By Andrew J. Hoffman, Holcim (US) Professor of Sustainable Enterprise at the University of Michigan
Sustainable business is reaching the limits of what it can accomplish in its present form. It is slowing the velocity at which we are approaching a crisis, but we are not changing course. Instead of tinkering around the edges of the market with new products and services, business must now transform it. That is the focus of a new article in the Spring 2018 issue of the Stanford Social Innovation Review – which can be found here – your comments are welcome and encouraged.
Business sustainability 1.0: Enterprise integration
The first phase of business sustainability, what we at the University of Michigan’s Erb Institute call “enterprise integration,” is founded on a model of business responding to market shifts to increase competitive positioning by integrating sustainability into preexisting business considerations. Framing it as a market shift, the notion is that key business constituents bring sustainability to the business through existing corporate functions, thereby making it a strategic concern.
Once insurance companies apply sustainability pressures on the business, the issue becomes one of risk management. From competitors, it becomes an issue of strategic direction. From investors and banks, it becomes an issue of capital acquisition and cost of capital. From suppliers and buyers, it becomes an issue of supply chain logistics. From consumers, it becomes an issue of market demand.
Put in such terms, much of the specific language of sustainability recedes, being replaced by the core language of standard business strategy. In doing so, they are turning the false dichotomy between the economy and the environment on its head. This is the first model of business sustainability and it would seem to be setting us on a path to becoming more sustainable.
But, not so fast
As promising as these developments are, our world continues to become less, not more, sustainable, and the nature of the problems we face are markedly different than they were in the 1990s. To mark this shift, scientists have proposed that we have left the Holocene and entered the Anthropocene, a new geologic epoch that acknowledges that humans are now a significant operating force within the Earth’s ecosystems. A new model of business sustainability is necessary.
Sustainability 2.0: Market transformation
The next mode of business sustainability, which we call “market transformation,” involves corporations making systemic changes in the business environment instead of waiting for a market shift to create incentives for sustainable practices. We can see some of the elements of this shift coming into view along two initial categories: system corporate strategies and new ways of doing business.
Systemic Corporate Strategies. Real sustainability is a property of a system. It cannot be measured by one company or one product but must alter the entire system of which it is a part. This calls for new conceptions of operations, partnerships, government engagement and transparency.
First, it involves the optimization of supply-chain logistics to reduce risks by moving away from linear production models and toward models such as life cycle analysis, industrial ecology and the circular economy to reduce material and energy use.
Second, going beyond the supply chain, companies also look to novel partnerships outside standard modes of shifting the market, including nonprofits, government, competitors, and seemingly unrelated companies.
Third, it calls for more collaborative and constructive government engagement, moving beyond the stale and negative connotations that generally accompany the topic of lobbying and towards more constructive engagement in policy formation.
Fourth, it calls for increased transparency to gain both internal management and external validation, under the watchful eye of activists, investors, suppliers, buyers, employees, and customers.
New Ways of Doing Business. Market transformation also challenges traditional ways of conceiving of the market including corporate purpose, consumption and its underlying models and metrics. the purpose of the corporation, business itself.
First, it calls for a reexamination of the purpose of the corporation as simply to make money for its shareholders. This narrow focus leads to excessively short time horizons through a focus on only the type of shareholder who is, in the words of Cornell Law School professor Lynn Stout, is “shortsighted, opportunistic, willing to impose external costs, and indifferent to ethics and others’ welfare.”
The second is to examine new models of sustainable consumption, calling on businesses to “abandon the existing consumption paradigm” and move toward “transformations in mainstream lifestyles and consumption patterns.”
Third, market transformation requires compelling new business models to augment traditional ones that dominate business thinking, including neoclassical economics and agency theory. It also calls for an adjustment in taken-for-granted metrics such as discount rates and GDP, both of which can lead away from an accurate assessment of sustainability risks and opportunities.
Ultimately, market transformation is essential for addressing our 21st century environmental challenges. The market is the most powerful institution on earth, and business is the most powerful entity within it. While government regulation remains critical, business can transcend national boundaries, and it possesses resources that exceed those of many nation-states. Business is responsible for producing the buildings we live and work in, the food we eat, the clothes we wear, the automobiles we drive, the energy that propels them, and the next form of mobility that will replace them. This does not mean that only business can generate solutions, but with its unmatched powers of ideation, production, and distribution, business is best positioned to bring the change we need at the scale we need it. Indeed, if they do not, solutions to these challenges may not be found.
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Andrew J. Hoffman is the Holcim (US) Professor of Sustainable Enterprise at the University of Michigan; a position that holds appointments at the Stephen M. Ross School of Business and the School of Environment and Sustainability. He is also a faculty affiliate and past director of the University of Michigan’s Erb Institute for Global Sustainable Enterprise.