The effort to reconcile climate economics with market forces has so far stalemated, but Jonathon Porritt and David Bent say there is a sustainable business model that works.
The world’s financial markets are still very fragile, with economic recovery in Europe and the United States tentative and uncertain. It’s not so very different with climate change. From the Bali climate-change summit at the end of 2007 through to the chaotic failure of Copenhagen in December 2009 and the limited progress at Cancún at the end of last year, climate negotiations have staggered from one missed milestone to the next, principally because of fears of the impact that any substantive agreement would have on our fragile economies.
To say that today’s political elites are not joined-up in their fragmented responses to these and other crises is something of an understatement. There would appear to be no “over-arching economic rationale” other than to maintain the status quo. But what if the current version of capitalism – consumption-driven, credit-fuelled, export-dependent economic growth – is itself at the heart of these crises? Then the root causes will go untouched, and there will be no serious recognition that we need a new version of capitalism that enables all to have better lives within environmental limits.
There are some who argue that there is no form of capitalism that can be sustainable. Capitalism’s imperatives to grow, to accumulate, to concentrate ownership and to turn everything and everybody into commodities and “monetisable assets” are seen to be completely incompatible with a more equitable economy constrained by the limits of the natural world.
We both have a good deal of sympathy for those sentiments, but we are also realists. The UK Meteorological Office's report "Informing Choices" is a reminder of the urgency of the climate challenge; it warns that if mankind is to have a 50% chance of avoiding warming of more than two degrees Celsius above pre-industrial levels by the end of this century, greenhouse-gas emissions must peak by 2020, with 5% yearly reductions thereafter.
Over the coming decade we do not have a choice on the nature of the global economic system: it will be capitalism in all its varieties, from the notionally “free market” of the United States to the state-managed capitalism of China. The unapologetically pragmatic response of our own organisation, Forum for the Future, and indeed of the majority of environmental NGOs, is therefore to seek to put sustainability at the heart of that economic model rather than to seek to replace it with some fully-fledged ideological alternative.
Happily, there’s already a wealth of authoritative, high-powered work to drive forward the emergence of new ways of reconciling our material aspirations with the constraints of a finite planet. France's President Nicolas Sarkozy has challenged what he describes as “the fetishisation of GDP as the sole measure of economic progress” by dint of setting up a high-level Commission to come up with different ways of measuring economic progress.
It is now more than 30 years since the pioneering economist Herman Daly first defined “the minimum ecological conditions” for any economy in terms of maintaining constant stocks of physical (or “natural”) capital. And it’s 10 years since Paul Ekins, one of the co-founders of Forum for the Future, took that a step further by introducing the idea of “safe minimum standards” so that policymakers could put in place systems to avoid irreversible damage to stocks of “critical natural capital”.
But as the author Tim Jackson has pointed out, economics – and macro-economics in particular – remains ecologically illiterate. “We have no model for how common macro-economic ‘aggregates’ (production, consumption, investment, trade, capital stocks, public spending, labour, money supply and so on) behave when capital doesn’t accumulate. We have no models to account systematically for our economic dependency on ecological variables such as resource use and ecological services.”
That macro-economic challenge can only be realistically addressed by governments working together. But at the micro-level, there is still much to play for. Since its inception in 1996, Forum for the Future has based its work as a strategic advisor to a wide range of both public and private-sector organisations, including some of the largest companies in the world, on the kind of integrated approach advanced by Daly and Ekins.
The Five Capitals framework is, in essence, a tool that allows organisations to understand the bigger systems of which they are a part, to recognise the limits to those systems and to flourish by working out how best to optimise the contribution they can make to maintaining and even enhancing the different stocks of capital on which they depend. The Five Capitals are:
Natural capital (also referred to as environmental or ecological capital) is that part of the natural world which humans make some use of, or derive some benefit from, hence its definition by economists as any stock or flow of energy and matter that yields valuable goods and services. There are different kinds of natural capital:
• Resources, some of which are renewable (timber, grain, fish and water), and others that are not (fossil fuels).
• Sinks that absorb, neutralise or recycle waste.
• Ecosystem servicessuch as climate regulation, flood control, pollination and so on.
Human capital comprises the physical, intellectual, emotional and spiritual capacities of any individual. In an economic context, it consists of our health, knowledge, skills and motivation, all of which are required for productive work. Enhancing human capital – for instance, through investing in education and training – is vital for a flourishing economy. Poverty is both morally indefensible and socially inefficient in that it prevents millions of people from fulfilling their potential.
