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Difficult business: The corporate world and climate change

In the corporate arena, climate change is both a friend and foe.

On the one hand, companies must adapt to growing regulatory, environmental, and consumer pressures and face a range of climate-related risks. On the other hand, for some corporations, taking effective action can turn risk into a sustainable competitive advantage.

In the absence of large-scale, sustained government action on climate change, individuals are increasingly placing their trust in business, specifically large multi-national corporations, to accelerate this ‘green’ change. However, there are disturbing warnings that despite our dependence on corporations to make a green transition, the overlap between market interests and green interests is weaker than once believed.

Are the world's companies leading the way in the fight against one of humankind’s greatest challenges, and can we depend on corporations and markets to address one of the gravest threats to our collective future?

Business has an enormous responsibility in addressing the challenges of climate change. A study from the World Bank revealed that from the world’s top 100 economic entities, 69 are corporations and only 31 are countries. Business is the world’s most prevailing economic force and is responsible for the lion's share of investment, spending and wealth generation. Moreso, businesses are substantial contributors to escalating greenhouse gas emissions. The Carbon Majors Report, reveals that just 100 companies and state owned entities have been the source of 71% of the world’s greenhouse gas emissions since 1988. Australia’s BHP Billiton Ltd falls in at 20th on the list, contributing 0.91% of the world’s carbon emissions alone.

Fortunately, some businesses are starting to see climate change as a strategic risk, and are reducing consumption to avoid the most harmful climate impacts. Yet, while the idea of market capitalism reinventing itself around new technologies and processes that would wean us off our fossil fuel addiction is tempting, what really happens when market interests collide with environmental interests? Recent research from Harvard Business School, investigated the underlying tensions between the demands of radical decarbonisation and more basic business imperatives of profit and shareholder value, using Australian corporations as case studies.

Despite operating within different industry contexts (energy, manufacturing, banking, insurance, and media), ultimately, a common pattern of corporate response was noted: ‘initial statements of climate leadership degenerated into the more mundane concerns of conventional business activity’. Catalysts for this change were found to be varied, and included declining corporate fortunes, a shifting political context, new CEOs who promoted a “back to basics’ strategy, new fossil-fuel related business opportunities, and the dilution of climate initiatives.

Although it’s undeniable that some businesses are riding a sustainability boom, for many corporates, this research highlights a sad truth: we cannot rely on relaxed assumptions of corporate self-regulation and “market solutions” for business to lead the way out of the environmental crisis.

As pointed out in a New York Times piece, it’s also not the dishonesty of specific iniquitous corporations that is to blame. Volkswagen’s diesel scandal was only one of many carmakers that ‘deliberately exploit lax emissions tests’. The issue lies in the very system and structure in which our corporations and society operate. The issue lies in the unrelenting focus on generating short-term profits and maximising shareholder value.

Is there a solution? What is increasingly clear is that we need to move towards a society where shareholder value is replaced by ‘shared value’ as an end outcome. The connection between social outcomes and business outcomes is already strengthening. Take for example the launch of mobile banking technology to 200 million in developing countries via Mastercard and Visa. Shared value cannot solve every problem, but there’s an enormous space in which this concept can be harnessed to drive a new wave of productivity and innovation that not only advances profits, but also social or environmental outcomes.

Ultimately, if business could also be tied to environmental outcomes at its core—at the very concept of shareholder value—then we may be able to see an end to the market failure of business on climate change.

Tom Perfrement is the Climate Change and Energy Security Fellow at Young Australians in International Affairs.

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