The Paris Climate Agreement and Future Business Implications

Pursuing the goals of the Paris Climate Agreement will ensure businesses long-term success while allowing them to participate in the reshaping of the economy while saving the environment.

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By:  Jenya Sakaeva, Lynx Global Intelligence

 

In light of recent political events, the environmental future of the United States, and consequently the world, may look quite bleak. Fortunately, as the saying goes, every cloud has a silver lining. For the planet’s climate, this silver lining could be businesses big and small leveraging their power for global good. While the Trump Administration has yet to formally withdraw from the 2015 Paris Climate Agreement, the executive orders to date signify the United States’ noncompliance with the goals set forth to prevent global temperatures from rising another 3.6 degrees Fahrenheit. This is a point when scientists have agreed the Earth will be irrevocably locked into “a future of severe droughts, floods, rising sea levels, and food shortages” [1].

Pursuing the goals laid out in the COP21 Paris Agreement will set businesses on a course of action that will lead to sustained success. In Lynx’s previous post, https://tinyurl.com/mnqbq9q, we outlined the ways in which corporate social responsibility and ethical business practices bring long-term prosperity to those who participate in them. Addressing climate change is a part of corporate social responsibility.

Why should businesses uphold the Paris Climate Agreement?

 A changing climate poses many risks to business. First, there is the risk of depleting natural resources that are either raw materials in a company’s product, or necessary to the process of manufacturing or shipping those products. There are tangible, physical risks associated with damage to facilities or manufacturing centers from a more extreme and volatile climate and weather events. Of course, there are financial risks that lack of natural resources or extreme weather will result in. Market risks in the form of shifting consumer preferences, behaviors, and demand are equally prevalent. Additionally, companies face reputational and regulatory risks for poor performance in climate related endeavors.

The Paris Climate Agreement is historic in terms of the goals set and number of countries that have committed to take them seriously. This reflects the global understanding of the multitude of issues stemming from climate related problems. The time to act is now.

In the words of some of our economy’s biggest players, “Implementing the Paris Agreement will enable and encourage businesses and investors to turn the billions of dollars in existing low-carbon investments into the trillions of dollars the world needs to bring clean energy and prosperity to all” [3].

The Paris Climate Agreement creates a global landscape in which business opportunities are plentiful. As the world economy and political powers move towards achieving reduced emissions and capping temperature rise, businesses will see a need to change their practices to support their country’s commitment to the agreement. Evaluating the strategic decisions now can put you ahead of the curve, but failing to adjust just means a more turbulent transition further down the road. Aside from political agendas impacting businesses and the Paris Climate Agreement, there are also economic, social and technological reasons to begin honoring the agreement sooner rather than later.

According to a business briefing on the topic by Cambridge University, “Companies such as GE, Unilever, Nike, IKEA, Toyota and Natura are already reaping the benefits of offering ‘green’ products and services, a market which has grown to over $100 billion” and “Unilever’s purpose-driven brands are growing at twice the rate of the rest of their portfolio and if GE’s Ecomagination was a standalone business, it would be a Fortune 100 company.” [4] Additionally, there are many economic opportunities to invest in renewable energies and new technologies, while oil prices may vary globally and contribute to higher energy prices.

Socially, consumers are increasingly more aware of the sustainability efforts and initiatives of the companies they purchase from and their behaviors are shifting to favor those businesses with more commitment to the environment. Patagonia is a classic example of a company that embodies the ideals of the Paris Agreement within the core functionalities of its strategy, and is rewarded for that by consumers. On the other hand, businesses that ignore these social patterns often witness consumer backlash and reputational damage.

Technology is already a rapidly evolving field in which some businesses have seen immense success. In order to reach the goals set forth in the Paris Agreement, many more technological advances will have to bridge the gaps between where we are now and where we aim to be. This presents businesses with huge potential. New business models, like the circular economy, have begun to emerge as an innovative response to dealing with climate problems. “Smart” technologies are becoming more customary in our daily landscape, from wearable technology to transportation solutions, and even smart cities. Also, the role of big data will only grow as the world tries to understand how to enact technological changes and incorporate them into society.

