Should companies focus exclusively on maximising profit? Nothing in life is that straightforward, and certainly not today when our understanding of how our world works has had quantum leaps. In this episode I explore the legacy of Milton Friedman with some needed food for thought on profit vs purpose.
What does the raging debate around ESG actually mean to you as an economic actor in society?
I’ve been buried in research for my upcoming book - Do What Matters - The Purpose Driven Career Transition Guide, as well as completing a course from University of California, Berkeley - School of Law on ESG, and preparing micro learning on sustainability for the team at Mind Channel.
What’s been central around discussions of late is the role of purpose in organisations, and whether or not boards or shareholders have the right
Since pursuing learning on ESG matters, I've read much on the role of Milton Friedman on the theory of shareholder primacy and the profit maximisation purpose of companies. I've referred often derogatorily to his doctrine, but I’d never read it end to end until recently.
I quote now from his article
“In a free‐enterprise, private‐property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom. Of course, in some cases his employers may have a different objective. In either case, the key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation and his primary responsibility is to them.”
Now in that quote he talks about the basic rules of society as embodied by both law and custom, but this idea of custom doesn’t work the minute an organisation crosses borders, and even the law isn't uniform, and this again leaves the door open to fuel and incentivize irresponsible corporate action.
Milton Friedman also scoffed at the idea of corporate responsibility - as corporations don't have responsibilities except to the law that created them. but individuals do. Either way, the flaw in much of this article in my opinion is in a lack of integrated systems thinking.
I've listened to countless debates among professors that argue that even when shareholders act in the interest of profit maximisation, they are more likely to develop solutions that address long term social and climate concerns because it is fundamentally within their interest to do so, once ensconced in an appropriate tax structure that considers negative externalities.
Others argue for director primacy, challenging boards to embrace a north start or purpose in balancing the interests of all stakeholders in determining their actions.
You will see from Friedman’s article that he believes this role assigns boards powers they do not have. Whilst Friedman's arguments are interesting and worthy of some design consideration, The arguments remain as academic and removed from real life as are the doctrines of economic theory itself in my opinion.
When economists, lawyers, historians and politicians debate these issues, they are ignoring fundamentally important disciplines from their discourse. We live in a series of interconnected systems. From the individual, the household, the community, the state/county, the country, the global economic system, and all of these are bounded by biological, geological and atmospheric systems that support existence itself.
If we want to debate what's right, appropriate, legal, fair, just, we can't do it in the same bubbles we have in the past, we need the voices of engineers, biologists, botanists, geologists, chemists, artists, physicists, statisticians, theologians, activists and a host of other siloed characters before we even understand how the system works in order to improve it.
We live in the Anthropocene; a widely disputed fact of geology (don't worry I'm not oblivious to the contradiction in this statement), which means that humans now more than any other factor are impacting on climate and other major geological systems on the earth, and increasingly in space. That this is happening isn't inherently a problem; risk always walks in the hands of opportunity.
With the capabilities we have today on data, technology, systems science, modelling, design, we can create a new trajectory for humans within the context of society and natural systems to correct, and potentially reverse the damage we've done by the weaknesses of our past understanding. It will take a strong and compelling desire for a legacy of having a continuously livable earth, at the expense of individual egos.
When Andrew Winston and Paul Polman speak of net positive, this I believe is what they challenge us to envision. When Kate Raworth discusses doughnut economics, I believe she also addresses these gaps. Have a read and share your thoughts below.
“The purpose of business is to profitably solve problems of people and the planet, and not to profit from causing problems.” The British Academy
Perhaps this is the simple idea that we can all get behind!
Heather Burns is an independent ESG and sustainability consultant who for the past 15 years has helped global companies and NGOs find ways to improve and report on their social, environmental, and corporate governance performance. She has also helped to develop global ESG certifications and standards, and is the founder of a nonprofit business association focused on scaling business solutions to climate change. Her work in sustainable development (an initiative called Haiti Onward) was recognized as a semi-finalist in the 2011 Buckminster Fuller Challenge.
Her interest in sustainability was sparked in 1998 while traveling and working as a Divemaster on a small island in Thailand, where the waters she dived every day were in rapid decline due to two local economies (tourism and fishing) battling over the same fragile ecosystem. Working with local residents, dive shop owners, and local fishermen, she and other divers formed an island conservation organization still in operation today.
Her latest adventure involves teaching consultants of all types how to start and grow a successful ESG Consulting practice.
Thank you, Katherine. I'm so happy to be here. I love your podcast.
Katherine Ann Byam 1:33
Thank you so much for joining us and for shedding some light on this whole idea of ESG. And I think that's going to be my first question to you, actually. I talk about it at times, but I think that not everyone understands what ESG is. Why don't you share with us what exactly this means and where came from?
