Sustainable Systems

A Matter of Value, Not Values

Old notions of corporate sustainability, such as charitable donations, ethical investing or just appealing to the better angels of our nature, are giving way to sustainability practices more aligned with the business logic of profit maximization. The new capitalism of ‘profit with purpose’ might yet achieve faster results with respect to climate and biodiversity loss than even the strictest government regulation. But it also opens up entirely new challenges to our ideas about who gets to make such decisions, and even, who runs the world.

In September 2019, e-commerce giant Amazon wowed both the environmental and the business communities with its unprecedented Climate Pledge, committing to achieve net zero greenhouse gas emissions across the entirety of its enterprise by 2040 1 . This was a full ten years earlier than the target set by the UN Paris Agreement to avoid ‘dangerous climate change.’ At that time, no other major private company had adopted so ambitious a global warming mitigation goal. In addition to this already impressive promise, the company promised to achieve 100% renewable energy powering their operations by 2025, and half of all shipments were to be net zero carbon by 2030. Amazon also announced that it would be purchasing 100,000 electric delivery vehicles – the largest single order made to date of clean trucks or vans 2 . In the year since then, Amazon has convinced dozens of other corporate colossi such as Siemens, Mercedes-Benz and Uber to sign on to the pledge.

Notably, Amazon’s pledge handily beat all emissions reduction commitments made by national governments, up to that point. As Unilever CEO Paul Polman provocatively put it last year 3 : ‘We are entering a very interesting period of history where the responsible business world is running ahead of the politicians – taking on a broader role to serve society.’

Amazon’s move fits smoothly within the explosion of the number of firms around the world embracing what senior executives and commerce scholars have termed environmental, social and corporate governance, or ESG. The movement attempts to deliver a more evidence-based and, crucially, data-centric approach to what previously had been called corporate social responsibility, or CSR. This time, firms are not engaged in token conservation charity offerings, such as planting a few hundred trees or, worse, using clever communications experts to dress up ecologically destructive business practices as environmentally friendly – a behavior commonly derided as ‘greenwashing.’ Instead, ESG offers a hard-nosed recognition that environmental and social stewardship is not just something that businesses should participate in as good corporate citizens. Rather, sustainability is desirable because it improves operational efficiency, enhances market growth, reduces financial risk and, of course, boosts profits. A 2020 survey 4 found that a full 90% of CEOs believe sustainability to be core to their business’s success; not an ethical, community-minded extra, like paying for a local football team’s kit in return for a logo on the jersey. ESG is not parallel to the logic of business, but central to it.

It is integral to what the Financial Times argues will be the ‘Future of Capitalism’, or what it calls The New Agenda. A decade on from the global financial crisis and amid widespread and growing distrust in experts, politicians and corporate executives, the world’s leading financial newspaper challenged business leaders to protect the free enterprise system ‘by pursuing profit with purpose.’

Editor Lionel Barber said at the launch of their New Agenda campaign last year 5, ‘The liberal capitalist model has delivered peace, prosperity and technological progress for the past fifty years, dramatically reducing poverty and raising living standards throughout the world. But, in the decade since the global financial crisis, the model has come under strain – particularly the focus on maximizing profits and shareholder value. These principles of good business are necessary but not sufficient. It’s time for a reset.’

And what a reset Amazon’s Climate Pledge was, made just a few months after the FT issued its corporate challenge.

Or was it a reset at all?

In November 2020, Amazon’s public image was rocked by a leak 6 to Vice magazine of dozens of internal documents from its Global Security Operations Center that exposed an aggressive monitoring of European environmental and labor groups that the company believed threatened its operations, such as Greenpeace, Extinction Rebellion and Greta Thunberg’s Fridays for Future movement. The documents describe how Thunberg and her fellow climate activists were ‘increasing their influence especially on young people and students’ and ‘growing and attracting more and more people rapidly.’

Amazon was especially concerned when Thunberg’s global climate strike had inspired thousands of its US-based, white-collar staff to issue an open letter 7 to the company and later even stage a one-day walkout over the company’s continued delivery of custom cloud computing services to the oil and gas industry. These cloud services made possible the acceleration and expansion of fossil fuel extraction, and they were in addition to other alleged poor environmental practices. The documents also revealed how the firm had hired spies from the union-busting security firm Pinkerton – infamous from the darkest days of the 19th century when Pinkerton staff were used to violently attack workers for union organizing. Pinkerton was tasked with tracking activities of green groups and staff viewed as a threat, especially during the period of peak profits for the company, between Black Friday and Christmas. Amazon has fired staff who have spoken out against the company’s emissions-related activities 8, and it has donated to dozens of US Congress members 9, all of whom vote against climate legislation 100% of the time.

