The Economics and Business of Sustainability

Peter N. Nemetz

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000440232
• Edition: 1
• Topic: Business
• Subtopic: Sustainability in Business
• Index: Business

Given the emergence of sustainability as the defining issue of our time, it is essential for university graduates, and especially business and economics students, to have a fundamental grasp of the key issues in this emerging multidisciplinary field of study.

Nemetz provides a comprehensive, detailed overview of the interlinked economic and ecological concepts central to this new discipline. Accompanying the introduction of the underlying theory is a broad array of real-world supporting data from Asia, Europe and North America. This volume also features a chapter on the threat of emerging pandemics and their significance for the achievement of a truly sustainable world.

This book accentuates the value and importance of a strong sustainability approach in an age of climate change emergency. It is an ideal companion for instructors and students of sustainability in business, economics and related disciplines such as geography and political science.

1
Book outline, rationale and introduction

DOI: 10.4324/9781003170730-1

Why study sustainability in a business school? This is a legitimate question for an undergraduate or master’s level student who has chosen his/her specific discipline within business and is finishing all course requirements in anticipation of graduation and impending employment. The principal answer to this question and the message of this book is fourfold: (1) there is a significant probability that within the next decade or two at most, the national and international business environment will be radically different from today; (2) this may be, in no small part, because of the enormous ecological challenges facing the globe and the feedback effects they have on our economic systems; (3) by necessity, issues of sustainability will be central to the strategic decision-making of mid-sized and major corporations; and (4) any middle-level or senior manager unfamiliar with the issues, both theoretical and empirical, will be placing themselves and their firms at a serious competitive disadvantage. The most recent addition to these modern global transformations is the impact of the potential re-emergence of pandemics on the path to sustainable future ecological, economic and social structures (a topic addressed in Chapter 11).

It can be argued that the goal of achieving sustainable development is probably the greatest challenge humankind has ever faced. It will require a concerted and coordinated effort among consumers, business and government. If sustainable development is indeed to be achieved, it can also be argued that the sine qua non is the education of the emerging business elite in the fundamental principles of sustainability, for only with the active engagement of the business community is there any realistic hope that our economic, social and ecological systems can achieve sustainability.

This presents a major challenge within the confines of a business school, as traditional business education has adopted the reductionist approach pioneered by the sciences. This model has withstood the test of time, producing highly educated young graduates who are focused on the theory and empirical data of their chosen discipline. The study of sustainability, within business as in other subject areas, represents a fundamental divergence from this traditional model. This new educational model requires multidisciplinary integration across a wide range of disciplines in the areas of business, ecology, economics, geography, political science, psychology and social issues. Aside from the occasional capstone course at the end of a business degree, there are few, if any, precedents for this holistic approach.

The mission of business schools is to lead in the area of business education, developing new theory and exploring the significance of a vast array of empirical data. It is also their mission, however, to identify and respond to emerging trends in their environment. One need only read the national press, business magazines and corporate reports to see the emergence of a dramatic change in the environment of business. Issues of sustainability have been the focus of cover pages from such high-profile journals as Business Week, the Economist, Time and Vanity Fair.

This phenomenon has been mirrored in the proliferation of corporate reports devoted to sustainability and/or corporate social responsibility. For example, the Governance & Accountability Institute (G&A 2020a, 2020b) reported that in 2019, 65% of the Russell 1000 Index companies and 90% of the S&P 500 Index companies published sustainability reports.

What has focused all these companies on an issue that received very little corporate attention just two decades ago? Consider the following headlines from corporate, governmental and academic reports:

“Human Society Under Urgent Threat from Loss of Earth’s Natural Life,” Guardian, May 6, 2019.

“Bank of England Chief Mark Carney Issues Climate Change Warning,” BBC, December 30, 2019.

“JP Morgan Economists Warn Climate Crisis Is Threat to Human Race,” Guardian, February 21, 2020.

“Why Blackrock’s Larry Fink Warns Climate Change Is on the Edge of Reshaping Finance,” MarketWatch, January 14, 2020.

“Flooding from Sea Level Rise Could Cost Our Planet $14.2 Trillion, Study Says,” CNN, July 30, 2020.

“Federal Report Warns of Financial Havoc from Climate Change,” New York Times, September 8, 2020.

“Fifth of Countries at Risk of Ecosystem Collapse, Analysis Finds. Trillions of Dollars of GDP Depend on Biodiversity, According to Swiss RE Report,” Guardian, October 12, 2020.

“UN Warns That World Risks Becoming ‘Uninhabitable Hell’ for Millions Unless Leaders Take Climate Action,” CNN, October 13, 2020.

“Merkel: Tackling Climate Change a Matter of ‘Survival,’” Politico, November 10, 2020.