Heather Burns 1:51
Yeah, so I think I love a good definition. And it's really important, particularly in sustainability, because there are so many of them flying around. So ESG is the practice of measuring, monitoring and reporting on environmental, social and governance performance. So the environment can include operational impacts, like wastewater energy, or those related to climate change, such as carbon emissions. And then social impacts can include how a company treats its employees, how it engages with the communities in which it operates and whether or not it prioritises diversity, equity and inclusion. And then governance addresses decision making and transparency and the distribution of rights and responsibilities. But it's important to keep in mind that the goal of ESG is actually sustainability, which is defined as our ability to meet the demands of the present without jeopardising the ability of future generations to meet their needs.
Katherine Ann Byam 2:52
How do you think we're doing?
Heather Burns 2:55
Well, we could always be doing better. You know, I definitely think we could be doing better. But I think that and as I'll get into a little bit later, it really has reached the tipping point that many of us have been hoping for for the last decade, and has hit the mainstream. So I think we're on a good trajectory.
Katherine Ann Byam 3:15
That's a good answer. I want to get back a bit and talk about how you came to this in the first place. Because when I meet consultants now in the space; Environmental Consultants who've been around, or that's what it was called in the old days, environmental consultancy. How did you come to this? And where did you come from to bring those skills to this space?
Heather Burns 3:35
Have you ever watched a movie that changed your life? Yeah, right? And so that's happened to me twice. And the first time and both are related. The first time was back in the late 90s. And I was feeling a little bit lost, you know, all my friends are settling down, getting married, doing that whole, you know, kid thing. And I was like, still trying to figure out what I'm supposed to be doing. And I remember watching Seven Years in Tibet, and I was just so enthralled by the idea of getting out of the United States, and seeing the world. So I sold or gave away all my stuff. I bought a one way ticket and I spent the next three years living and working in Asia. And while I was there, I lived on this tiny island in Thailand called Koh Tao and I became a scuba dive master and I was diving the same waters every day for hundreds of dives. And I really witnessed human impacts causing the coral reef to die. And when I stopped to think about it, I realised that it was because commercial fishing and tourism, you know, two main economies of this community were at odds over the same ecosystem, and that really sort of planted a seed. So fast forward.
A handful of years later, I'm back in the United States, and I'm doing that whole thing of getting married and having kids and I sit down to watch Al Gore's An Inconvenient Truth which is a doctor's memory about climate change, as you probably know. And what I learned watching that movie really became the sort of before and after period in my life, right? It was like before I knew about climate change, and after I learned about climate change, and let me tell you, it's not an easy movie to watch. And I almost turned it off. But there's this part, you know, where he looks at the audience, you know, and he's looking you dead in the eye. And he's like, before you jump from denial to despair, like, stop in the middle and do something. And I was like, Okay, I'm going to figure this out.
So at first, I thought about going to work for an NGO, like Greenpeace for Sierra Club, because they were doing really cool things. But that seed that has been planted back in Thailand, around economies, you know, really kind of needle me and it told me that working with business was one of the things that not a lot of people were doing at the time. And perhaps it was actually one thing that can have a great impact. You know, the problem was that the industry at that point was incredibly nascent. And everyone was like, still trying to figure out what sustainability and ESG actually even were.
So I started with what I knew how to do, which was research and right. And so shortly after watching the movie, I created this blog called CT Green Scene, which was basically like a round up of all things green and environmental that were happening in my state, and I focused as much as I could on business and entrepreneurs. And, you know, I learned as much as I could from watching companies like Seventh generation and Patagonia and seeing what they were doing. And after a few months, I started hosting these networking events, which took off because we were, we ended up in the New York Times, somehow, I don't know. I don't know who called them, it was not me. But before I knew it, like companies were asking me to consult them back then it was called going green. So, you know, getting my first paying client, of course, is a bit more of a story. Because it's always easy to do free work as a consultant. But eventually, I think, yeah, it was a colleague who told me about an association that her company or company was a member in, and they ended up hiring me to write a sustainability report. Well, of course, I had absolutely no idea what I was doing. And it was definitely like flying a plane by Well, you know, trying to build it. But they renewed for a second term of the contract. So I couldn't have done such a bad job. And that was kind of how I got started.
Katherine Ann Byam 7:31
That's an incredible story. And I think that a lot of us think like this. So we have this, this moment where things become clearer, like my clarity moment was actually reading a book called Jugaad Innovation to get innovation stories of India and how they innovate solutions from cheap from from the natural environment to make things work, like building incubators for kids, or building fridges so that they can keep their food fresher for longer from clean water and stuff like this. And there's always a moment when there's cognition, you know, something sparks, something opens up. And then the next question is, how do you do something? It's, it's kind of like, you know, you listen to the knees and something happens, and you're like, how do I get involved? How do I participate? How do I make an impact? And I think what's great about your story is that you didn't come from a traditional environmental background, if you want to talk a little bit about the kind of skills you brought to the table, and you started.
