Elsewhere, their profiles may even frighten recruiters or managers whose organisations have not yet made a strong commitment to sustainability. 

On the other hand, organisations could use more managers who, while not specialised in sustainability, are well equipped to contribute to sustainable innovation and change. This is especially relevant when working with engineers, scientists and technicians who are themselves specialised in sustainable practices.

It is interesting to note how this siloing of sustainability mirrors corporate trends. There, the development of dedicated CSR departments have, in many cases, proven to be an imperfect answer to lingering issues with a lot at stake. For this reason, Unilever, to name just one example, dismantled its CSR department in 2016 for the purpose of embedding sustainability throughout all of its activities, an approach called for by other CSR professionals across industries.

Towards actual integration

In academia, a comparable de-siloing dynamic is needed. In our proposed model, programme leaders are given the necessary resources and support to integrate sustainability effectively throughout their programmes’ current courses. This involves empowering them to embed a cohesive sustainability message into their existing curricula, organise relevant training for their faculty, and engage with prospective students on the topic.

Programme leaders are in the best position to initiate and foster this paradigm shift. Their proximity with all programme stakeholders bears the potential to accelerate decision making and customise action, which in turn impacts the success of their programmes in rankings, which is one important measure of their performance.

On this trailblazing route to sustainability integration, programme leaders may face obstacles that mirror the experience of visionary business leaders: 

+ In the midst of conflicting interests and ideological debates, you should anticipate a battle for resource allocation.

+ As in any process of change, you will find reluctance among your teams (including faculty and staff), who will need to be brought on board using the appropriate support and training mechanisms.

+ You will have to find ways of implementing your ideas even though they may not tick existing boxes in terms of administrative planning and reporting.

+ You will have to define the specific terms of stakeholder engagement adapted to your programmes and region.

+ In a constantly evolving context, there will be few impact measurement tools available at the onset of your work (BGA’s Continuous Impact Model is one) and there will be limited recognition by rankings. It’s important therefore to keep in mind that you are contributing to the development of both, by generating data and providing feedback.

Conclusions on the current state of affairs

As both MBA alumni and postgraduate management programme lecturers, we believe programme leaders hold pivotal responsibility for the integration of sustainability in business education. 

This is because they are strategically positioned at a crossroads between companies and the individuals who will one day manage them. Not only will these individuals impact communities through their businesses’ operations, but they will also send signals that, in turn, influence public policy and, more generally, public opinion. 

More than just becoming reliable problem solvers, students should be taught to become accountable solution designers. 

Higher education should empower students with knowledge on a wide range of systemic reactions to help them make enlightened decisions on what to care about and how to prioritise, thus arming them with the capacity to act responsibly before a full range of stakeholders. 

Judging from the current state of affairs, it seems that too many management students are graduating without that capacity.

Carina Hopper teaches sustainable business and entrepreneurship at Business Schools including ESSEC Business School, SKEMA Business School and ESMOD Fashion Business School. 

Johanna Wagner is a hospitality finance and asset management expert. She teaches in leading European hospitality management master’s programmes. 

Hopper and Wagner are Co-Founders of La Belle EDuC, which offers training for institutions on the path to sustainability integration with the goal of empowering students in their choice of studies.

This article was originally published in Ambition, the magazine of the Association of MBAs (AMBA).

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Integrating sustainability into business education: part II

The second part of Business Impact‘s synopsis of a panel event, co-hosted by BGA earlier this year, on how sustainability can be better integrated into the DNA of higher education. By Daniel Kirkland and Ellen Buchan

Following the topics covered in the first part of this account (which you can read here) the panel proceeded to discuss the limits of desirability and possibility, in terms of embedding sustainability effectively across a range of courses and where its focus might lie as a business concern over the next three to four years. 

SDA Bocconi’s Pogutz explained that there are two possible paths that could be taken to embed sustainability in organisations. One is to appoint a technical professional – the chief sustainability officer – and the other is developing leaders with sustainability mindsets through MBA programmes. 

‘The big challenge is that organisational structures are still not metabolising that, so they go back and ask for a very vertical style of competence. So the integration would be mandatory, but not for becoming a sustainability manager. That’s even more complex as a challenge, at least for us in Italy,’ Pogutz said. 

