23 September 2024 - Lindsay Hooper, interim CEO of CISL, and Paul Gilding, a CISL Fellow, explain why we must urgently address the tension between profitability and sustainability.
The business case for sustainability is clear: companies cannot thrive on a planet suffering from cascading crises and unmanageable risks. Yet, despite decades of corporate commitments, businesses continue to damage the planet, carbon emissions continue to rise and fossil fuel companies continue to chase growth. The environmental, social and governance agenda has not delivered and in its current form it never will. We urgently need a change of mindset and a fundamental redesign of the markets that frame business decisions.
The sustainability actions of leading businesses demonstrate what is possible and generate momentum. They are setting ambitious net zero targets, reducing carbon emissions, collaborating to make supply chains more fair and sustainable and reporting transparently on their progress. However, there is a risk that the broad ESG or corporate sustainability sector is contributing to our collective inadequate progress by giving the impression that we’re doing fine. This reduces the impetus for structural change.
It is time to confront the uncomfortable truth: ESG as it stands — grounded in disclosures and voluntary market action — will not deliver the necessary change. The solution is a radical shift towards “competitive sustainability” — a concept I have recently set out in a paper co-authored with environmentalist and sustainability adviser Paul Gilding.
The core issue is not intention but execution. ESG has been largely an extra layer on top of traditional business models to manage risks and enhance reputations. But this fails to address the fundamental tension between profitability and sustainability. As long as the market rewards short-term gains over long-term resilience, businesses will harm the planet, and markets will destroy the foundations on which they depend.
We do not have enough time to rebuild institutions and economic systems before the global ecosystem spirals into chaos. Instead, we must leverage the market’s potential to deliver change quickly and at scale by redesigning business incentives and penalties. This will require a critical mass of businesses to push for government action — and a corporate mindset shift to view sustainability as a matter of competitiveness, not responsibility. We need proactive business support for a redesign of markets.
Businesses need to recognise that the imperative for action on environmental issues is one not of morality or consumer sentiment but the laws of nature. Climate change and biodiversity loss are not abstract threats but real and measurable factors that will undermine business as usual. Rather than asking “How much sustainability can we afford?” companies must ask “How do we accelerate, navigate and benefit from the transition?”
Some companies are getting it right — for example the Swedish steel, mining and utility businesses that formed the Hybrit initiative — working for a reinvention of their industry with solutions such as fossil-free steel. They are not just preparing for a fossil-free future, but shaping it — and positioning themselves to win. But others have clung to inadequate measures. For example, many in the plastics sector have defended claims of recyclability and focused on the use of recycled content. What they should be doing is building the critical mass needed to advocate for policies and action to drive waste collection, cut material use and increase reuse and recycling.
A change of mindset alone is not enough. The market must be redesigned to eliminate the tension between profitability and sustainability. We need thriving markets for climate-neutral, nature-positive and circular products. Governments must create conditions that make it economically compelling to phase out damaging activities. Otherwise businesses that voluntarily transition will be undermined by those that don’t. Business needs to hammer home the message that swift action on sustainability will benefit economies, jobs, security and health.
Leading businesses are already calling for these shifts, including members of our institute’s corporate leaders groups. But a few progressive voices are insufficient. Legislation is systematically moderated by lobbying from incumbents — think of the German car industry’s defence of the combustion engine or agriculture’s resistance to curbs on chemical use or greenhouse gas reduction targets.
ESG as we know it is over. In the decade ahead, businesses must compete not just for market share but for the future itself. The rewards will be significant: long-term resilience, market leadership and the ability to succeed in a world that has the necessary environmental and social foundations.