While much of the discussion of sustainability issues within the popular press has focused on negative aspects, many of these sustainability challenges represent extraordinary opportunities for business. This double-sided interpretation is not new to history. The ancient Chinese phrase for “crisis” is composed of two characters: the first represents “danger,” but the second represents “opportunity.” The modern re-interpretation of this historical characterization was enunciated by Michael Porter of Harvard University in a Scientific American essay in April 1991 where he stated that “the conflict between environmental protection and economic competitiveness is a false dichotomy” (Porter 1991, p. 168). This thesis has been further developed by Porter in several seminal articles from the Harvard Business Review and the Journal of Economic Perspectives (Porter and van der Linde 1995a, 1995b; Porter and Kramer 2006, 2011). The key message of these articles is simple: there has been a false dichotomy between expenditures on pollution control and corporate profitability. The gist of the authors’ argument is that corporate strategy – the highest level of decision-making within a corporation – which recognizes, addresses and incorporates issues of sustainability can yield significant and “sustainable” competitive advantage.

Several high-profile investors, including Warren Buffett, have recognized the business opportunities associated with addressing climate change (Inside Climate News February 29, 2016). In particular, Buffet has focused on wind energy (Bloomberg Green February 22, 2020), a major component of renewable energy – a market which is expected to reach $2,152.9 billion by 2025 (MarketWatch March 25, 2021). A major economic initiative has been underway for several years to finance this transformation in the form of green finance, an industry which reached over $31 trillion in 2019 (Bloomberg June 6, 2019). Among the major players are HSBC, which has earmarked an investment of $1 trillion to achieve net zero emissions by 2050 (Reuters October 9, 2020).

The holistic approach to sustainability advanced by this book is based on three interrelated components. First and foremost is corporate strategy. But the formation and execution of such strategy cannot be understood without knowledge and appreciation of the economic and political environment in which this strategy must be crafted. Hence, the second major component is government policy – incorporated in legislation and regulations, as well as economic and political theory, which help shape much of this immediate corporate environment. Finally is the scientific framework, largely in the form of ecological theory, which – at least in principle – provides the intellectual rationale for a signifi-cant portion of government policy relating to sustainability issues.

This volume presents a detailed description of the economic and ecological issues which must inform decision-making within the corporate and governmental sectors; a companion volume (Nemetz, Corporate Strategy and Sustainability, Routledge, 2022) outlines how businesses can incorporate sustainability considerations into their highest levels of corporate strategy.

The context

Few concepts have had such a major impact on public discourse over the past few decades as sustainability. In this period, a vast array of initiatives have been taken by governments, business, non-governmental organizations and individuals to advance the cause of sustainability. While there are numerous examples of relatively successful policies and practices, the achievement of sustainability at the level that matters most – the global scale – has been an unmitigated failure. Recent evidence in support of this discouraging conclusion has been provided by several major international scientific reports. The most recent reports from the Intergovernmental Panel on Climate Change (IPCC) paint a bleaker picture than their previous report of 2014, with greater impacts and a foreshortened deadline in which to act in order to forestall potentially catastrophic results. These comprehensive studies by the IPCC, representing the consensus views of thousands of scientists, have concluded that greenhouse gas emissions (esp. carbon dioxide and methane) continue to increase, the temperature of the atmosphere and oceans continues to rise, land- and sea-based ice continues to melt, sea levels and ocean acidification continue to rise and climate extremes have and will continue to worsen (see NAS March 2016; NOAA 2019; Nisbet et al. 2019; BAMS 2018, 2019; WMO 2019; IPCC 2018; IPCC 2019). In their annual surveys of several dozen anthropogenic global risks, the World Economic Forum (2019, 2020) identifies climate change with all its manifestations as the most likely risk with the greatest impact.

In May 2019, it was reported that carbon dioxide levels in the atmosphere had reached levels higher than those recorded in the past 800,000 to 2 million years (Smithsonian.com May 15, 2019; Washington Post May 11, 2019). Symptomatic of this phenomenon was the extraordinary temperature of 84 degrees Fahrenheit (29 Celsius) recorded near the entrance to the Arctic Ocean in northwest Russia, approximately 30–40 degrees higher than average (Smithsonian.com May 15, 2019; Washington Post May 11, 2019). One year later, the Arctic Circle saw its highest ever recorded temperature with the Siberian town of Verkhoyansk reaching 38 degrees Celsius on June 20, 2020 (BBC June 22, 2020). It is accepted fact that the Arctic is experiencing the effects of global warming at a much faster rate than the rest of the world (AMAP-SWIPA 2017; Jeong et al. 2018; Struzik 2015; Washington Post May 14, 2019; Fischetti 2019; Francis 2020; Hu et al. 2020; Lai et al. 2020; Landrum and Holland 2020; Garbe et al. 2020; King et al. 2020; Previdi et al. 2020). This provides the equivalent of a crystal ball for scientists to see what lies in store for the rest of the world in the years to come, as there are significant climatological linkages between the Arctic and mid-latitudes (Francis and Vavrus 2012; UNEP 2019). The United Nations Environment Programme report (2019) concluded that a sharp rise in Arctic temperatures in the order of 3–5 degrees Celsius is now inevitable. In 2018, the world experienced the breaking of all-time global heat records (Washington Post July 5, 2018). These provide clear signals of the direction and magnitude of the changes the globe is undergoing, with profound implications for the future. Similar dramatic changes are occurring in Greenland and Antarctica with the threat of rapid loss of ice cover and subsequent sea-level rise (Lai et al. 2020; Garbe et al. 2020; King et al. 2020).

All these climate-related changes are marked by positive feedback loops, lags, potential abrupt shifts (so-called tipping points) and irreversibilities tha...