St.Gallen’s Walls added: ‘I would push that concept even further. At Business Schools we have a responsibility and an obligation to teach students not only about sustainability, but also about values-based management in general. 

‘How we’re going to implement that is going to be a different question, but I feel that we’ve done a disservice to our students; we’ve created this kind of MBA person that goes out and focuses on certain things when they go out into the business and, as a result, we’re now facing some global challenges, like climate change, social unrest, and all kinds of biodiversity loss. 

‘Business are not able to cope with these challenges right now. I think we need to take a deep and critical look at ourselves as Business Schools and ask what is it that we should be providing to students. [Sustainability] has to be the oil for everything, it can’t just be one cog. Otherwise we won’t solve the problem.’ 

Understanding ourselves as Business Schools

Zollo responded to this challenge, adding: ‘The entire challenge can be framed in terms of understanding ourselves as Business Schools. We’re having the same type of challenge that we’re asking businesses to face. 

‘They have to rethink their purpose, in terms of creating value for stakeholders and giving up on the idea of privacy to monetise stakeholders and shareholders. We also have to rethink. 

‘First of all, content-wise, there is no logic in adding one more course, or one more module. There is no question about that once we have decided that we want to be part of the solution – to contribute and shift the world towards a sustainable society. 

‘Then the question is [how to go about] redesigning all the programmes, including the MBA, starting from those assumptions – i.e. this is the theory of the firm that we’re going to teach, and every single course, whether it’s finance, marketing, strategy, organisation, is going to be taught on the basis of that theory of the firm, which says “your role as managers is to create that value for stakeholders, period”. There is no choice anymore.’

Taticchi responded by outlining his own belief that it is impossible to teach different modules without integrating sustainability within them.  

‘I think it’s very important to create the right narrative,’ he said. ‘Sustainability should not be a separate module, otherwise it is perceived as something different from “real” business. 

‘Sustainability is about smart business; it’s about exploring opportunities; and it’s about exploring management risks. I think it’s important that students realise this at the beginning of their business education so that when they study strategy or operations they have the right mindset for that.’

The purpose of the MBA

Crane outlined a pressing challenge: the way Business Schools market an MBA is often on salary uplift and the Financial Times ranks programmes based on this criteria, so a rethink into how Business School programmes are marketed and evaluated is needed. 

‘We need to transform the way that we think about the purpose of an MBA programme before that happens,’ he said. ‘That will only happen if the whole ranking changes, if the way we market programmes changes, and if the business model of Business Schools changes.’  

Crane went on to describe a ‘sense of isolation’ in Business Schools, and the difficulty in encouraging business students to go outside a Business School and talk to people in other fields, such as environmental science, sociology, and developmental studies. 

‘They don’t want to know,’ he said. ‘They want to talk about finance, they want to talk about marketing in the safe cocoon of the Business School because they are there to get an increase in their salary. The challenge we have is breaking out of our own silo. 

‘We have a structural problem; we are pulling up the drawbridge not putting it down. You need to create an open institution. As Business Schools have emerged, they aren’t the model that we need in order to tackle the problems that we want to solve.’

The role of accreditation bodies

With that in mind, do accreditation organisations also have a role in pushing for more of a focus on sustainability? 

‘If you want Schools to focus on things such as stakeholder capitalism or the climate emergency, you can ask them to do so, but ultimately you have to require them to do it, to get the kind of change necessary,’ said Crane.  

‘That’s where accreditation comes in,’ he added. BGA and others are starting to push quite strongly at this and it is a requirement to some extent for accreditation that’s getting stronger all the time, but [in terms of transformation], I don’t think we are there yet in the accreditation system.’  

Robert outlined her views that it’s useful for Business Schools to have rules to follow that help them know what to do: ‘Not all Business Schools are accredited but the top ones are. Accreditation has a really huge impact because Business Schools which aren’t accredited follow the ones that are – and the students know this as well. We want to have the accreditation bodies take sustainability into consideration more and more. The accreditation has to take this big chance in order to make a difference.’  

Walls agreed with this sentiment: ‘You need the student body to push and you need the accreditation bodies to pull. I think that something which is even more crucial is how Business Schools stay relevant. Not only relevant to business and the global challenges we face but also relevant to new students coming in and for future students who are now high schoolers and will be entering university questioning why they would they go to a Business School if there is nothing there about sustainability or ethics. 

