Can There Be Sustainable Business in an Unsustainable Economy? Or Does Achieving Sustainability Require Economic System Redesign?

By Ralph Thurm & Bill Baue

This is part 4 of the Reporting 3.0 series that highlights the ‘burning questions’ of Boards and Sustainability Professionals why we need Reporting 3.0 and what it aims to deliver with its Blueprints on Reporting, Accounting, Data and Integral Business Model Design.

What’s the issue?

The pursuit of sustainability only makes sense in the context of an unsustainable system; if the system were sustainable, there would be no need to pursue sustainability — it would be the water fish swim in. So, companies and investors pursue sustainability precisely because the system — our economic system, that is — is unsustainable. And yet individual pursuit of sustainability will not achieve systemic sustainability — at least not until those individual pursuits add up to some tipping point of grassroots transformation. But if we know that the economic system is broken — unsustainable — doesn’t it make sense to simultaneously pursue sustainability bottom-up at the individual and top-down at the systemic level?

“There can be no sustainable company in an unsustainable economy” is a truism at the core of Reporting 3.0’s philosophy. Yet corporate “sustainability” focuses almost exclusively at the micro level of the company (and addressed through enterprise risk management), with scant attention to the macro level of the economic system. Likewise for investment, which focuses on the meso level of the portfolio, and is only beginning to wake up to the macro level of systemic risk (much less the cosmic level of existential risk). And the Sustainable Development Goals are articulated within the context of the existing economic system design, and do not address the question of economic system redesign in any depth.

As a Global Common Good R&D provider, Reporting 3.0 proposes four areas in which economic system conditions and incentive structures need to change to allow for a Green, Inclusive, and Open Economy:

• Adjust cost accounting to cover the true cost of the depreciationof natural and manufactured capitals, to more accurately and holistically reflect current value and future value. Such calculations would more clearly identify how costs enhance or diminish the ability of current and future generations to live lives with equal opportunities, respecting the Precautionary Principle to ensure the intra- and intergenerational equity condition of sustainabili­ty. The intended outcome is to align financial costs with ecological costs so as to manage vital natural resources within their carrying capacities, enabling existing natural capital stocks to regenerate productive flows in perpetuity. The same logic applies for social costs consequences that often flow from ecological overshoot — for example, the current costs for climate migration and the integration of climate refugees into new habitats around the world.
• Introduce benefit accounting to capture the appreciation of positive impact, and thereby achieve a total contribution accounting system. This would include the monetization of positive increases in social capital, hu­man capital, reputation capital and intellectual capital. The same applies for environmental benefits, accounted for through natural capital and manufactured capital.
• Translate true costs into true prices, shining light on the shadow calculations many companies already use as internal pricing mechanisms, but do not add them to products — yet. The intended outcome for consumers is higher quality, sustainable goods that are cheaper than lower quality, unsustainable goods, because the true costs (across the multiple capitals) are reflected in prices. Action at the meso level can spur this transformation new “level playing fields” across industries, thereby creating collaborative advantage (instead of blocking progress that benefits the entire industry — and society — because it currently incurs competitive disadvantage at the micro level). This would break the deadlock of 25 years of attempts to spur demand for sustainable products through consumer behavior change. As long as pricing signals are the main driver for buying decisions, scalability of sustainable solutions can only be achieved through such market-based pricing levers.
• Change incentive structures through true taxation that encourages productive activity by a liberating labor from taxation and discouraging detrimental impacts by increasing taxes on non-renewable resource use. This move would align also subsidies with beneficial business and behavior. Coordination at the regional, national, and global level would tap into a similar “level playing field” dynamic — particularly if business and investment leaders lobby for such common-sense approaches.

What can you do about it?

Economic system redesign will require collaboration between business, investment, and government, among others. While we acknowledge such a complex endeavor is likely to require multi-generational action, we also recognize we only have one generation left to make needed changes. It is therefore necessary that end goals and timelines be negotiated from the outset. A lot can be learnt from the climate change negotiation process over the last couple of years, the journey from Kyoto to the Paris Agreement, and how to negotiate these new terms for a green, inclusive & open economy that builds on those costing, benefiting, pricing and tax­ation transformations and honors multiple-capital accounting to reveal organizations’ total contribution. These ingredients are part of the “North Star” Reporting 3.0 envisages over time, enabling financial markets to more accurately gauge future value, creating innovation incentives and supporting more scientific benchmarking through ratings, rankings and indices.

So, in practical terms this leads us to the following set of activities that you can initiate:

• Apply scenarios for outcomes of new level playing fields associated with true costing, pricing, and taxation, as well as benefit accounting. Run shadow calculations of how your business model is affected by any such changes.
• Build the case for bold action, for example by researching economists advocating for these kind of measures, such as Doughnut Economics author Kate Raworth or the Stiglitz-Sen-Fitoussi Commission Report on the Measurement of Economic Performance and Social Progress.
• Engage with same sector peers, industry associations, investors, lobbyists, and government representatives to vet / promote the idea of collaborative advantage to break through first-mover / free-rider disadvantages. Nothing is more powerful than a collective plea for change and action.

What will you have achieved?

Reporting 3.0 advocates for economic system design change not because it’s easy, but because it’s necessary for reaching scalability, away from looking up to the leaders in sustainability, but to make anybody else followers of a system that does the ‘right thing’ automatically through its incentives. What makes the challenge worth taking is the end result of an economy that grows wellbeing, the “ultimate ends” according to Limits to Growth Co-Author Dana Meadows, displacing our current economy’s fixation with the “intermediate ends” of financial and economic growth that actually reduces wellbeing through environmental degradation, wealth concentration and disparity, etc.. In other words, a transformed economy results in shared prosperity, economic resilience, social stability, and ecological regeneration. And you can be part of that change!

What question will we discuss next time?

How do you compare your current strategy with future needs? Please see part 5 here.

Please add your feedback, the authors Ralph Thurm and Bill Baue of Reporting 3.0 will look at all responses. Don’t forget to ‘wave’ if the above resonated with you ;-).

[Context of this series: The sum of these articles form the basis of an Implementation Guide that summarizes the total value of Reporting 3.0 in implementing a future-ready sustainability strategy and disclosure approach, in line with the idea of a Green , Inclusive and Open Economy. By posting these articles here Reporting 3.0 seeks feedback in the writing process of the final document, to be released as Blueprint 5 at the 5th International Reporting 3.0 Conference in Amsterdam, The Netherlands, on June 12/13, hosted by KPMG, see www.2018.reporting.org]