Heather Burns 8:29
So at the time, I was working in the publishing industry, I was working as an editor and a freelance writer. So my skills were basically you know, revolved around research and interviewing questions, asking really good questions, thinking deeply about a topic and kind of being able to peel away the layers to get to what's really going on behind that I think was sort of, and then being able to communicate in a compelling, you know, way that made people want to get involved. I think those were sort of the core skills that I started with. And I'd add to that of deep interest and passion for learning, and really just wanting to, you know, expand my skill set.
Katherine Ann Byam 9:17
That's really interesting. And I want to take us a little bit now to what are some of the shifts that you've seen happen in your tenure in this space? So you've kind of been doing this work now for more than 10 years? What sort of shifts have happened? And how do you sort of compare this to what's happening right now? And what's really made the big difference in your view?
Heather Burns 9:42
Yeah, so I think there have been two significant shifts that have shaped the industry and created what is now this unprecedented demand for ESG and sustainability consulting services. And the first was the shift from thinking about everything In terms of green, right, which really means all things environmental, to the idea that people, planet and profit, which was referred to as the triple bottom line, are actually connected. And that really led to this idea that sustainability is the goal, and that you have to have those three pieces in order to achieve true sustainability and business. So that was the shift that was really the precursor to ESG. And to companies understanding, you know, this idea that triple bottom line meant that they could actually, you know, prosper as a company. So around that same time, seventh generation, which makes non toxic consumer products was acquired by Unilever for $700 million.
Heather Burns 10:53
And that was like that made people kind of pause like, whoa, Unilever's interested in a company like that, because until that point, those types of companies have really been in this very specialty type of market, right. And of course today, Unilever's sustainable living brands has a 50% faster growth than the rest of their portfolio. So certainly proven now.
But the second trend is more recent. And this is that critical move from, you know, the sidelines to mainstream. And people ask me all the time, you know, how do you know that this is shifted to the mainstream when so many companies are still oblivious, or in denial or whatever it is? And you know, how do we know that things won't just go back to business as usual, when there's a next change in government leadership or something. And I tell them that, you know, it's because it's at this point, it's coming from all directions, and every stakeholder group, right? So it really started with this consumer demand, there was the emergence of what was called a low hos sector, which was lifestyles of health and sustainability. And these were folks that were, you know, vocal about the fact that they were willing to pay more for environmentally or sustainable products environmentally friendly. And today course that Mark is on track to hit 150 billion in the US alone, and 90% of millennials are willing to 90% of millennials are willing to pay more for products that are environmentally friendly, or sustainable. So those people actually happen to work, right, they have jobs, so their employees.
So then you have this shift into the employee stakeholder group, where you've got 80% of millennials wanting to work for a company that's strong on ESG. So companies obviously want top talent. And their top talent is telling them this is what we're looking for. So they're getting it now from employees, and then you layer on the supply chain. And you've got all these disruptions that are, you know, started off kind of in the fashion industry and saw a lot of terrible fires in Bangladesh, and people died. And, you know, this led to really like, you know, this outcry around the supply chain, right. And now you've got COVID and a pandemic, which just elevated everything and really put a microscope on and the fact that our supply chains are completely broken.
So all of this uncertainty is really seen as risk, particularly when you're looking at it from the perspective of investors. So, you know, last but certainly not least, are a stakeholder group of investors. Right? And so, last year, in his annual letter to CEOs, Larry Fink, who's the CEO of Blackrock, which is an investment firm with over $9 trillion of assets under their management, proclaimed CEOs, right, that climate risk is investment risk, and that companies need to get serious about it. Well, everyone thought, well, that's really interesting, right? Well, and then the pandemic hit, and they thought, ah, that is just, you know, that will kind of fizzle. Well, instead, it didn't fizzle. In fact, it took hold. And then in his next year, which was this year, a letter to CEOs, not only did he reiterate that, but he basically said that companies that are not Net Zero, by 2050, are going to be, you know, ops become obsolete. So this is really now sending complete shockwaves through the global markets. And not to mention, it's led to companies like Amazon and Unilever and Microsoft are now making these netzero claims. And they can't get there without their suppliers because 80% of a company's greenhouse gas emissions is actually embedded in their supply chain. So now you've finally got this pressure that's being put on more of the midsize companies and so that's why I say it's here to stay
Katherine Ann Byam 15:00
Yeah, no, I totally hear you with that. And I want to slightly shift and challenge you a little bit. And it is, is ESG the same as CSR? And therefore, is it just another form of greenwashing. Now, I think I understand a bit more about it than that. But for my listeners, they want you to debunk this idea that the ESG sort of framework is not just another effort of companies to cleanse their past?
Heather Burns 15:31
It's a fantastic question. And, you know, I'd say that the answer is quite complicated, really. And there are certainly experts out there who I respect, and who are actually very vocal right now and criticising ESG. And they're not wrong. But my pushback really is always that we need to do what we can when we can. And, you know, I will directly address that in just a minute. But I think, you know, everything about this industry is evolving. And we really need to evolve very, very quickly. And we need to keep that in mind. Companies are not designed to be able to evolve quickly. They're designed to get really good at their core deliverables and what they do and what they provide, right. And so, change is difficult, even on the individual level, you try to take that to the whole corporate culture level, and you're talking about it, it's going to take some time.
