Guest Post By James Donovan, CEO, ADEC Innovations
In 2015, the United Nations proposed the Sustainable Development Goals (SDGs) for 2030, which the organization describes as “a new plan of action for people, planet and prosperity, with 17 SDGs and 169 associated targets at its core.” In the same year, the COP21 conference in Paris created a comprehensive and binding agreement to address climate change. In September 2016, the U.S. and China, the top two emitters of greenhouse gasses, agreed to ratify the Paris Agreement, which was recognized as a significant breakthrough addressing the challenges associated with climate change.
As both the SDGs and Paris Agreement explicitly recognize, addressing climate change will require long-term commitments from governments, NGOs and businesses worldwide. Both the United Nations’ SDGs and the Paris Agreement call for the integration of sustainability measures into business operations and government policies, as well as stakeholder involvement in the planning and implementation of sustainability measures. But what is the most effective way to secure business commitment? Is it up to outside groups, regulators or litigation to pressure companies to take action?
One opinion is that since businesses helped prepare the SDGs and the Paris Agreement, they are well suited, and even partially obligated, to make explicit societal commitments to achieving the goals enumerated. People who analyze businesses in the context of climate change rightly point out that companies stand to gain substantial benefits from sustainability, which leads to resource conservation, and, ultimately, greater profitability and business continuity. Moreover, a business that is committed to promoting sustainability will be more credible in the eyes of consumers.
However, the obstacle to getting more businesses on board with meaningful action on sustainability has been that it requires a shift in focus from short-term goals like quarterly shareholder returns to longer-term corporate responsibility objectives, which is a heavy lift. Company leaders are under enormous pressure to drive stock prices higher to generate ever-greater returns for investors. Their compensation — and indeed their continued role as company officers and board members — often depends on it, so naturally they have focused on meeting or beating revenue expectations above all else.
But there are encouraging signs that the short-term dynamic that drives business focus may be changing. Other stakeholders who have a direct revenue relationship with businesses are recognizing the risks inherent in climate change and reacting accordingly, elevating sustainability beyond a mere political or branding issue to a core operational consideration. Earlier this year, the president of the Reinsurance Association of America observed that, “our industry is science based: the actuarial sciences, and in this case the natural sciences.”
Insurers have to take sustainability into the overall risk calculation, and that means businesses do too. Science-based risk calculations and other sustainability-related facts are crucial to long-term business strategy and profitability across virtually every sector. For example, global companies that deal with water issues must plan around the scientific fact that approximately half the groundwater in South Asia is not potable. Shareholders are increasingly conversant in risks related to sustainability and are demanding meaningful programs that address sustainability issues and responsible investment options. Shareholder involvement is transforming a long-term objective into a short-term goal.
The bottom line is that litigation, consumer pressure and regulation alone won’t be sufficient to drive widespread adoption of truly transformative change to achieve sustainable development goals. Sustainability advocates can and should make their case, but ultimately, company actions will change when corporate officers take a long-term view on climate change issues. The good news is that groups like the Global CEO Alliance and others are doing just that. And as more companies are spurred to action by the business case made by insurers, investors and other stakeholders, sustainability will take its rightful place as a core business objective.
About Jim Donovan, CEO, ADEC Innovations
Jim is Co-founder, President, and Chief Executive Officer of ADEC Innovations. ADEC Innovations is an impact investing company with a portfolio of Environment, Social, and Governance solutions (ESG).