While the political approach to the Paris Climate Agreement remains uncertain in the United States, the rest of the world remains committed to the deal. As we know, neither climate nor the economy exists independently in one country or another. We live in a global world and a global economy, and businesses that realize the opportunities within the goals of the agreement will be successful in the long-term across many different aspects.

 

 

[1] https://www.nytimes.com/2017/03/28/climate/trump-executive-order-climate-change.html?_r=0

[2] http://www.cisl.cam.ac.uk/publications/publication-pdfs/A-New-Climate-for-Business.pdf

[3] http://www.lowcarbonusa.org/

[4] http://www.cisl.cam.ac.uk/publications/publication-pdfs/A-New-Climate-for-Business.pdf

 

Does Corporate Social Responsibility and Ethical Business Practices Pay?

In an increasingly globalized marketplace, CSR and ethics are crucial not only to businesses, but also to their stakeholders involved. How does one turn these concepts commonly believed to be weaknesses into strengths?

By:  Marc Babel, Lynx Global Intelligence

 

Companies spend hours, months, years, lifetimes to build a reputation that they can hang their hat on.  It only takes seconds to lose that reputation if ethical business practices aren’t fostered throughout the entirety of an organization. The word, ethics, is drawn from the Greek word, ethikos, which signifies character – the distinctive, noteworthy quality of an individual or organization. Perhaps one of the best qualities of ethics is that it is well understood across all cultures, languages, races, and income levels.

At best, organizations believe ethics to be an intangible idea that should be promoted in the stockholders’ annual report but nothing on which a financial analyst or CPA can calculate a rate of return. After all, ethics are not a profit center but a cost center, right?  It won’t generate revenue or attract new stockholders, will it?  Customers can’t tell a highly ethical firm from one who puts it on the back-burner, can they?

Research from The Institute of Business Ethics, leaders in promoting corporate ethical best practices, has shown for the first time that companies with a clear commitment to ethical conduct outperform those that don’t [1]. Using four indicators of business success – economic value added, market value added, price/earnings ratio volatility, and return on capital employed – it compared two groups of companies: those with a demonstrable commitment to ethical behavior through having a published code of business ethics and those without [1]. Their performances were then analyzed over five years to discover the firms with established ethics had clearly superior metrics in these indicators.

Furthermore, the market research organization GfK NOP surveyed 5,000 consumers in the United Kingdom, United States, France, Spain, and Germany and discovered a third of those claimed they would pay a 5 to 10 percent premium for the products and services from an ethical company over its competitors [1]. Another survey performed by Gfk NOP uncovered that 80 percent of U.S. and European consumers are willing to pay more for goods and services from a company with a well-regarded labor and environmental record [1]. Clearly it is becoming more difficult for the C-suite to justify watered down versions of ethical conduct in their firms.

Forty-five years ago, Milton Friedman penned a famous article for The New York Times Magazine whose title appropriately abridged his main opinion: “The Social Responsibility of Business Is to Increase Its Profits.” Friedman has since maintained his position of having no patience for those who believe otherwise, claiming corporate social responsibility is merely pure and unadulterated socialism [2]. Do firms owe their complete allegiance to the benefit of shareholders alone? John Mackey, the founder and CEO of Whole Foods, is one businessman who disagrees with Friedman. Mackey holds that Friedman’s view of capitalism ardently ignores the humanitarian facet common to many businessmen in the 21st century. According to Mackay,

“I strongly disagree. I’m a businessman and a free market libertarian, but I believe that the enlightened corporation should try to create value for all of its constituencies. From an investor’s perspective, the purpose of the business is to maximize profits. But that’s not the purpose for other stakeholders–for customers, employees, suppliers, and the community. Each of those groups will define the purpose of the business in terms of its own needs and desires, and each perspective is valid and legitimate.” [2]

Mackay does believe this can be done without holding profit hostage.  The challenge many of those on board with his train of thought is how much attention does each stakeholder receive in terms of value?  Mackay believes there is no magic formula for everyone, however, it can be a dynamic, fluid approach that attempts to satisfy stakeholders since stakeholders are usually satisfied for short periods at a time.