An even worse exposure of backroom climate skullduggery amidst public touting of sustainability occurred in 2015 when the US Environmental Protection Agency found that a number of Volkswagen cars with diesel engines had been fitted with ‘defeat device’ software that was able to perceive when it was being tested in a laboratory and alter the performance readings to indicate emissions that were 40 times lower than the vehicles were actually pumping out when driving in the real world. Volkswagen later admitted that even as it had launched a major advertising campaign touting its cars’ low levels of greenhouse gas pollution, it had secretly fitted some 11 million cars with the software. It had, in effect, ‘hacked’ its own cars to lie to the public and regulators on a vast scale. As of writing, the Emissionsgate scandal has resulted in over $33 billion in fines and other penalties, and long prison sentences for some executives 10 .

Thousands of firms around the world have committed to rigorous, often independently assessed ESG reporting, but we also have these examples of egregious disregard for our climate. How can we reconcile these two facts?

In response to the Great Recession and occupation of public squares by citizens who chanted about the 99% versus the 1%, the corporate world needed a fresh public relations counter-offensive. So perhaps ESG is just an updated version of greenwashing?

This is overly simplistic. If it were true, then all sustainability claims by firms should ultimately turn out to be false or exaggerated. But Amazon did start work on its Climate Pledge immediately. From a standing start in 2019, its first custom, state-of-the-art electric delivery vans were unveiled in October 2020, and they are set to deliver their first packages in early 2021. There will be 10,000 of them on the roads by 2022, the company says.

And other firms really are transforming their business practices in radical ways. The likes of Facebook and Google are siting their data centers in cool, northerly climes of Sweden, Iceland and Canada, where electricity grids are dominated by clean, cheap and reliable hydroelectricity, nuclear and geothermal.

So, maybe this gives us a hint as to how this apparent contradiction can be resolved.

The northerly data center locations do happen to have super-low-carbon electricity grids, but they are also much colder than the rest of Europe or North America. The bulk of energy costs associated with data centers comes from cooling the banks and banks of servers. By siting these server farms in much cooler locations, the energy costs are already much lower. It just makes business sense to do this. The public relations benefit of being seen as environmentally friendly by customers and users is almost just an added bonus.

Appliance manufacturer Whirlpool has consistently ratcheted up the energy efficiency of its washers, driers and other products not out of a sense of corporate responsibility – the investment in such constant innovation would be too expensive for the sake of a moral rumbling in the tummy of a CEO. It has done so because it is supremely profitable. It reduces the electricity costs of its consumers, making its items more attractive than those of competitors not offering the same energy efficiency. Unsurprisingly, energy efficiency has climbed from being number 12 in the list of consumer priorities in the 1980s to third today, after cost and performance.

In January 2020, Cyrus Taraporevala, the head of State Street Global Advisors who are the world’s third-largest investment management firm, said 11 , ‘We believe that addressing material ESG issues is good business practice and essential to a company’s long-term financial performance – a matter of value, not values.’

But there’s a sting in the tail here.

Logically, if a firm takes aggressive environmental action to enhance profits, if profits are in fact enhanced by actions that run counter to environmental protection, then they will choose that route instead.

This begins to explain why both Amazon and Volkswagen did what they did.

Shifting to a clean, electric (and potentially automated, should this technology live up to its hype) vehicle fleet is likely, in the near to medium term, to deliver enormous energy and labor-saving costs. Disruptive employees that publicly discredit Amazon and encourage work-stoppages are unlikely to reduce costs. And Extinction Rebellion style blockades of key transport infrastructure nodes, inhibiting delivery of Amazon packages, definitely doesn’t. If Volkswagen can avoid the engineering costs of overhauling its fleet while promoting its products to higher-end consumers that, both surveys and purchasing history show, care deeply about environmental issues, then they are beating the competition that does incur those engineering costs.

