A new form of capitalism is needed to address today’s major global challenges and ensure the future of generations to come, writes Beth Knight. Beth is head of corporate sustainability for financial services at EY, which partnered with Salt for the recent pioneering Disrupting Finance event.
Traditional capitalism has proved itself successful at delivering growth in an age of abundant land, natural resources and biodiversity. That age is over. We need a new form of capitalism that values opportunities and risks in an economy that is being reshaped by a changing climate, finite natural resources, dwindling biodiversity and an increasingly urbanised and connected population. These trends cannot be sustained without major adjustments to our existing capitalist model.
Traditional change approaches aren’t working
Integrating sustainability considerations within the current model of capitalism is a difficult and disruptive process. One example is the low-carbon economy, which is being slowly boosted by efforts such as carbon taxes, emissions trading and deforestation disincentives. The World Bank estimates that US$6 trillion will need to be invested globally in infrastructure, every year, up to 2030 to deliver a truly low-carbon economy.
Outside of the commonly used examples of corporate sustainable leadership (e.g. Unilever and Kingfisher), a key challenge is convincing leadership of the value of integrating sustainability. Demonstrating the value of such integration is difficult, particularly when working against financial and resource constraints, combined with short-term profit maximisation objectives.
Examples of innovative solutions do exist (see the Consumer Goods Forum “Soft Commodities”), but are often experimental, dependent on weak and unreliable government support, isolated from mainstream methods and up against incumbent multinationals.
Systems change involves moving beyond the lens of financial value, to incorporate environmental and social impacts. Whilst corporate responsibility and socially responsible investing are examples of short-term fixes to the existing model, they fail to recognise the imperative for the capitalist system to change.
A question of value and values
The financial services sector is at the core of modern economies, ensuring that businesses function and people maintain their livelihoods. However, capital markets are failing to incorporate all relevant 21st century factors into their investment, lending and insurance decision-making. Short-termism is coupled with a lack of understanding of true modern economic value.
As demonstrated in the following statement by Unilever CEO Paul Polman, long-term value is required across the system: “Since we don’t operate on a 90-day cycle for advertising, marketing, or investment, why do so for reporting?” The financial system needs to embrace Polman’s vision of long-term capitalism and how this concept applies to two connected, but very different areas of the economy – divestment/diversification from fossil fuels and accounting for natural capital.
For divestment, “stranded assets” are on the forefront of the agenda, with HSBC warning that oil and gas majors could lose up to 60 per cent of their market value if current global carbon reduction targets are implemented. Simultaneously, placing value on natural resources and biodiversity – natural capital – is radically changing product and investment calculations.
As demonstrated by the lack of environmental risks mentioned in Basel III, figures such as the US$6.6tn (11 per cent of global GDP) of environmental costs are trivial unless they become a specific line item on a company’s balance sheet. Assigning correct long-term economic value to fossil fuels and natural capital will have vast implications for both the financial system and capitalism as a whole.
To lead the long-term value economy, financial services must first get its own house in order, addressing the values (resulting in scandals such as PPI and LIBOR) that have cost companies billions each year in fines and penalties. On a small scale, there are companies demonstrating sustainability commitments, expanding investments in clean technology and adopting policies to address environmental and social risks. Coupled with capital constraints and regulatory compliance, the sector has a long way to go.
Bold and innovative strategies are needed
To achieve “sustainable capitalism”, innovators, entrepreneurs, intrapreneurs, investors and policy-makers need to work together to address key leverage points and ambitious targets.
This already exists in pockets of the sector, with investment guidelines like The Climate Principles, Equator Principles and UNEP Finance Initiative being followed in 2012 by the UN Principles of Sustainable Insurance (reacting to climate change impacts on business models). Within businesses themselves, millennials are growing in number and rank, their values attuned to long-term capitalism following them up the corporate ladder.
To make the change in capitalism happen, there are six principles that leaders need to embrace:
- Bold and innovative strategies – the corporate culture of responsibility
- Reframe government regulation and policy – forward-looking frameworks for sustainable development and long-term value
- Long-term incentives – growth being thought of in sustainable terms
- Innovation in investment products and services – attractiveness of sustainable investing and alternative finance
- Environmental and social materiality – understanding what factors will make companies successful in the new capitalist age
- Reporting transparency – data disclosure and sustainability risks assessment of investments and internal operations
Bold and innovative action, beyond corporate responsibility and sustainability reporting must be taken to ensure our future and the future of generations to come. We need to take the best of what is being developed by incubators and enable big companies to work with entrepreneurs, sector specialists and other business leaders to develop new products, services and transform business models. Paradoxically, our best hope for transformational change lies in the C-suite of incumbent businesses.
To access EY and Beth’s full report, click here
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