So that's certainly not an excuse, by any stretch of the imagination for companies to take advantage of that. And I think what I really do like about ESG, is that it is, you know, what is measured gets managed, and along with ESG, is this component of reporting, and becoming very transparent, and publicly open about whatever your environmental, social and governance performance is. And then setting goals that you're comfortable with. And this is usually where the most criticism comes in is, you know, companies are setting goals that they're comfortable with. They're not necessarily setting goals that place planetary benefit at the core of that goal, or even what's called, you know, planetary context. So for example, you know, if a company makes a commitment to reduce its water usage by 10%, over the course of whatever, that could sound like a great or 20, even 20, or 50%, whatever that number is, because it sounds like an amazing number.
But then if you really look at that particular company, you have to look at what watershed is it actually in? And what does that watershed require? Not the company what, but what does that actual watershed require to become more sustainable? So there's certainly some weak spots. And then as far as greenwashing goes, I mean, it's always a risk, and it and it will continue to be a risk. But I think that this idea that transparency, and supporting and backing up with data is becoming much, much more than expected, right, it's expected from investors. I mean, you can't really pull the wool over an investor size. I mean, if you do, there's serious consequences to that, you know, you're gonna be held to a much higher level of accountability around investors than you are consumers, unfortunately. But that's kind of just the truth. So I think that this idea that this newest kind of wave of investor involvement is, is critical to stem the spread of greenwashing.
Katherine Ann Byam 18:51
Yeah, I, I really get this. And I think there's a lot of pushback also on how companies are solving the problems. So things like, you know, should we be doing offsets? Or should we be really innovating from within? Should we really be getting all the things out? And I think you've kind of answered that already, in terms of how difficult it is to make change happen. And we actually need the companies that are dedicated to the offsetting to kind of get something for their effort, right. So companies that are trying to build solutions that are specific to that, you know, you kind of want to support those even if they are interim solutions, but we need every solution. Right. But I don't know if you have a different thought than that.
Heather Burns 19:32
No, I agree with that. 100%. We need our solution. And new solutions will also come online, right? I mean, we're not thank goodness, we're not operating in a bubble. And now the companies see a very strong business case for incorporating these things. I think that's going to lead to more R & D than it already is. It's leading to more R & D, more investments and more innovation, innovative solutions for the marketplace. So we'll continue to see more of those as we go along.
Katherine Ann Byam 20:07
That's interesting. I want to tap into that, because what do you anticipate as the sort of future of the next five years of this ESG framework, etc. Because, for me, what I'd probably like to see is that it really becomes more integrated and embedded in everything in all the reporting that we do in everything that comes out of a company. But what are your thoughts on where you see this going in the next five years? Well, it's
Heather Burns 20:32
definitely going to become more integrated. And I think that certainly has pros and cons to it. And the way that we get there is a little bit concerning because there's not a lot of standardisation, particularly when you're talking about, you know, consulting, and providing advice in this space. And in some ways, that's a good thing. Because I truly believe that there's a place for every single consultant who wants to get involved in this can have a positive impact doing so. But at the same time, there's very little, you know, academic programmes that are sort of all over the map, in terms of what they cover. Most of them are highly theoretical and methodology based or not practice based. So it's really a nascent industry sector that needs more. Yeah, more, you know, consistency across the board. But sort of from an industry wide perspective, I think one of the things that I see that's kind of exciting, actually, on the horizon is this idea of carbon pricing. And, you know, there are lots of different models out there and each other has pros and cons for sure, as far as climate change goes, but putting a price on carbon will really help us to realise the true cost of our emissions. And so for too long, you know, companies have externalised environmental costs, and basically borrowed from our future and future generations, to keep prices as low as possible for Chris consumers, you know, and we, as consumers have benefitted from that, so there's sort of no innocent bystanders here. But what's interesting is that many companies actually see carbon pricing as a necessary shift that they need to make to get to a carbon neutral economy. And many of them are already using an internal price on carbon to make really important business decisions. So yeah, I think, I think that's really exciting in terms of like, getting everyone on the same page, and starting to really understand the cost of the things that we use,
Katherine Ann Byam 23:03
So true. And I also think that, you know, it's like your analogy about borrowing from the future, like, one of my guests once said, and I always remember it, that we have that we have this inheritance, right? It's like your great grandfather's left your big, big inheritance, and we decided to do it on the first party, right? Instead of sort of leaving it for What's tomorrow. And, and essentially, that's, that's where we're at in it's like, you know, what we see going on with Russia and Ukraine and all the situations that we have going on in the world at the moment, a lot of it is a land grab for resources, right? That's a land grab for things that are scarce. And I can't see that changing until we change until we start thinking about things differently. So it seems, and I don't want to see anything as inevitable because that's scary language. But if we don't, if we don't embrace this, we will have other consequences that we will need to embrace. So we need to, I really think we should choose the lesser of the evils. I don't know if it's,
Heather Burns 24:10
yeah, I mean, Change is inevitable, and adaptation is necessary at this point, you know, and, and the science is evolving, right. So as we learn more about the impacts and the CO impacts, and the long tail impacts, you know, I mean, the things that we're missing today are not what we're experiencing today, right? It's what our kids will experience. So it's, this is a long game. And I think that's another sort of mindset shift that's necessary if we're so instant gratification, you know, programmed and we've really have to start to think more in seven generations, right? Like think about those seven generations. Yeah, I think that's an important mindset shift to have for sure.