‘It’s about Business Schools looking at their long-term survival strategy, in the same way that businesses do. The external environment is changing, we can see that. Business Schools need to respond if they want to be there.’

Taticchi was keen to reiterate what the role of an accreditation body is: ‘It’s not just about setting requirements and making sure that Business Schools meet those requirements.

‘It’s also about creating a best practice and helping Schools improve on what they do. There is an advisory board with accreditation bodies which is extremely important. That’s why sustainability should be part of the conversation for accreditation bodies.’  

Iliev closed this part of the debate by adding: ‘Accreditation is a consultancy process. We have created an inventory of the key terms that need to be implemented across all the programmes, including sustainability terms. An accreditation, such as BGA, can provide the template for Schools that don’t have the expertise in sustainability.’ 

The role of Business School rankings

Having discussed the role of accreditation in taking the sustainability agenda forward, the panel moved on to discuss ratings and rankings – which they were challenged to consider in terms of a help or hindrance to Business Schools when recruiting students. 

‘I think that there is a difference between ratings and rankings’ said Robert. ‘We talk a lot about rankings and not so much about ratings,’ she continued. ‘For the rankings, obviously it’s a major thing for Business Schools. Everyone wants to be ranked number one but that is only one place, so they at least want to be well ranked.  That’s what Schools use to make sure that students are going to pick them, and that the activities in the Business School will fit what they need to move up the rankings ladder, which is an incentive. But we feel, as students, it is also good to have another tool which can be used, because once you are ‘ranked’ you either celebrate or you are disappointed. The ratings system has another purpose because you can do something about it.’ She explained that this was why oikos International launched a positive impact rating, which is about evaluating and assessing the positive impact Business Schools have on society and students. 

Robert said: ‘In the positive impact rating we have different dimensions, like educating and engaging as well as governance, culture, programmes, learning methods, student engagement, the institution as a role model, and public engagement. Students are enabled to rate their Schools in terms of positive impact and, from there, the Schools have the data to know what the students think of their institution’s positive impact.

‘The goal is to encourage stakeholder engagement and everyone to work together to bring the Schools to another level, in terms of positive impact. There were no Business Schools in this first edition [of the rating] that reached the top level in terms of learning methods, in terms of institutions as role models, and in terms of engagement. 

‘We believe in Business Schools and we want them to move on and have positive impact. I think it’s important that the rankings take into consideration the positive impact of Business Schools, because in some ways this is where we need to go and in this sector we are trying to move ratings and rankings in that direction.’

Other panellists were keen to discuss rankings and what could be improved in their methodologies to support sustainability.

Crane was pulling no punches. ‘I think rankings like that of the Financial Times have had the most negative, pernicious influence on the greater development of Business Schools as you can imagine, in terms of dealing with this issue,’ he said. ‘It focuses on all the wrong things. I would say that in terms of getting Schools to focus on sustainability, responsible business and positive impact, its finally got a bit of sustainability in it, like 2%. But the whole salary uplift thing overwhelms this so that the overall effect is minimal.’  

But he added that the biggest problem with rankings are how Business Schools respond to them: ‘Schools are very good at managing the rankings,’ he said. ‘The trouble is that rankings are [often] based on students’ responses. The way that Schools react to that is to try and influence the student responses, not influence what they do in their Business School. 

‘So rather than focusing on their educational responsibilities, they will be much better at promoting what they are doing to the student body and they will be much better at connecting with their alumni and telling lots of positive stories and getting them to say lots of positive things about them.

‘For a relatively small School, the idea that you could be the top of a sustainability ranking is like gold dust. Your dean will listen to you if you can say we can get you from number 20, to number one if you do X, Y and Z. You might never get to the top of the Financial Times ranking, but you can become number one in another ranking.’

Imperial’s Zollo agreed, stating: ‘I think it might be the time to really think about perspectives in creating the rankings. So far rankings have taken the perspective of the student: what do they want? 

‘It’s about time that we took the perspective of “what kind of MBA does society need?” and “what kind of MBA elements do we need to forge?”