Social capital takes the form of structures or institutions which enable individuals to maintain and develop their human capital in collaboration with others and includes families, communities, businesses, trade unions, schools and voluntary organisations, as well as other institutions.
Manufactured capital is made up of material goods that contribute to the production process, but do not become embodied in the output of that process. The main components of manufactured capital include:
• Buildings – the environment of villages, towns and cities.
• Infrastructure – the physical fabric supporting social and economic life, including transport networks; schools; hospitals; media and communications; energy; and sewerage and water systems; and
• Technologies – the means by which goods and services are produced, from simple tools and machines to information technology, biotechnology and engineering.
The role of financial capital is perhaps the least understood of all the categories of capital now seen as essential to a sustainable economic system. It is usually excluded from such models on the grounds that financial capital has no intrinsic value, is not essential for the production of goods and services, and simply provides a means of exchange for the fruits of other categories of capital. Paper assets that make up the stocks of money, bonds and equities have no value in themselves, but are simply derivatives of the underlying manufactured, natural, social or human capital stocks.
For companies, the Five Capitals framework enables decision-makers to understand better what “capitals” it depends on (staff, customers, communities, raw materials, supply chain, stable eco-systems and so on) and to integrate sustainability into core business strategy.
One example of a company using the framework is Finlays, the global tea and flowers producer. We helped the company re-think its strategy for the next 15 years in the light of sustainability issues – from the rate of natural resource decline to the nature of governance in Kenya, from the structure of the global retail sector to the technological innovations which could affect the company’s supply chains. Finlays used the lens of the Five Capitals to turn future risks and opportunities into an ambitious set of commitments that should enable the company to become more resilient and therefore more sustainable.
The framework also works well on a cross-sectoral basis. We have worked with key players in the tourism industry to outline the features of an exemplary sustainable tourism destination so as to help “internalise” a proper understanding of those stocks of capital that any destination relies on to be successful, as well as the positive and negative impacts it can have. Our report "Paradise Found"pulls together a total of 21 features of a sustainable tourism development.
These two examples illustrate companies that are searching for their role in creating a more sustainable version of capitalism – and make a profit from doing so. They are using the Five Capitals framework as a bridge from the micro-level business drivers they experience up to the macro-level dynamics.
Leading companies are today moving away from the elusive vagaries of “corporate responsibility” and are instead developing a much better understanding of both biophysical and socio-economic “sustainability issues” as drivers of long-term success and, increasingly, short-term financial performance. The recent UN Global Compact/Accenture report "A New Era of Sustainability" confirms our experience with some 93% of CEOs from 800 companies around the world saying they believe that sustainability will be critical to the future success of their business.
The quality of leadership now being shown by business executives is in marked contrast to the kind of grudging on-off incrementalism that characterises the policy interventions of most governments. One of the biggest barriers for businesses seeking to reconcile profitability with the pursuit of sustainability is regulatory risk, with governments failing to provide unambiguous market signals – for instance, a floor price on carbon dioxide– let alone incentivise proper investment frameworks for genuinely sustainable wealth creation.
By the same token, it is only fair to point out that even the most enlightened business leadership does not provide any kind of challenge to the deeper contradictions in contemporary capitalism. Growth, whether in earnings, profits or market share, is still a non-negotiable imperative for these companies. “We don’t make the rules,” they will tell you. And fortunately nor do they! But one can’t help but think they might be just a bit more proactive in supporting efforts by civil society to get the rules changed.
In the meantime, as Tim Jackson continues to point out, there is still no articulation of a “credible, socially just, ecologically sustainable scenario for continuing growing incomes for a world of nine billion people”. From our vantage point, working with over 70 companies and more than 20 public-sector organisations, we can see leading organisations reaching the limits of what they can do on sustainability within the current macro-economic framework.
That’s the real “bottom-line” for today’s political leaders. Only capitalism has the dynamism to create society-wide change in the space of 10 years. But only a sustainable version of capitalism can marshal that dynamism so that we avoid future crises – whether they are caused by climate change or by defaulting Eurozone economies.
We need senior people in European Union governments and elsewhere to do some heavy-lifting on the macro-economic front to help move towards a sustainable version of capitalism. The time available for reconciling today’s astonishingly dynamic market economies with the bio-physical life support systems on which we depend is going to rapidly ebb away.
Jonathon Porritt is Forum for the Future’s co-founder and programme director and David Bent its head of business strategies.
The original version of this article was published in the Spring 2011 issue of Europe’s World.
Homepage image by Dudarev Mikhail
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