Katherine Ann Byam 25:05
I want to ask a few questions now for the people who are listening to this who may be interested in dipping into consulting in this space. And I know that many of my younger listeners, people in that sort of millennials, slash Gen Gen Z categories, are really thinking about what they can do to make an impact, and what advice would you give them?
Heather Burns 25:28
Well, it's a super exciting time. And I said it before, but I'm gonna say it again, I honestly believe that there's a place for everyone. And it really is a blue ocean opportunity for consultants who want to help or people who want to help companies prepare for what's ahead and become a part of the solution. So I certainly think that that's, you know, the time is now if you've been thinking about it, like, dive in. Because when you think about it, and everything we've talked about today, right, there's just enormous, the floodgates have opened. And I actually have friends who own a company that helps pair companies looking for consultants and ESG consultants, and there's just such overwhelming demand, even the consultants, these firms that are out there that are doing this kind of work, they don't have enough people. So there's just this unprecedented demand.
And I think that's first, the second thing is that there really is this myth, and it's starting to weaken, but it's still really very much there. And that is that, you know, you have to be science oriented or tech, not, you know, very technical in your expertise. But that's really not true. I mean, like you said earlier, I did not come from, you know, in a traditional environmental background, many of us don't. And in fact, companies certainly are utilising, you know, subject matter experts and technical experts for their, you know, their footprinting, or their life cycle analysis. But they also really need more of the overarching consultants who can help them navigate all of this change that's required to embed a strategy, you know, create a strategy and embed it, and then communicate it. And so you know, as for more specific skills, and experience, I think there's probably like three things to keep in mind.
The first is that surveys have shown that the most sought after criteria that companies are looking for when they're hiring people, is that they have industry specific experience. So if you can find a way to start, within an industry that you already have experience in, you're definitely going to have a leg up.
The second is that strong communication skills are very important, right. So the ability to make a compelling case for change. Whether that's through written internal kind of communications, or external branding, kind of communications, or verbal presentations, its communications is definitely something that everyone involved in ESG. And sustainability really needs to be good at. Because you're trying to get a lot of different people onto the same page and rowing in the same direction. So I'd also say, really close to that is that there's relationship building. And, you know, companies are really often very nervous about like, you know, pulling back the curtain, and, you know, they fear judgement. And let's face it, no company is doing everything. 100%, right. And lots of them have been contributors to the problem. But it's a learning curve. And so the ability to create trust and relationships and rapport with companies, I think is really important.
And then third is kind of like a bonus, I'd call it and it's maybe a bit more of like a superpower. But it can certainly be learned. And that is whole system's thinking. So I really like the ability to draw connections to sustainability from all sorts of angles. And this helps you not only come up with innovative solutions for your clients, but it also makes it easier to see, kind of down the road, what's coming next in the industry. And that is something that companies will definitely like to pay a premium for.
Katherine Ann Byam 29:49
That's really great and a slightly different tack on this question. And it's something that I've been kind of receiving and I want to validate if it's actually true, but I think this is probably The first corporate role maybe other than HR, that could be female? What are your thoughts on that?
Heather Burns 30:06
Well, I think certainly there is a shift. However, you know, if you're looking at business and industry, I mean, it's predominantly male. Right? So I mean, we have that. But I think as far as the potential, it's, it's certainly there. And I would, I would definitely say that it's gotten better or a little bit easier to be female led, because, you know, in the early days, the denial was just so like, in your face, and I mean, I've had men really kind of get in my face about it, you know, back in the 2000 10s, kind of, you know, looking at me and like, Yeah, this is never going to be a thing. Like, we, you know, what are you even doing? This is just not even gonna be a thing. And it is a thing, to those of you who said that, to me, it is a thing. So, yeah, I do, I do think and I think women are also very well positioned in terms of like, they're typically good communicators. Right. So I think there's some, definitely some alignment there
Katherine Ann Byam 31:19
any closing remarks that you want to share with my listeners, and maybe how they can connect with your work?
