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Make the Market Work for People and Planet

Imagine for a moment that Earth is a business. Planet Earth Ltd. is an integrated global conglomerate, providing products and services to customers all over the world. It’s been in business a long time, with such huge capital accounts that only recently, in the wake of other business scandals, have its owners decided to audit the books and examine how well it’s really doing. The audit reveals a company in deep trouble.

Fourteen of the company’s 18 divisions examined are in the red. Only four are profitable. The auditor’s opinion is sobering, pointing to the absence of internal controls: capital accounts undervalued and depleted for short-term gain, and extensive use of off-balance sheet assets and liabilities. Business units are pitted against each other with inefficient transfer-pricing mechanisms, no strategic planning and underinvestment in R&D. The company is being run without a CEO. The auditor contends that to avoid bankruptcy, the company’s management must transform its practices or be replaced.

The Intergovernmental Science Policy Platform on Biodiversity and Ecosystem Services (IPBES, “the IPCC for nature”) global assessment report can be compared to a business audit. Its 150 scientists found that of the 18 ecosystem services they assessed globally, only four had been enhanced since 1970. The rest were all degraded or depleted, despite warnings from an earlier global assessment 15 years ago.

We are simultaneously amid a “Great Acceleration” of humanity’s environmental footprint and a Great Concentration of wealth. According to Oxfam, 82% of the wealth generated globally in 2017 went to the richest 1%, while half the population struggled on less than $5.50 per day. And COVID-19 is exacerbating the gap between rich and poor.

What to do?

Change the Rules of the Global Market

The global market system is designed to maximize profit while meeting people’s needs. It’s had some success. As economic historian Deirdre McCloskey noted, Western Europe’s embrace of the profit motive was the catalyst for what she dubs the “Great Enrichment” of the last two centuries. In this period, the world experienced unprecedented improvement in living standards and enhanced individual freedoms. But these benefits have come with a heavy and growing price.

Today, the market is the single-most environmentally destructive force on the planet. It’s the hungry elephant in the Garden of Eden. It profits at the expense of the environment and ultimately society. And by 2050, it will likely be more than twice as big as it was in 2016.

We must harness and redirect the market’s unmatched capital and ingenuity as a restorative force for the planet. We know what moves it — growth in profit. CEOs may make nice speeches, sign on to nice declarations, embrace nice values, but if they don’t continually increase profits, they lose their jobs.

Fortunately, business is pragmatic about how it grows its profit. It’s willing to change locations, products, technologies, inputs, etc. if it leads to more profit. We, therefore, must ensure the rules of the market incentivize societal stewardship. That means factoring in environmental cost and benefits into the profit calculation. This cannot be a voluntary exercise. It must be required. Yes, easier said than done. But it must be done.

How to Factor Environmental Costs and Benefits into Profits?

I will focus on two actions to achieve this. Government is central to both, but citizens and business must also be a driving force.

1) Fix the omissions in the calculation of corporate profit.

The pursuit of profit is not the problem. The real problem is the incompleteness of the profit calculation.

It leaves out things that matter the most — the value of clean air, water, healthy ecosystems, and the costs borne by society — especially the most vulnerable — when these resources are degraded. These omissions may have been less significant a century ago, when there was an abundance of resources and the population was lower. But today, as we approach and exceed the planet’s boundaries, they are the main event.

Returning to Planet Earth Ltd.’s audit, it’s revealing that the four divisions IPBES found had increased (food, fish, bioenergy, and the harvest of other materials) all have a price in the marketplace that reflect their benefit to society. The 14 divisions in the red mostly have no price for the critical benefits they provide to society. These include nature’s services such as pollination and the regulation of climate, natural hazards, and water quality and quantity.

Financial accounting owes its integrity to double-entry bookkeeping, recording both credits and debits. But when it comes to the environment, we practice single-entry bookkeeping. We record the value of what we harvest from nature but make no matching entry for its depletion or degradation. Food companies do not account for soil erosion, water pollution or the climate change effect of forest conversion into agricultural land. Fishing companies do not account for the depletion of fisheries. And forest product companies do not account for the depleted or lost carbon regulation of forests when they are harvested. This isn’t just a failure of markets, it’s a failure of government to set appropriate market rules.

