From Compliance to Impact: The Role of Business Has Changed

Dr Craig Anderson, Lecturer in Economics, Stirling Management School

Craig Anderson explores the changing role of business in relation to climate change. Watch the lecture online or read the transcript below.

Hello, my name is Dr. Craig Anderson and I’m the MBA Programme Director in starting school, and I’ve been asked to do a short lecture for the University of Stirling in the lead up to COP, which is in Glasgow this year. 

I want to talk to you today about the way that the role of business has changed in relation to the issue of climate, and, of course, the society and the environment more widely in recent years. 

So often it can feel like the scales are balanced in the favour of money from planet to the business of business is doing business, if we make that quote. 

That may have been true in the past, but increasingly for a whole host of planetary boundary reasons, social boundary reasons, it’s becoming increasingly difficult for business to operate with a solely profit motivated purpose. But nevertheless, because of the history of business and the fact that economic activity inevitably lead to environmental degradation, in some cases, some social issues that have arisen. 

Sometimes you can see environmental movements suggesting that there is a dichotomy between profit and planet and that with more profit means less planet or vice versa. And equally along with that, there’s been lots of social movements that feed into these notions of well, which obviously focus on inequality and some of the inequalities that have arisen either in consequence of globalisation or financial crisis processes around austerity. 

But in defence of the economic system and what it does for social systems and indeed inequality by extension, I want to show you here on this slide the elephant graph. And, of course, that the data here on this slide is up to 2008, it so doesn’t look at post financial crisis, but you can see that in the globalisation era that many people in lower income countries along the back and the head of the elephant here saw substantial increases in their income. Those substantial increases in income occurred along with substantial improvements in welfare and other socially important metrics. 

What we do see is obviously a reduction in some of the lower earnings in higher income countries that at the bottom of the elephant trunk and that’s where some of the issues of inequality and social inequality come from. Of course, those lowest earners in developing countries still find themselves worse off than they were before globalisation began.   

Another aspect of globalisation and economic and social structures that surround it, is of course, the exporting of not only social problems and potential employment through some of these globalisation processes, but also the exporting of waste and the climate gases in the case of this slide. Of course, this isn’t exclusively a Chinese issue, but as we have exported a lot of manufacturing to China, for example, then we are ultimately exporting our own greenhouse gases from our own consumption to other parts of the world, which has made it harder for business to or perhaps easier for business to avoid certain regulations, but also harder for consumers to track the impact.  But also, importantly, it’s become harder for countries to regulate against their own businesses. 

With these social and also environmental problems that have arisen and the erosion of the power of the state in a globalised system to be able to control those outcomes we’ve seen the way that the role of business in society has changed as a result of those processes and that we now have social enterprises. But in a spectrum of social enterprises that exist to try to tackle environmental and social problems, a variety of forms, they may want to work alongside non-governmental organisations and charities in order to achieve those aims. And it’s no longer the case that business just exists as traditional business used to exist in isolation of social and environmental systems. In essence, business has stepped up in the area of impact investing to try to contribute towards outcomes and the social environment problems that have arisen. 

We can see this even in the SEPA One Planet Prosperity document, which is five years old now. But nevertheless, in that document, there were incentives to get business to go beyond compliance. 

The issue of sustainability is no longer about trying to regulate business and put barriers to them, so that they don’t cause environmental social damage, but instead encouraging a move towards profitability and value creation. Sustainable development goals have been undoubtedly really important in that movement, and although they were created in 2015, business has only really started to pick up these metrics for targeting purposes as well as for targeting performance in maybe the last three years or so, so it took a little bit of time. Some of those sustainable development goals, of course, are related specifically to industry and we are going to need industry and innovation in order to achieve those sustainable development goals. But what’s happened is that businesses are now measuring, as I mentioned, their impact against sustainable development goals and it’s giving them a new way to direct their activities. 

And one of the reasons for them doing this kind of measurement is the rise of environmental and social government investing or ESG. Now, and what that means is that these so-called non-financial elements in environmental and social governance are now part of the risk assessment of the financial portfolios and the investments that score well in environmental and social governance are actually outperforming the market as a whole for a short while. And going back to the issue of the balance between the state and the economy, it’s undoubtedly the case that equally during the globalisation period, that the level of wealth between the state and private industry and private equity has changed and in favour of private industry carrying the power in terms of global wealth.  

And so, we need to have business on board. This particular slide is taken from another OECD report, but there are lots of collaborations that we need in order to achieve these climate change outcomes. And businesses absolutely as a partner, whether it be through innovation or through other targets and partnerships around resetting the financial system, for example. And within the report, a key point here is that six point three trillion dollars a year, up to 2030, that’s expected to be needed in order to achieve these outcomes. And given the balance of finance and society, we simply cannot achieve these outcomes if we don’t take business and finance with us. 

I’m using a slightly different slide from KPMG, obviously, but ultimately what this is here to highlight is the fact that in Europe there is the corporate sustainability reporting directive that came forward, 

but we may have similar legislation. And the important point to this legislation is that it will mandate these ESG or non-financial reporting on financial disclosures into financial reporting standard. 

And so all companies would be expected to report on those. And so, ESG and incorporating social environmental problems into business is now mainstream. Why? Partly because of these directives, but also because of the money and because of the performance of investment. Now, one of the reasons for that investment doing well potentially has multiple reasons. But two reasons could be if we look at the recent events with large oil firms having both shareholder and other stakeholders vote against them, forcing them to rethink their strategy towards reducing their carbon emissions. 

Clearly, there’s a huge risk to any industry that ignores those kinds of trends in terms of the financial performance of those organisations. But equally, as part of COP26, there is the Glasgow Financial Alliance for Net Zero. And the banks within that, in order to achieve their commitment to that alliance are going to have to have their customers also achieve certain zero targets. So, the long story short, you’re going to struggle to have money, you are going to struggle to have shareholders in business if you don’t take this issue seriously. So, we need to bring business with us. Business is already on board and moving forward, it has to be, and it will be. 

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