Heather Burns 31:26
Well, I'd say there's two ways. First, is through a digital course that I developed called ESG, consulting foundations, and that teaches how to build a successful ESG and sustainability consulting practice. What makes it different is really, you know, we go well beyond theory into the practice of being an ESG, and sustainability consultant. And, you know, how do you find your first clients? How do you make a strong business case? And how do you build credibility quickly, things like that. And second, I don't even know if you know this yet, but you have inspired me to start a podcast. So it's called consulting 9.0. And we look at what it's like to build a successful consulting practice on a warming planet. Season One is going to be interviews with seven pioneers of sustainability business. I think six of those seven are actually meant. So there's some equity work necessary there. But the 9.0 really is a play off of the nine planetary boundaries that are required for humans to be supported on the planet. I love
Katherine Ann Byam 32:41
This is because I love that word. You recommended it to me actually, you recommended that I read donut economics and, and get into that space and and I really like how she has sort of centred this idea that we need to live in balance with these nine boundaries. But we also need to make sure no one falls through the hole. And when we say no one, it's like, it's biodiversity, right? Life itself doesn't fall through that hole. So I really love that you've embraced that in your work. And I'm really looking forward to when you bring that podcast out. Thank you. So Heather, it's been really a pleasure to have you ever learn so much in the session, and I'm sure many listeners have to thank you so much for joining the show.
026 Future Capital
About this Episode
It was an absolute pleasure for me to talk to Dr Janez Potočnik about the state of our natural resources, and how we understand capital today, and what must change if we are to sustain life on our planet.
Dr Potočnik is a leading authority on the economics of sustainability, and it was truly an honour to learn from him in this session. He is a Doctor of Economics from the University of Ljubljana. In July 1994, he was appointed Director of the Institute of Macroeconomic Analysis and Development of the Republic of Slovenia.
In April 1998, the Government of the Republic of Slovenia appointed Dr Potočnik for the Head of Negotiating Team for Accession of the Republic of Slovenia to the European Union.
From June 2000 to December 2000, he was also the acting director of Government Office for European Affairs.
In June 2001, he was appointed a Minister Councillor at the Office of the Prime Minister Drnovšek. On January 24, 2002, the Government of the Republic of Slovenia appointed him for the Minister without portfolio responsible for European Affairs.
From 1991 until 2004 Dr Potočnik has also been an assistant professor at the Faculty of Law at the University of Ljubljana, where he lectured statistics and economy.
Dr Potočnik became a Member of the European Commission on May 2004.
From 2010 - 2014 he took on a second full mandate as Member of the European Commission responsible for Environment.
In 2014 he was appointed a Co-Chair of International resource Panel hosted by United Nations Environment Programme.
In the same month he was also appointed as a Chairman of The Forum for the Future of Agriculture and a chair of the RISE foundation.
He is also a Member of the European Policy Centre's Advisory Council. From April 2016, from the very beginning, he is a Partner in SYSTEMIQ.
From early 2020 he is a president of the ThinkForest and a special advisor to the Commissioner for Environment, Oceans and Fisheries Virginijus Sinkevičius.
In May 2008, he was awarded the honorary degree of Doctor of Science by London Imperial College (UK). In March 2009, he received the honorary degree from Ghent University (Belgium). In May 2016, he was awarded the honorary degree of Doctor of Science in Economics and Business Administration by Aalto University (Finland).
In September 2013, he received the United Nations' 2013 Champions of the Earth Award for the Efforts to Promote Resource Efficiency and Reduce Food Waste in European Union.In March 2014, the Catalan Association of research entities awarded him with The ACER Award for the visionary contributions and leadership that made possible the European Research Council (ERC).
December 2014, the European Environmental Bureau (EEB) awarded him the Twelve stars for the environment Award for his science-based approach to promoting environmental sustainability. In January 2015 during World Economic Forum he was as a first one awarded Circular Economy Leadership Award by the Forum of Young Global Leaders and Fortune. In November 2015, the Carlowitz Society awarded him the Hans-Carl-Von-Carlowitz Award for courageous, open minded, and international work for promoting the idea of the circular economy in Europe.
Recently on my podcast, I hosted Dr Janez Potočnik who has been a prominent voice and strategist in the path to development of circular economic business principles in the European Union and around the world.Outline of the challenge
The International Resource Panel co-chaired by Janez recently released the global resources outlook, a comprehensive study of resource management.
The report reveals that global resource use has more than tripled in the last 50 years.
Global material demand per capita grew from 7.4 tonnes in 1970 to 12.2 tonnes per capita in 2017, which means almost doubling in the last 50 years.
This suggests the majority of the “tripling” could be devoted to economic growth, and to a lesser extent, to the population growth, which is, of course, also important, but there is more to the story.
Material productivity (the efficiency of the use of materials, comparing to the unit of GDP) has been growing steadily to the year 2000 until it began to decline globally due to certain shifts of the production from countries which were more resource efficient, like European Union, Japan, to the countries which were less resource efficient, like for example, Indonesia, China, India, and others.
We currently need more resources or more materials per unit of GDP than we needed two decades ago, which is an interesting phenomenon.
It suggests that how we produce needs to be examined from a comprehensive lens, and not just cost, but also consider the environmental impacts in the value chain in the resource extraction and processing phase alone. The report found that more than 90% of global biodiversity loss and land related and water stress can be related to the use of the biomass contributing more than 80%.
