I particularly want to thank the Dean and Faculty of the London Business School for having chosen to award me with this honorary degree this evening. I’m not entirely sure what I have done to deserve it – but mine is not to reason why! Perhaps it is something to do with what I have been trying to say for the past 30 years, suddenly becoming a bit more ‘flavour of the month.’ Of course, it might possibly be something to do with the quarter of a century I have spent as President of Business in the Community, where I have been fortunate enough to work with many of the world’s most inspiring executives. Almost without exception, they understand that the way businesses behave, not just in their communities, but in the market place, and towards the environment – indeed, even towards their own staff in the workplace – is of the most tremendous importance.
What is fascinating about your School, however, is that you are working with the next generation of business leaders and, if I may, I would like to say a few words about some of the challenges they are likely to face in the coming years and to spell out the reasons why I believe we need to develop a new way of thinking about our financial future and the way we manage the resources on which economic growth actually depends.
We all know that the world economy is still reeling from the shocks it has felt since the banking crisis. This has been exacerbated by natural disasters, such as the terrible destruction wrought in Japan let alone in the other parts of the world. And while the European economy, as a whole, is slowly growing again, its stability does seem, in the short term, to be utterly dependent on the precise calculations and interventions of central bankers and policy makers. Obviously, we all pray their efforts will succeed and that the economy will, once again, become more robust; but we shouldn’t let this short-term focus distract us from thinking about some of the root causes of our economic instability and long-term trends that your students will be facing throughout their careers.
It is now widely accepted that the credit crunch was the result of a collective failure to understand the levels of systemic risk in the financial system. This we can address relatively easily, but there is another systemic risk which is, to my mind, much more serious in the long term: the threat of increasing and accumulating environmental collapse and with it the devastating consequences for us, as a species, but also for the myriad others, both visible and invisible, which share this planet with us and on which we depend for our survival, did we but know it. Our myopic determination to ignore the facts and to continue with business as usual is, I fear, creating the risk of a crash which will be far more dramatic, and far harder to recover from, than anything we have experienced over the past few years.
I would have thought that risk management comes quite high up the list of priorities in terms of business, so from that point of view alone I would like to suggest that, by looking at our economy slightly differently, it is possible to see a way of averting environmental catastrophe.
For too long we have tended to think of the welfare of societies in terms of their ability to harness technology or achieve economic growth, when, in fact, there are far more fundamental factors supporting our needs.
Take the whole issue of water. On a recent visit to India, I was able to see the work of the Jal Bhagirathi Foundation in the village of Tolesar Charan in the state of Rajasthan, located in the most densely populated arid zone anywhere in the world. As little as 4 inches of rain falls here in an entire year which seems to be the way we are heading here if were not careful, and severe droughts are common. It is a place where one finds vivid reminders of how utterly dependent humankind is upon Nature – in this case upon rain. If there is little rain then incomes plummet and people are forced to migrate or incur debts to survive.
Last year was a drought year, so water (and the ecosystems which help generate rain and capture it in the ground) are perhaps one of the most striking examples of how our current economic model fails to value the gifts Nature bestows upon us and, instead, chooses gleefully to use up the Natural Capital on which we depend with little or no regard to the consequences.
Let me explain. In New Zealand, the 22,000 acres of the Te Papanui Conservation Park provides water for hydroelectricity, urban water supply, and water for irrigation to the neighbouring farmers, for free. However, to replace this would cost some $136 million New Zealand dollars a year. In other words, Nature is providing a multi-million dollar subsidy which isn’t being recorded on any balance sheet or in any set of accounts. Its contribution to our economic health is not being captured. It is an auditor’s nightmare!
Once you start to factor in the threat multiplier which is Climate Change, you get some idea of the challenge which is ahead of us. The scale of that change was made very clear to me recently when I asked Professor Tim Jackson, from the University of Surrey, to speak at an event here at St James’s Palace for my Accounting for Sustainability initiative. Professor Jackson argued that today, for every dollar of wealth we create in the world, we emit roughly 770 grams of CO2 from the burning of fossil fuels. If we are to meet our global carbon targets for 2050, and at the same time build an equitable economy in which an estimated 9 billion people can all aspire to rising Western income levels, this number has to drop to just 6 grams of CO2. As the economy continues to expand, stabilizing the climate could even mean turning that number negative. In other words by 2100 we will need an economy which is paying to take CO2 out of the atmosphere. Carbon intensities have been falling, but nothing like that fast. In fact, global carbon emissions have actually risen by 40 per cent since 1990.
There are those who attempt to argue that all we need to do is decouple our economic growth from our carbon emissions and all will be well. I fear they are underestimating the challenge. Instead, I believe we need to develop a whole new way of looking at our economy and accept the fact that capitalism will, once again, have to change and adapt if it is to meet the challenge.
The respected economic commentator, Anatole Kaletsky, recently argued that, since the 18th Century, Capitalism has gone through various transitions. From laissez-faire economics, through a Keynsian post-war consensus, to the free-market economics of the Chicago school. But what will Capitalism look like in the future? His conclusion is that we need, what he calls, an “adaptive, mixed economy.” Creating partnerships between the public and private sectors in such a way that they have, built into them, the necessary flexibility that can adapt to rapidly altering circumstances. We live, after all, in a much more global business environment than we did twenty-five years ago, where shifts can be sudden and sharp.