This is clearest in the case of Patagonia, the manufacturer of outdoor apparel whose very brand is defined by ecological awareness. It encourages purchase of used Patagonia clothing on eBay before buying them new from their stores or stockists as part of its Common Threads Initiative. It has even taken out bold, full-page ads in the New York Times discouraging people from buying their products on Black Friday 12 . Despite these provocations trying to get consumers not to buy its commodities, the billion-dollar company has gone from strength to strength 13 . But Patagonia products are extremely high-end. Its consumers demand such quixotic activism. It likely sells more products through such marketing wheezes, not fewer.

Just a few steps down the consumer product ladder, most people buying outdoor clothing are much more sensitive to price and do not have the luxury of paying a premium to companies that appear to reflect their ecological values. If they even have the luxury of such values.

The Gilets Jaunes/Yellow Vest protesters that blocked roads throughout France for much of 2019, protesting an increase in an environmental tax applied to gasoline, famously spat at the government trying to impose the law, 'There are those who talk about the end of the world. We worry about the end of the month.' Any firm servicing the market segments represented by these people’s income brackets (and they are, sadly, the majority) that tried to do what Patagonia does would quickly be outcompeted by any brand that simply delivered a cheaper product of equivalent quality.

From Tesla electric vehicles to lab-grown chicken nuggets, if the more sustainable product happens to be better and/or cheaper than the less sustainable one, it will quickly displace the latter. But if the green product isn’t either of these things, then only those most committed to sustainability will purchase it. And then, primarily as a means of conspicuous consumption to distinguish themselves from those they consider less moral. This is an aesthetic decision, a fashion, and fashions can always change.

In addition, those firms with less ‘consumer facing,’ whose commodities lie deeper in the supply chain, such as raw commodities from copper to lithium, will inevitably face less pressure from eco-aware shoppers. They’re not the ones that buy these products. What all this tells us is that the belief that market capitalism is inevitable, and in all cases environmentally destructive, is wrong. But it also tells us that those like Unilever’s Polman, who tell us that market capitalism is now in the 21st Century inevitably leading to more environmentally sustainable outcomes than even governments, are wrong as well.

The reality is much more banal: so long as sustainable practices are profitable, companies will engage in those practices. When they aren’t, they won’t.

So, does this leave us in an unexceptional, ahem, business-as-usual situation that prompts a few clickbait headlines or sweeping claims about a new spirit of capitalism? When private enterprise does good in the search for profit, well done. And when profit-seeking leads to undesirable consequences, government steps in to shepherd, through regulations, commercialization of technologies that are both low-carbon and cheaper than fossil fuels. This just seems like the same old capitalism we have always had.And up to a point, that's true. We sometimes forget, but there was another existential environmental crisis, back in the 1980s, that has since all but been solved: the depletion of stratospheric ozone, popularly known as the hole in the ozone layer. This hole was caused by the industrial and commercial use of chlorofluorocarbons (CFCs), which within short order would have come close to extinguishing terrestrial life on the planet. As a result of a global treaty, the 1987 Montreal Protocol, requiring government regulation to phase out the use of CFCs, the ozone layer is well on its way to healing. The apocalypse was canceled, not by the companies who made use of CFCs in their products, popularly understood as fridges and cans of hairspray (although their use was much more widespread), but by government intervention in the face of resistance from the companies who produced and used them.

But this isn’t the whole story. In fact, this is where the tale takes a very strange turn indeed. It turns out there is something novel about capitalism in the 21st century – or at least within a very important segment of capitalism – that is driving genuinely system-wide beneficial and rapid environmentally friendly change in business practices, regardless of the profitability for a particular enterprise.

And once we dig into its drivers, we might find that we don’t feel terribly comfortable about this transformation.

In April 2019, the governors of the Bank of England and France’s central bank, Mark Carney and François Villeroy de Galhau, issued a warning 14 that the financial sector risks potentially catastrophic losses if they do not act decisively to avoid climate pollution and other ecological harms. Once again, noting that insurance losses from climate-related events have risen five-fold in the last three decades, they argued that it is in these companies’ own financial interest to make such environmental changes.