Furthermore, 50% of global climate change impacts can also be explained through the environmental impacts in the resource extraction and processing phase and even one third of the air pollution health impacts.
To bring this home. If you are buying your car, parking it for its lifecycle without ever using it, you will already be causing one third of the pollution, because the resources need to be extracted and the car needs to be produced and that production and extraction of resources is already creating pollution.
Add into that picture the expected global population growth expected to be 9.7 billion at the middle of the century. This means that in one year on the planet we will have the additional population of Germany, and in four years the additional population of the United States of America.
This growth is happening in the least developed parts of the world who by right esteem to the same quality of life enjoyed in the US or within the EU.
The pressure on the use of natural resources in the future will be enormous, driving us to redesign our economies so that we may be more resilient. The Club of Rome shares that we moved from an empty world dominated by labour and infrastructure to a full world where our wellbeing now depends on how well we treat the environment.
In this context, we need to rethink the signals we are sending to the markets, because those signals currently say that we do not value resources, building up a debt with future generations.
The Politics of change
In politics time is needed, as well as a critical mass of support and understanding before changes take place and new more relevant policies become reality. The big issue facing corporations and governments is this idea of stranded assets, and the extent to which this will have an impact as we pivot away from them.
Yet, it is also key that we all understand the seriousness of the challenges facing us. The governance matters. For the first time in human history, we are the generation living in socio ecological space of planetary scope. We are so interconnected, interdependent that our fragility is very high, and which is also raising the importance of our individual and collective responsibility.
This does not even cover climate change, which has a material global impact, only that impact appears more distant, so it is harder to gather the critical mass for a reaction. If we want to reach the right decisions, then we must connect those who were responsible to solve the problems with those who have the instruments for a solution in their hands. There is a need for more co-operation across these goals, and across the interests of multiple stakeholders and complex and interconnected issues.
As for the circular economy, from a European perspective the union is vulnerable as it is a net importer of the natural resources; energy for example, so conserving resources and moving into the circular economy is a logical choice, and a competitive one, considering the economics. The unsustainable irrational or irresponsible use of natural resources is a major contributor to climate change, biodiversity loss, and air pollution.
Our Role as Consumers
Behaving in a responsible way, is our obligation, and has always been, although it has become more obvious and visible now. Getting consumers on board using market signals is key. We live in market economies, and consumers and producers are acting on market signals which do not price in the negative externalities. As a result, items that are by design healthier and more sustainable, have the appearance of costing more, which sends the wrong signal to both producers and consumers.
Defending the public interest through the regulation and public funding is creating confusion of producers and consumers in the market, particularly with the strength of the political lobbying. The cost of the public interest needs to factor in the market mechanics.
Nature has intrinsic value, and as such it seems counterintuitive to assign a cost to it, but if we do not assign a cost, we do not assign a value. This is no longer a distant future. In our lifetimes, we will experience much more dire consequences of failing to act. If you look to the data, on climate impact, biodiversity, pollution, health, it is not difficult to conclude that something is wrong. We have a moral obligation to evaluate these effects better and integrate them into the system guiding our lives or change the system.
Leveraging varying abilities to respond
Our ability to transition effectively to sustainability will fly or fall on the strength of our action on the social part of the story. There is currently so much inequality that it is practically impossible to talking about a full cost system without taking care of those who do not have access to food. The vicious circle can only be unlocked if we start seriously and sincerely dealing with the social part of the questions.
As we look at major players in our global market economy exploring colonization of the moon and mars on the premise that we can source minerals or carry out some of our more harmful processes there is not convincing. Exploration and curiosity guide the human spirit, but we first have a responsibility to the one earth we know we can save.
Tune into the episode here.
020 When Labour No Longer Matters
About this Episode
Ten years ago, I realised that something was broken with the way I understood the economy. It wasn’t because I didn’t know the theory. It was that the theory stopped making sense to me.
The 17 Sustainable Development Goals came into being in January 2016, and act as the foundational lens under which to review the sustainability of our businesses, countries and entire planet.
The goal that threads my business together is 8 - Decent work and Economic growth
About 10 years ago, I realised that something was fundamentally broken with the way I understood business, governance and the economy. It wasn’t because I didn’t know the theory. It was that the theory stopped making sense to me.
I left my employers on a sabbatical year, not to travel the world (as perhaps I should have done) but to do an MBA. It was in that MBA year, that the idea behind the sustainable strategy business that I run was born.
My MBA was mostly traditional, and mostly taught the same old methods and processes, but for 3 glimmers of hope. I specialised in innovation, as this was clearly going to be the source for the radical changes the planet needs, and then I deeply sought to understand geo-politics, competitive advantage and inequality and I understood that my instincts were not wrong.
The 17 Sustainable Development Goals came into being in January 2016, and act as the foundation lenses under which to review the sustainability of our businesses, countries and entire planet.
One goal became passion in particular, although all are in some way key to my business, but this was goal Number 8, Decent work and Economic growth.