‘That should be the overarching criteria to create the various metrics on which Business Schools have to compete.’  

St.Gallen’s Walls put forward her fear that Schools might, in fact, dismiss ‘smaller’ rankings because they will be perceived as ‘less important’ in time-pressured and political university environments.  

‘This is why it would be great if the larger rankings bodies focused on sustainability, because not everyone pays attention to specialist rankings,’ Walls said.   

Stakeholder relations

Building on this, Pogutz explained that one point missing in the sustainability agenda is the relationships that Business Schools have with their various stakeholder groups when it comes to prioritising their competencies. 

‘Climate change is urgent,’ Pogutz said, ‘and we may not have time to repeal the effect of it. It will take a lot more time [than the nine to 10 years we have]’ before pointing out that sustainability is multidisciplinary. 

‘How many of us have ever heard of anyone from natural sciences speaking about climate change? If you take all of the social dimensions of it [into consideration], such as human rights – who are the experts in human rights in Business Schools and how can we build pathways in Business Schools in this type of topic? 

‘We have pressure because the agenda is there and we have a long way to go. There is a huge cultural transformation.’  

Inspiring cultural change

As the debate drew to a close, the panellists agreed that while issues around rankings and course design were looming hurdles in developing a sustainability agenda across Business Schools, accreditations and research – such as those offered by BGA – would support Schools in embedding sustainability in business education. 

The biggest challenge identified, however, was implementing a shift in the culture and internal politics of Business Schools and the wider universities of which they are a part – and measuring the impact they are having in terms of this culture shift, and the wider sustainability and climate change emergency. 

The panel agreed that the first step would be collaborating to prioritise this pressing issue and communicate it to students, employers, and external and internal stakeholders before it’s too late. 

Held in partnership between AMBA & BGA and Imperial College Business School, ‘Integrating sustainability into business education’ took place at the London institution’s campus in February 2020. 

The panel for the event consisted of: Andrew Crane, Director of the Centre for Business, Organisations and Society, University of Bath; Clémentine Robert, President, Oikos International; George Iliev, Director of Strategic Projects and Innovation; Accreditation and China Director, AMBA & BGA; Judith Walls, Chair for Sustainability Management, University of St.Gallen; Maurizio Zollo, Head of the Department of Management, Imperial College Business School; Paolo Taticchi, Director of the Weekend MBA and Global Online MBA, Imperial College Business School; Stefano Pogutz, Tenured Faculty of Management, Department of Management and Technology, SDA Bocconi. The panel moderator was Andrew Jack, Global Education Editor, Financial Times.

This article was originally published in Business Impact magazine, issue #4 (June 2020).

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Integrating sustainability into business education: part I

Earlier this year, BGA brought together a panel of Business School leaders to debate how sustainability could be integrated into the DNA of higher education effectively, to prepare business and society to address the challenge. Daniel Kirkland and Ellen Buchan report

Sustainability is one of the key issues facing society today, and garners increasing attention from governments, the media, academics and industry.

In response, BGA partnered with Imperial College Business School earlier this year to host an event focused on integrating sustainability into business education, which included a lively panel discussion among sustainability experts who delved into various aspects of the sustainability agenda, including the economic, the environmental and social perspectives. Business Impact attended the session and picked out some highlights and key takeaways from the debate.

Andrew Jack, Global Education Editor at the Financial Times (FT) kicked off the discussion in his role as moderator: ‘The Financial Times does deep coverage on business and business education, and we do a number of rankings’, he said. ‘But the FT itself has a new agenda which is about balancing profits with people, planet and purpose, so this area of sustainability, corporate responsibility and social impact is something that’s deeply important to us and is part of the reflection that we’re undertaking around the review of our rankings.’

He added: ‘I think a lot of people in this room share an understanding of the importance of sustainability, but of course given the historical culture of business, I wouldn’t say that the driving force behind the demand [for sustainability] has come from employers, or the majority of students, necessarily,’ before asking participants what the level of demand coming from employers and students really is for Schools to take sustainability more seriously and to integrate it into their teaching.  

Demand for sustainability

Paolo Taticchi, Director of the Weekend MBA and Global Online MBA at Imperial College Business School, took forward the conversation around the demand for sustainability: ‘In terms of the percentage of students demonstrating an interest for sustainability, I’ve seen this growing in the past six years,‘ he said.  

