The rise of responsibility

 

Climate concerns have gone mainstream. Partly obscured by the economic and human distress as a result of Covid-19, this shift is likely to be more significant and have longer term impacts on the human race than the temporary (but severe) effects of the pandemic.

In this de-cooded, we review the shifting attitudes towards the role that business plays in climate change, why bears like honey and what the implications are for organisations (of the rise of responsibility that is, not honey).

Our perfect planet

It is difficult to identify a specific moment where the game changed, but we have gone from a situation in 2019 where sustainability – and the broader topic of ESG (Environment, Social and Governance) – were fringe pursuits, to today where countries and companies compete to pledge ever-tighter timelines for becoming carbon neutral. In the car industry, the electric-only Tesla has shown the way (and has been rewarded with a market capitalisation greater than the largest nine car makers, despite accounting for <1% of global vehicle sales) and the industry is following, with JLR being the latest manufacturer to commit to an all-electric range by 2025.

The oil and gas majors have sniffed the wind and decided to be masters of their own destiny rather than become the next asbestos and are accelerating their efforts to move towards a low carbon economy. BP has shown itself to be an early mover under their new CEO Bernard Looney, announcing ambitious plans to become carbon neutral in both its operations and its products by 2050. Perhaps the promise of their 2001 re-brand to ‘Beyond Petroleum’ is finally going to be fulfilled. The difficulty of such root-and-brand transformation of established companies is hinted at by the departure of numerous clean energy executives from Shell in December, reportedly unhappy with the speed of change towards a greener business model.

What gave progress towards the 2016 Paris Agreement such a boost in 2020? The likes of David Attenborough and Greta Thunberg gave the topic considerable press coverage and emotional heft, but the real shift happened out of sight, in how capital gets allocated. Over the past 12-24 months, large institutional investors, pension funds and insurance companies, who necessarily take a long view on their investments have been pressing companies on their ESG plans, especially on climate, and allocating capital accordingly. Larry Fink (Blackrock’s CEO) captured it well in his 2020 letter to CEOs, stating clearly that ‘Climate risk is investment risk’. This has had a knock-on effect on share prices, rapidly getting the attention of boards who previously saw climate as a hygiene factor and a reputational risk.

Bears like honey

It is said that markets move as a result of both greed and fear and both are heavily at play here: greed in that acting and investing sustainably is now seen as profitable and smart and more likely to make profits in the long term; whilst fear is driving business not to get left behind and become ‘stranded assets’ where capital costs rise and reputational damage results in increased hiring costs and difficulties in staff retention (if you want to know what this looks like, look inside today’s cigarette manufacturers).

A useful metaphor for what is going on is a hungry bear climbing a tree to raid a beehive for its honey. As Pooh Bear knew, ‘bears love honey’ and they’ll tear apart a hive to get it. No amount of lecturing of bears about bee welfare will change bear behaviour. If the bears think that public opinion can be satisfied with public declarations of how much they love bees and some high-profile bee re-hiving schemes they’ll do it, but they’ll still climb trees to get the honey they crave. This has been the dominant dynamic in established business for some time, especially in the extractive industries (mining, energy, etc).

What has changed is that it is now dangerous to climb trees. The metaphorical tree won’t hold the bear’s weight, forcing a fundamental re-think on the whole risk-reward of climbing trees to acquire honey.

Gradually, then suddenly

In the past, it has been rational for corporate leaders to carry on regardless of public pressure (whilst tasking their PR departments to carpet-bomb media with attractive but meaningless declarations of commitment to Purpose and Sustainability) because they could … their customers didn’t really care as long as the products remained good value and shareholders were happy as long as the share price kept rising and they received regular dividends. No longer. It has rapidly become rational to not be laggard in addressing climate change and to take action instead. Echoing Ernest Hemingway from ‘The Sun Also Rises’ (describing how one goes bankrupt), this change in the factors in corporate decision-making has happened ‘Gradually, then suddenly’.

British banks are launching a wave of climate change products after coming under pressure from campaigners that they were not doing enough. Under Christine Lagarde, the ECB is reportedly slashing its purchases of bonds issued by fossil fuel companies in a bid to become a pioneer in fighting climate change … the list goes on and the direction of travel is clear.

It is possible that the Covid-19 pandemic has played a role in demonstrating how much change is actually possible in a short period of time, acting as a massive expansion of Solomon Asch’s experiments on conformity, illustrating that it is possible to think and act differently.