My business connects with this goal in various ways. My work with entrepreneurs is intended to support small and micro businesses to lift off with support throughout the journey.
My work with larger businesses and business executives, is to raise this heightened awareness of the deepening role that they will play in a future of sustainability and full transparency.
This podcast aims to bring these worlds together.
Let’s flip back to this topic of Decent work and Economic Growth.
Growth is something we all want and expect, it seems almost hard coded in our DNA to seek it. Yet growth is unsustainable without reviewing the way we look at the factors of production.
Some of the targets in this goal cover topics such as a focus on sectors that encourage employment opportunities such as sustainable tourism, opportunities for entrepreneurship and developing small and micro businesses through access to finance.
The pandemic has not only decimated the tourism sector and events industries, but it has also accelerated the exit from traditional jobs, retail and others, right along side a faster pace of digital transformation.
If you are over 30, you probably learned about the 4 factors of production, Land, Labour, Capital, and Enterprising spirit.
Yet here’s the thing. Labour is diminishing as a factor, while capital is accelerating, especially when it comes to technology.
Our system is set to destroy itself by destroying the middle class that fuels the global engine of growth, in addition to the fundamental real resources on which growth still depends.
Since the education of the 80s and 90s, we now understand capital in 6 more granular ways, and this may begin to shed some light on where we can go from here.
The traditional definition of capital included Finance, manufactured capital, and Intellectual capital. The modern more nuanced forms of capital include Human capital, social and relationship capital and Natural capital.
We have never asked governments or businesses to take account of the way they deplete the latter 3 forms of capital in their activities, but Environmental Social and Governance Reporting is beginning to change the playing field for businesses everywhere.
What’s inside ESG?
45% of boards reported in 2020 that ESG is a regular part of their update. This is good news, even if there’s still some way to go.
Under the environment pillar, we include topics such as climate change (Carbon emissions, Product carbon footprint, financial environmental impact, Climate change vulnerability) Natural resources (Water stress, Bio diversity and land use, Raw Material Sourcing), Pollution and Waste (Toxic emissions and waste, Packaging waste, electronic waste) Environment opportunity (Opportunities in Clean Tech, Opportunities in Green Building, Opportunities in Renewable Energy)
Under the social pillar we have human capital (Labor management, Health & Safety, Human Capital development, Supply Chain Labour standards) Product Liability (Product safety and Quality, Chemical safety, Financial product safety, Privacy and data security, Responsible investment, health & demo risk,) Stakeholder opposition (controversial sourcing), Social Opportunity (Access to communication, Access to Finance, Access to health care, Opportunities in Nutrition and Health.
Finally the Governance Pillar (Corporate Governance – Board Diversity, Executive Pay, Ownership & Accounting) and Corporate Behavior (Business Ethics, Anti Competitive Practices, Corruption and Instability Financial System Instability Tax Transparency)
Some might argue that Tax Transparency isn’t taking it far enough as an example, but these are meaty topics to get into for boards that so far have been used to having things all their own way.
ESG has been introduced to help stakeholder groups understand how ESG risks are being considered in the business strategy of the world’s largest corporations. Not providing an ESG report can harm a companys valuation, its access to capital and its reputation in the market.
ESG is a move toward having a more long-term view of a firm based on its decisions today. Its supporting the cultural shift from the quarterly short term decision making to long term impact. Paul Polman former CEO of Unilever famously didn’t hold quarterly reporting in high regard, as had his sight set on a more long term view of the company, as a long time advocate for more sustainable practices.
The rating agencies supporting these valuations include MSCI, Institutional Shareholder Services (ISS), Sustainalytics, and S&P Global are among the most prominent.
From a reporting perspective, what is material in a company that has truly adopted ESG in its way of doing businesses is Financial Materiality and Social Materiality, and they need to consider this impact across the full range of their stakeholders.
The guidance on ESG has been created by some reputable bodies, including The Sustainable Accounting Standards Board, The Carbon Disclosure Project CDP, the GRI or the Global reporting initiative and the TCFD – Task force on climate related Financial Disclosures.
90% of S&P 500 companies are publishing CSR and or ESG reporting, although the level to which this is embedded can certainly be questioned.
What these considerations reveal is that we can no longer think in silos, and a decision maker’s role cannot be discipline specific. To embed change, a new decision making framework is needed across the board, including the nature of the information and data flows within that organisation, quantitative and qualitative.
The other hot topic is around the knowledge and capability gaps that need to be addressed throughout the organisation structure; data science isn’t the only important skill.
The implications for you dear listener.
If you are a sustainable business owner and not publicly listed you are under no obligation to comply, but I would recommend knowing your numbers anyway, as this is a good exercise for us all. Learning what and how to measure our carbon footprint and social impact would be powerful.
If you are a senior executive at a FTSE or S&P 500 firm, you should familiarise yourself with the guides around ESG and circular economy, and learn ways in which you can make a difference.
How is your board and business adapting to implement and embed ESG in its way of working? I would love to know.
Connect with me on LinkedIn and tell me what you think!