‘If you look at the number of electives that we offer in the sustainability space, all of them are doing well. We recently launched a module called ‘the future of cities’ where we look at the future of sustainability. Immediately we see there is demand for that. 

‘We are also seeing a growing number of students becoming interested in activities relating to sustainability, including workshops, conferences, and networking events which are organised by our students around investing in responsible business, diversity, or inclusive business.’

Judith Walls, Chair for Sustainability Management at the University of St.Gallen, added: ‘We have seen a strong student interest [in sustainability] for more than 30 years. If I look at master’s programmes, there is very high interest and demand in sustainability and people self-select into certain courses but I had the experience, recently, at the MBA level where we were offering a course and there wasn’t enough interest in sustainability. We didn’t have enough MBA students signing up and we cancelled the course. We’re now reviewing how we sell sustainability to MBA students. ‘At the university itself we have more than 10 student groups that are dedicated to
social and environmental sustainability,‘ Walls added. ‘So there are a lot of bottom-up initiatives from the students themselves.’

Clémentine Robert, President of oikos International, a student organisation that seeks to strengthen sustainability-oriented entrepreneurship, said that there was a higher demand every year for sustainability from students.

But she moved to address the apparent lack of interest in sustainability from the employer perspective, saying: ‘Basically, sustainability – at its core – is not necessarily there. It’s not what [employers] look for when recruiting a student for an internship or job. They want an ethical mindset and that is central to the recruitment process. Previously employers were not really looking for that in the recruitment process, so I would say that this has evolved. But there is still a lot to do, so we’ll keep working.’

The international business education arena

Maurizio Zollo, Head of Imperial College Business School’s Department of Management and Entrepreneurship has previously held roles at SDA Bocconi in Milan previously, and as a Visiting Professor at MIT in Boston, so he was keen to discuss the different approaches to sustainability between Italy, the UK and the US. 

‘In the European context there is a lot of growth and there is a lot more ease in both promoting and integrating sustainability content in programmes,’ he said. ‘The employer side, is still slowly progressing. 

‘Progress on the other side of the pond – in the US – is mixed. Some Schools seem to be able to find the appropriate way of doing this. It is typically Schools that are small, Yale [School of Management] for instance, that are able to rethink and redefine the whole MBA, starting from simple assumptions [based on] stakeholder organisation. We only have one planet, not two and a half. You know, that type of obvious assumption for those of us that are converted [to championing sustainability].’

Critical mass

Stefano Pogutz, Tenured Faculty of Management at SDA Bocconi said he was seeing ‘critical mass’ in terms of students seeking sustainability courses: ‘I see a lot of movement and attention at the undergraduate and the post-graduate level. The numbers are growing to the point that we are in trouble because now there are too many people and this type of active education cannot extend to 120 people in a class. 

‘The MBA has been a bit more resistant, so at Bocconi we’ve slightly changed the first year of the programme… Let’s see how it will be at the end of this year. I have mixed feelings right now. I think [the MBA programme is] where you have a little more resistance; it’s a common theme.’ Pogutz’s comments were followed by those of Andrew Crane, Director of the Centre for Business, Organisation and Society at the University of Bath who agreed that there had been a definite increase in sustainability on Business School programmes during his career: ‘We’ve got more students interested, we’ve got more faculty interested, and we’ve got more courses on sustainability, which is the good news story,’ he said. ‘The bad news story is it can only go so far. I don’t think there is a level of student interest or demand to really pull it deep into the curriculum. I’ve worked for the past 20 years in at least three of the top Schools for integrating sustainability into the core of the curriculum. If you want the percentage of students that are actually demanding more sustainability content, it is 1%. I get an MBA programme of 100 students. Within that, you’ve got one or two students who are the activists. 

‘And those are the programmes that are already doing pretty well. They’ve already got a core course dealing with sustainability, and an elective on sustainability. The challenge is getting students to think that they need more. They’re saying, “we already did sustainability, what else do I need to know?” 

‘So the challenge is, if we want greater student demand, how do we get students to ask for more than we’re currently giving?’