It is really about responsibility

If we step back for a moment and take a wider view, it’s possible to see the current focus on climate in the broader context of re-framing of responsibility. Alongside the noise around climate, there are other instances of corporate misdeeds where the rules and expectations have also changed in a meaningful way. One can look at the outcry following Rio Tinto’s destruction of aboriginal caves in the Pilbara region of Western Australia (which cost the CEO and several senior executives their jobs) and McKinsey’s agreement to pay $600m to settle claims that its advice to Purdue Pharma exacerbated the opioid crisis in the USA as isolated instances of corporate misdeed, but it’s the reaction to these events that catches the eye as being different in their levels of intolerance of businesses pursuing their financial interests in a narrow way.

The old model of shareholder capitalism – where companies were focused solely on generating profits for shareholders, and in doing so, sailing close to the legal and regulatory wind whilst viewing the (rare) occasions where they were held to account as tolerable speeding fines in their pursuit of growth – appears to have changed. The swift and negative reaction of shareholders and customers to these companies not acting in line with a broader responsibility to the societies in which they operate, as well as the planet, should act as a wake-up call to all organisations. The expectations of, and context in which businesses operate has changed and the implications are significant in how organisations are led.

So What?

For organisations, we see five principal implications:

  1. Decision-making has just got more complicated. The primacy of shareholder value made decision-making relatively simple as well as being driven by financial considerations alone. A move to a stakeholder capitalism model means decisions are more complicated and, in some cases, profit will need to be foregone in order to satisfy the needs of other stakeholders. It also means that financial models are insufficient in supporting decision-making in this new world. New mechanisms will be needed as will the premium on gaining input and establishing feedback from a broad cross section of stakeholders.
  2. Greater attention needs to be given to creating a clear, compelling, and aligned strategic narrative for an organisation, with Purpose at its core. If an organisation can’t identify the positive role it plays in society, it will quickly lose its licence to operate. Forward thinking organisations such as Renewi saw this as they re-branded as part of a major merger in 2017, positioning themselves as pioneers in the circular economy. For companies like Renewi that can orientate their purpose towards ‘doing more good’ have an easier ride than those who have to move to ‘doing less bad’, which will not find it so easy to find a purpose with a positive societal impact. The major oil and tobacco companies are all scrabbling to sell positive messages about the changes they are making, in the process resembling magicians practising the art of distraction. A good example can be seen in BAT’s ‘A Better Tomorrow’ campaign and their PR around the growth in ‘non-combustible’ products, which amount to a rounding error to the 638 billion cigarettes they sold last year. Also, see Aramco’s promotion of recycling CO2 in their production of cement.
  3. Sustainability teams within organisations need greater strength and depth … and fast. The change in sentiment and focus seems to have taken individuals in sustainability leadership positions somewhat by surprise. Having become accustomed to working around the edges of an organisation, they now find themselves at the centre. Viewed by many as do-gooding radicals, they now need to find the influencing skills and language to build their capability and impact to match heightened expectations.
  4. The role of leadership has changed in a number of ways. For many, leadership was seen as a facet of seniority and something to be achieved (and enjoyed) – what John Maxwell referred to as ‘Level 1 leadership’ – resulting in organisations that primarily ‘looked upwards’. The dominant leadership model is now moving to one of servant leadership, where people are put ahead of power. During the pandemic, skills such as empathy, compassion and setting context have come to the fore, which has accelerated an existing trend, led by expectations of the younger members of the workforce. Bill Michael, the recently defenestrated Chairman of KPMG in the UK found this out recently, at the expense of his job.
  5. Organisations need to get on the front foot in engaging externally on the key issues. An internal focus and a reluctance to partner with customers and competitors are out of date and will keep an organisation in ‘reaction’ mode. A long-time leader in this area, Unilever’s plans to give shareholders a vote on its plans to tackle climate change is a great example of this. The most progressive companies in this area are creating new partnerships in flexible ways, looking beyond historical categories of customer, competitor, regulator to find the best solutions and fastest progress.

As the global weather patterns change, so too is the corporate weather changing. The businesses who get on the front foot and play leading roles in finding solutions will be the ones that win in the long term. The remainder will find their options narrowing as the world looks to businesses to embrace a broader sense of collective responsibility.

 


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