Generating value with sustainability
Green policies are not a tax to pay, but on the contrary a profit-generating investment
Article published in: MIT Sloan Management Review Italy, Year 3, Issue 1, January/February 2024
More and more companies are reporting their results not only in financial terms but also in terms of sustainability. The markets expect this, and analysts are paying attention. Almost all international organizations, from non-governmental organizations to UN agencies, now measure their impact using the indicators of the 2030 Agenda, the primary system for documenting collective progress on these issues.
However, in some circles, there continues to be resistance to viewing sustainability as a fundamentally strategic issue. Some believe it is merely a matter of communication or compliance, goals that are orthogonal to corporate profit. Others fear that pursuing sustainability is even counterproductive, seeing it as an additional cost with social benefits that are difficult to monetize. All of this reflects a fundamental misunderstanding.
The economic growth to which the entire modern productive world contributes is a phenomenon of the 20th century. The Second Industrial Revolution, mass emancipation, and the population explosion made the widespread improvement of material conditions a universal political objective.
However, it took time for growth to become an economic policy issue as well. The end of World War II and the emergence of dozens of former colonial countries, now independent and eager to enrich themselves, made long-term growth a universal economic goal. Economists then began posing the problem of how to encourage it.
Growth came: just think of the transformation of South Korea during the Park Chung-hee era or the Italian economic miracle.
What soon became evident, however, was that this growth produced collateral damage. The natural resources from which the economy extracted value bore an unaccounted-for cost, an externality, that threatened to undermine social progress. What to do? It was the 1970s. The oil crisis and related famines (albeit due to contingent phenomena) gave tangible form to these concerns. One answer came from the Club of Rome, founded by industrialist Aurelio Peccei, who espoused neo-Malthusianism: the obvious finite nature of the Earth could only restrict our growth aspirations.
In the 1980s, a synthesis was sought between environmental concerns and development aspirations. The result was the 1987 report Our Common Future, produced by the Brundtland Commission of the United Nations. Brundtland defined ‘sustainable development’ as that which meets the needs of the present without compromising the ability of future generations to meet their own needs.
This drive led to the first United Nations Earth Summit in 1992, where framework agreements on climate, biodiversity, and desertification were signed. Today, these agreements form the international architecture on which sustainability-oriented industrial policy initiatives are built, such as Next Generation EU and, most recently, the NREP.
In 1995, economist Kenneth Arrow formalized the hypothesis that there was an ‘inverted U-shaped’ relationship between environmental damage and per capita income. The idea was that countries would start out poor, with a low environmental impact, then go through a period of economic growth that damaged the environment. Recovering the environment, however, did not require a return to poverty. Beyond a certain level, increased wealth brought with it a focus on material conditions and the means to improve them, thereby reducing environmental impact.
The academic discussion surrounding these curves continues. The fundamental reason why markets are paying increasing attention to sustainability is the growing conviction that economic growth is, indeed, a cause of environmental problems, but it can also be the main solution, provided it is properly directed.
For example, it is clear that the solution to climate change lies in the electrification of the economy and the development of alternative energy production, storage, and transportation technologies, from renewables to batteries and hydrogen. To describe these industrial transformations inspired by sustainability as a cost to the real economy, as is sometimes done, is to misunderstand their driving force. It would be like considering the introduction of Ford’s Model T in 1908 as an unnecessary cost, simply because it could reduce horse and buggy sales.
Sustainability is nothing more than a particular mode of value creation, adapted to the prevailing needs of contemporary society. In all likelihood, it stands to the 21st century as the Second Industrial Revolution stood to the 20th. Understanding its implications is not merely a matter of compliance, but one of the most important strategic challenges of our time
By Giulio Boccaletti, Scientific Director of the Euro-Mediterranean Centre on Climate Change and Professor of Strategy and Sustainability at Oxford University