Some refute corporate social responsibility on the grounds that using resources and funds towards philanthropy is blatantly stealing from investors. After all, by legal definition, a firm’s assets belong to the investors, right? A firm has a fiduciary responsibility to maximize shareholder value; therefore, any activities that don’t maximize shareholder value are violations of this duty. If you feel altruism towards other people, you should exercise that altruism with personal resources, not with the assets of a corporation that doesn’t belong to you.

While that may be true, this argument is not wrong as it is too narrow. It is important to have an understanding with the investors since most firms can “hire” their initial investors, not vice versa. When philanthropy is regarded as a fundamental ethics practice in the corporate vision, shareholders and investors are bound by any investment to this type of corporate culture. Shareholders of company stock do so voluntarily, so if the philosophy of corporate social responsibility of a firm does not match with their own, they are free to exit their relationship with said firm.

The business model that Whole Foods has embraced could represent a new form of capitalism, one that more consciously works for the common good instead of depending solely on the “invisible hand” to generate positive results for society. The “brand” of capitalism is in terrible shape throughout the world, and corporations are widely seen as selfish, greedy, and uncaring. This is both unfortunate and unnecessary, and could be changed if businesses and economists widely adopted the business model of Whole Foods [2].

Advocates of CSR ought to reflect on the fact that the “triple bottom line” and the bogus pay scheme which rewards bad performance with riches have something important in common: the idea that the interests of “mere owners” should not be allowed to come between managers and their personal objectives [3]. Broken corporate governance and CSR are close relations. You often see them together.

However, CSR can be regarded as the antithesis to short-termism. Managers are increasingly seeing the importance of placing more of an emphasis on long term goals mixed with ethical practices alongside the short-term goals of profit. Companies deliver superior results when executives manage for long-term value creation and resist pressure from analysts and investors to focus excessively on meeting Wall Street’s quarterly earnings expectations [4]. New research, led by a team from McKinsey Global Institute in cooperation with FCLT Global, found that companies that operate with a true long-term mindset have consistently outperformed their industry peers since 2001 across almost every financial measure that matters [4]. As shown below:

ethics 2

While this can’t necessarily be the result simply of long-termism in the form of ethics and corporate social responsibility, it is hard to argue that those aspects didn’t contribute. For corporations, social responsibility has become a big business. Companies spend billions of dollars doing good works — everything from boosting diversity in their ranks to developing eco-friendly technology — and then trumpeting those efforts to the public.

Extensive research performed by The Wall Street Journal has delved into the consumer mind, uncovering just how much ethics can pay.  Results concluded that oftentimes, those consumers that will pay a premium for ethically sourced products will outweigh those that seek a cheap product without regards to ethics [5]. The lessons are clear. Companies should segment their market and make a particular effort to reach out to buyers with high ethical standards, because those are the customers who can deliver the biggest potential profits on ethically produced goods [5]. All stakeholders are becoming a priority in the 21st century. Firms employing corporate social responsibility and ethical practices will be the ones receiving long term benefits while pushing the envelope on the benefits capitalism can bring to society.

 

[1] http://www.fraud-magazine.com/article.aspx?id=374

[2] http://reason.com/archives/2005/10/01/rethinking-the-social-responsi

[3] http://www.economist.com/node/3555286

[4] https://hbr.org/2017/02/finally-proof-that-managing-for-the-long-term-pays-off

[5] https://www.wsj.com/articles/SB121018735490274425