I would be more direct and argue that we need our economy – and the businesses which operate in it – to think about their inherent resilience, by which I mean their ability to absorb, adapt or repel exogenous shocks. As far as I can see, responding to the problems we have with a “business as usual” approach towards the way in which we measure G.D.P. offers us only short-term relief. It does not promise a long-term cure. Why? Because we cannot possibly maintain the approach in the long-term if we continue to consume our planet as rapaciously as we are doing. At our current levels of consumption and growth fewer than two billion people can live the way we do. And fewer than six billion people at the income levels such as in Brazil or China. And yet we expect to be nine billion people by mid-century. The sums don’t add up. Capitalism depends upon capital, but our capital ultimately depends upon the health of Nature’s capital. Whether we like it or not, the two are in fact inseparable.
This was certainly the implicit suggestion in a recent and very important study by the U.N. The Economics of Ecosystems and Biodiversity, or T.E.E.B., assessed the multi-trillion dollar importance to the world’s economy of the natural world and concluded that the present system of national accounts needs to be upgraded rapidly so they include the health of natural capital, and thereby accurately reflect how the services offered by natural ecosystems are performing – let alone are paid for. This is very important. If we hope to redress the market failure that will otherwise blight the lives of future generations, we have to see that there is a direct relationship between the resilience of the planet’s ecosystems and the resilience of our national economies.
Many of the world’s leading firms are already thinking about this, asking if their business model will really be fit for purpose in a resource constrained world. Ian Cheshire, the Chief Executive of Kingfisher and a leading European business leader, has been chairing a project for me at Business in the Community looking at a Vision for a Sustainable Future. The project’s conclusion is clear. He said, and I quote: “The changes we are likely to see to our society and environment over the next two decades and beyond will require a paradigm shift in the economy and society. The companies that recognise and plan for it now will be the winners of the future. We need to think now about how business services will evolve in the next two decades and beyond. The opportunities are real for those who help create a sustainable future.”
This is already being put into action by Unilever who, as many of you know, have announced plans to double in size while halving their impact on the environment – effectively decoupling future growth from environmental impact. And speaking at my Business and Sustainability Programme London Lecture last year Jeff Immelt, the Chief Executive of G.E., described a clean energy future (one that is sustainable, that emphasises energy security, that drives competitiveness and job creation and that reduces pollution) as simply: “the biggest opportunity that we will face in the next decades”.
Ladies and Gentlemen, it is clear that many of those who are in the boardrooms of the world’s biggest companies today are already scrutinizing these issues, but there is more to do. Not least in properly equipping the next generations of business leaders with the knowledge, skills and outlook that will be necessary to deal with the circumstances that a vast body of data indicate will soon be upon us. This is where business schools such as yours have such a vital role to play.
But these issues can’t be dealt with in optional modules about sustainability or the environment. If we are to have vibrant and sustainable economic development in the future, underpinned by resilient and dynamic businesses, then it seems obvious to me that we need to do far more to bring the question of Natural Capital, how to conserve it, how to pay for the utilities provided by Nature’s ecosystem services – in other words, the rainforests, wetlands, rivers and soils - to the very centre of how we promote enterprise in the future and, indeed, into the heart of what we teach our leaders of the future. This is not simply a question of business ethics and doing the right thing on so-called green issues; this is about the very survival of our economic system and all that it has done to promote wealth, development and comfort for so many millions of people for so many years.
The point about all this – and why I have spent the last 26 years of my life working with the private sector to encourage corporate, social and Environmental responsibility – is that the private sector working with N.G.O.’s and local communities, and recognising its overriding responsibility towards the maintenance of Natural Capital in an increasingly threatened environment, is the key to the future viability of everything we have up to now taken for granted. In a world where the free market reigns supreme and many corporations have turnovers that dwarf the economics of many countries, it is even more important that companies work in partnership with governments and N.G.O.s – whether it’s retailers and the fishing industry working together with governments and local communities to conserve fish stocks and marine ecosystems in order to ensure a productive and profitable future, or the pharmaceutical sector recognizing its responsibility to help preserve the threatened biodiversity upon which our health ultimately depends and from which future medicines will be derived.
Businesses can rise to this systemic challenge at so many levels and, indeed, many already are. I have worked with companies that have achieved major reductions in their impacts, for example on fisheries and forests; others have come together to present new ideas to policy makers and their supply chains. Others have created completely new business models. This is not a task that cannot be addressed by businesses - in many ways, as I have pointed out, this challenge can only be addressed by business.
Your role in this, if I might be so bold, is absolutely central. Should you succeed in successfully building sustainability and an understanding of resilience into the heart of future business models, then the effect could be quite simply transformative. This needs leaders who can think systemically, who are willing to challenge the status quo where necessary, and who will inspire and encourage others to drive not just incremental change but transformational change too.
I have gone on for far too long, but it’s your own fault for giving me an honorary degree in latitude. However, I hope my message is clear – that the challenges posed by natural capital depletion are real, that the response represents a business opportunity and that your role in realising it is potentially very considerable.