Some argue against putting a value on nature. It’s too difficult. It undermines the intrinsic value. It can’t be divided. It’s part of an integral system. But without a value, it’s essentially valueless. And while the invisible hand of markets may have some power to manage scarcity, it doesn’t know what it doesn’t know!

We are starting to know what the invisible hand doesn’t know, and the results are disturbing. Researchers at Harvard Business School, for example, quantified the environmental impact of 1,800 companies and found that environmental costs often exceeded profit. Of the 1,694 companies that were profitable in 2018, 252 firms (15%) would see their profit more than wiped out if environmental costs were accounted for, while 543 (32%) would see their profit reduced by 25% or more.

It’s government’s job to ensure markets play by rules that do not harm society and the environment we all depend upon. The true cost of the environment must be factored into corporate profit calculations.

A good place to start is to put a price on carbon. The number of carbon-pricing systems has quadrupled over the past 10 years, now covering 78 jurisdictions and over 22% of GHG emissions globally. And when needed, governments should use old-fashioned non-market mechanisms, such as the U.S Clean Air and Clean Water Acts, to ensure certain destructive behaviors are off-limits.

Again, easier said than done, especially given the vested interests in politics. But this brings me to the second needed and related action.

<p>Environmental cost and benefits must factor into corporate profit calculations. A good place to start? Put a price on carbon emissions. Photo by Patrick Hendry/Unsplash.</p>

Environmental cost and benefits must factor into corporate profit calculations. A good place to start? Put a price on carbon emissions. Photo by Patrick Hendry/Unsplash.

2) Reduce corporate influence over public policy and elections.

Since the 1970s, corporate influence over policymaking has grown as measured by multiple metrics: number of corporate lobbyists, amount spent on lobbying, indirect spending on self-serving think tanks, revolving doors between government and business, election spending, and more. The world's five largest publicly owned oil and gas companies spend around $200 million annually lobbying against climate policy. It should therefore be no surprise that G20 countries pledged $207 billion to support fossil fuels in their COVID-19 stimulus measures (as of September 9, 2020) compared to just $137 billion for clean energy. And much of this had no conditionalities — not even that employees keep their jobs!

Governments must grasp the nettle of corporate capture if we are to have any hope of passing policies to correct market failures. They must reduce the power business holds over them, while providing citizens a greater voice. Ways to do this include limiting spending by political parties, ending contributions from corporations and lobbyists, and expanding disclosure around fundraising and spending. We need to get corporate and special interest money out of politics and give back power to the people.

Self-greening of Markets: Nice, but Not Sufficient

The business community will push back against greater government oversight and diminished influence. They will say leave it to the markets. They may point to the fact that 1,000+ companies have committed to science-based climate emissions-reduction targets, or to the emerging promise of a circular economy, or that a quarter of global financial assets are now managed sustainably in some form or other. While important leadership initiatives, they are not the end game. They are at best wobbly steppingstones that need to be reinforced by strong government action if we are to address ecological limits in the finite time left to do so.

In the early 1990s, John Elkington coined the term “triple bottom line” to inspire business to give equivalence to the value of environmental, social and economic factors. Since then, thousands of companies have produced sustainability reports. But these non-financial numbers do not count where it matters most — against the bottom line. It should therefore be no surprise that on the 25th anniversary of the triple bottom line launch, Elkington issued a product recall for the triple bottom line concept. Absent from strong government action, the idea failed to achieve its goal of system change.

Time for Governments to Get Back to Governing

When governments set rules of the game that factor the value of nature into profit calculations, it will help align profit-making with solving the crisis of our common home. And that elephant, instead of continuing to run rampant, will turn its attention to tending to our common garden, while making a profit.

Some business leaders are coming around to the same idea. In September 2020, 200 leading CEOs of the U.S. Business Roundtable issued a statement calling for government-led action on climate change. This stirring of business must be matched by citizens demanding action from governments. And if business and citizens prevail upon governments to get back in the business of governing, maybe we will see the passing of policies that match the scale of global environmental challenges.

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