International examples 

George Iliev, Director of Strategic Projects and Innovation; Accreditation and China Director at AMBA & BGA, explained that, at the time of the event, BGA accredits five Schools globally and that, as part of this recently launched accreditation process, each institution’s sustainability credentials are examined. 

He explained: ‘One [BGA-accredited] School is in China and the programme that integrates sustainability the most in its curriculum is a joint management and engineering undergraduate programme. ‘I’ve never seen employers speaking so positively about the graduates of this programme. Granted, it is probably not the sustainability that is driving this, it’s the mix of engineering, management and electronics at the university.’ Iliev went on to discuss a School in Finland, which has been running a master’s in corporate environmental management since the 1990s, remarking that its students are very successful in finding jobs. 

This article was originally published in Business Impact magazine, issue #4 (June 2020)

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Understanding the drivers and challenges of sustainable business

Sustainability in business has become a vital selling point, but companies remain value-maximising entities, writes Audencia Business School’s Iordanis Kalaitzoglou

In response to spiralling scientific evidence for climate change, increasing numbers of countries are introducing environmental legislation. Global political will in this area appears higher than ever, as evidenced by the 2015 UN Climate Change Conference (COP21), 2016’s Article 173 of the French Energy Transition Law, and the European Commission’s action plan on sustainable finance. There has also been 2019’s election of Ursula von der Leyen, who put environmental action high on her agenda as President of the European Commission and successor to Jean-Claude Juncker.

However, empirical evidence suggests that much environmental legislation is either overly ambitious or inadequate, meaning that the vast majority of countries do not meet their environmental targets. The usual explanation for this is that environmental action is not cost effective. Yet this is inconsistent with the fact that, over the long term, energy generation from renewable sources will become stable and economically viable. For example, around 75% of coal production in the US is now more costly in generating energy than solar panels and wind turbines, according to a study for Energy Innovation, a San Francisco-based firm that analyses clean energy and climate policies. 

Wish lists rather than concrete plans

Unfortunately, the political will to disengage from fossil fuels does not seem to be strong in the US, while other countries, such as Brazil and Turkey, prioritise economic objectives over environmental goals. 

This leaves global energy summits seeming more like an exercise in creating wish lists than opportunities to formulate concrete action plans. In fact, evidence shows that very few countries address their environmental impact adequately, with the result that global greenhouse gas emissions are reaching ever-increasing heights. Several reports stress that we are the last generation that can act on preventing climate change. They also suggest that unless significant action is taken now, the ensuing crisis will lead to worldwide social, political and financial turmoil on a level not seen since the Second World War. Even so, the setting of high targets while carrying on with ‘business as usual’ seems to be rooted in some strong macroeconomic trends.

Environmental corporate incentives

The warning signs are already here. July 2019 was the hottest month ever recorded on Earth. Even if we put this fact aside and look at the issue from a simple business standpoint, the growing sense of urgency around climate change is creating a strong demand for more ethical entrepreneurship and for products that address environmental concerns. In other words, sustainability has become a selling point as well as being necessary for human survival. Companies therefore have a strong incentive to show that they are in line with their stakeholders’ environmental concerns. 

A significant number of companies are beginning to cater more overtly to the ever-increasing demands of their stakeholders, to present a greener profile to their customers and suppliers, and to society in general. This shift in public demand means environmentally friendly activities have become commercially valuable. An environmentally friendly social profile has become so popular that there are now agencies that evaluate firms’ environmental performance and financial entities that focus exclusively on green firms. 

But if environmental friendliness is so high on so many companies’ agendas, why are so many companies, and countries as a whole, still not aligned with officially recommended environmental targets? Are these companies’ actions simply inefficient, or are there other factors holding things back? 

Most likely, it is both.

Financial corporate incentives

Companies are value-maximising entities. The primary objective of management is to increase the wealth of shareholders because they are hired by, and answerable, to them. Over the past few decades, it has become generally understood that value maximisation is an holistic approach that doesn’t just include financial objectives, but encompasses anything that can affect the profile of a company. In that spirit, companies are inclined to offer what their stakeholders request in the best possible way. If an environmental profile is in demand, it is advantageous for a company to adopt it. 

Yet, sacrificing consumption power in favour of the environment does not resonate unconditionally with consumers. As the ‘gilets jaunes’ protests in France, or US coal and oil protectionism measures designed to save jobs, have shown, this tends to influence government actions. 

