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).
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).