A sharp shift towards a zero-carbon economy would require a drastic shift in consumption habits. For example, energy generation from renewable sources, although abundant at times, is not stable and might result in periods of low energy generation. This might require electricity consumption (industrial and retail) to be adjusted, but current demand for electricity is completely inflexible at a global level. 

Similarly, green products might require higher production costs, which would make them more expensive. Energy-intensive industries and price-sensitive consumers are then more likely to prioritise financial needs over environmental ones. 

Companies therefore often face a trade-off between being environmentally friendly and price competitive. These two things are not necessarily aligned, so companies choose to optimise, rather than specialise. The criterion they optimise is their value-maximisation objective. This is somewhat sensible from an economic point of view, since it is more realistic to adopt new measures gradually, rather than to induce a shock. It is also the spirit of EU policies, in which promoted incentives focus on becoming smarter rather than better. This equates to a period of transition, during which individual firms and national economies are expected to move gradually towards a zero-carbon state. 

Companies’ incremental adjustments are looking to find the right balance between environmental friendliness and value maximisation. This is why their current actions might seem inefficient: the macroeconomic trends driving these actions do not yet support a full environmental engagement.

Window dressing vs. lobbying 

The economics of energy transition create both financial and environmental incentives, so different firms should be expected to pursue different strategies, according to their energy profiles. 

For example, it would be much more difficult for an energy-intensive firm, or a fossil fuel company, to change its business model drastically in order to be more environmentally friendly, because this would involve significant investment and cost. 

However, since a company’s profile is often improved if it makes this change, or at least gives the impression that it is doing so, businesses might take less conventional actions to preserve or increase their value in this way. There are two types of corporate activity that are observed frequently in this arena: ‘window dressing’ and lobbying.  

The private sector is well known for trying to bend political will towards its financial incentives by lobbying decision makers. But, when it comes to environmentally sensitive issues, these actions are often met with firm public opposition. The consumer base, especially in mature economies, is becoming more environmentally sensitive and lobbying activities that are perceived to have a negative environmental impact can also have a negative impact on the companies involved. 

Companies have been very active in trying to improve their public profile with respect to their environmental impact, but most continue to lobby at the same rate. 

In some cases, as in the examples of the big five fossil fuel companies (BP, Shell, ExxonMobil, Chevron and Total), PR campaigns are designed to show that attempts to reduce environmental impact are being made, while spending continues out of the public eye on current – and not so environmentally friendly – activities and/or lobbying. 

Again, a drastic shift in stakeholders’ consumer behaviour would help reduce the impact of lobbying, either by supplying a financial objective for these firms, or through changes to the political agenda and reforms to the relevant legislation. 

Is it all that bad?

Greater environmental awareness and a demand for more sustainable products create the foundations for a potential shift in corporate actions.

Although the demand for environmental friendliness among stakeholders may be best described as ‘lukewarm’, with an electoral base that leads governments to pursue a very slow shift of resources and priorities towards environmental policies, there is significant progress that partially mitigates the impact of the rigid demand for energy. 

The most encouraging progress has perhaps come with the realisation, among stakeholders, that to promote more environmentally responsible policies, they must mobilise the aggregated demand towards more responsible consumption. This can be done by quantifying their arguments so that people can understand and compare the relative costs – while also making use of social media platforms to nudge people to amend their spending habits.

Shifts in aggregated demand would force companies to innovate and offer
more environmentally friendly products, with the support of governments. While current levels of change are insufficient, there have been notable developments. In the finance industry, for example, terms such as ‘climate change risk’, ‘social cost of carbon’, and ‘carbon price’ have entered the vocabulary, and green financial products have emerged. As little as 10 years ago, this would have sounded far-fetched. 

The public and private sectors both serve a social purpose and are supposed to meet the needs of their stakeholders in the best possible way. Consequently, if the social groups they serve amend their attitudes at an aggregated level, it is in the best interests of both the public and private sectors to follow. In other words, if everyone played the same game, everyone would win. However, considering the demographic composition of the electoral basis, this should not be expected to happen any time soon.

Iordanis Kalaitzoglou is a Finance Professor at Audencia Business School, France.