Carney and de Galhau were worried that the corpus of scientific evidence regarding global warming offers probabilities of civilization-levelling climate events occurring that, while low, are not zero. Using the language of economists instead of climatologists, they said that sharp ESG action via a new, voluntary coalition of the willing was urgently necessary. The coalition was termed the Network for Greening the Financial System (NGFS), and it consisted of some 34 central banks overseeing economies representing half of all greenhouse gas emissions 14 and supervising two thirds of the globally systemically important banks and insurers. Carney and Galhau wrote that this is necessary to avoid a 'climate-driven Minsky Moment – the term we use to refer to a sudden collapse in asset prices.' In other words, a market crash.

In many respects, the central bankers are pushing at an open door within the financial sector, especially amongst insurers. Pressure placed on firms from insurance companies is having a significant effect in driving adoption of ESG reporting, because the cost of climate change for them is significant. The world is already suffering through a climate-driven increase in the number and intensity of extreme weather events such as floods, droughts, hurricanes and wildfires. And insurers foot the bill. When the risk is too great for insurance companies, reinsurers underwrite them. But what happens when the scale of damages from natural disasters becomes too much even for the reinsurers? Unsurprisingly, this is one sector of the economy that is extremely hawkish on aggressive climate action.

And while we talk of finance and insurance as sectors, as if they were just one part amongst many in the economy, like coffee or automobiles, really they are the foundation of the entire economy, touching everything. Ruling everything. What they say goes. And what they are increasingly saying is that ESG reporting and concrete action to back it up are key factors in their investment criteria.

Some of the very largest investors are warning that if they do not clean up their act on ESG, they will use their institutional heft to vote to discipline management that does not obey these directives. In May 2020, the 'Big Three' largest asset managers in the US, BlackRock, Vanguard and State Street, together constituting the largest shareholder in 88% of S&P 500 firms 15, cast votes in opposition to ExxonMobil management and demanded that the company release its climate change impact assessments.

These institutional investors are doing this like all the other firms discussed up to this point, because climate change negatively impacts their business’s profits. But here’s where it gets weird: their business is, in a sense, everything.

This takes a bit of unpacking. Since the Global Financial Crisis, there has been a massive shift by private and institutional investors from expensive actively managed mutual funds to lower cost passively traded index funds. Passive management involves investment in a broad portfolio of stocks or bonds designed to replicate the composition of an entire financial market index. It’s not quite 'one of everything,' but pretty close. This lowers management costs and transaction fees compared to the traditionally actively managed funds where fund managers try to buy the stocks that they believe will perform the best. Even more importantly, passive index funds grew out of the Efficient Market concept 16 that active management of investment cannot over the long run outperform market averages. The returns from passive investing are thus equal to the average returns of the market as a whole.

As a result of this shift from active management to passive index funds, the chance that any two firms in the very wide S&P 1500 index have a common owner that holds at least 5% of shares is 90% – up from just 20% at the start of the millennium.

This has a series of radical consequences. Conventionally, if you owned stock in one company, a car manufacturer or mining firm, you wanted it to outperform its rival car and mining companies. But this revolution in the financial sector over the last 20 years means that now vast swathes of investment cash (remember – the Big Three alone represent the equivalent of about a fifth of the global economy) have an interest in the market as a whole increasing in value. They don’t care at all which firm does best. And just as in a single firm, if one unit or department is dragging down the value created by the rest of the firm, then that unit is reorganized or even shut down. Hence the announcement by BlackRock – the company that New Yorker journalist and climate campaigner Bill McKibben calls 'the world’s biggest box of money' – in January that it would begin divesting from coal and climate-disciplining the CEOs of the firms it invests in 17 , which, is sort of everything.

These Everything Companies like BlackRock and Vanguard steering almost the entire economy sounds an awful lot like, quite frankly, communist dreams of planning the world economy, except without Bolsheviks or a dictatorship of the proletariat. In fact, in 2016, Bloomberg financial columnist Matt Levine even penned a provocative article entitled, Are Index Funds Communist? In it, he imagines a steady development from today's relatively simple index funds to a point sometime in the future where algorithms devise better and better puppetry of the firms they own parts of to maximize overall value creation for their investors – a sort of central planning by bots. A dictatorship of the bot-atariat?

These are just speculations of the distant future at this point. But 2020 has already given hints of where, at least in the near term, corporate sustainability is driving.

The environment is not the only facet of sustainability. The global Covid-19 pandemic has plainly demonstrated how pandemic unpreparedness and business practices that exacerbate probability of pandemics – such as deforestation extending the chances of zoonotic disease transmission or the reluctance of pharmaceutical firms to invest in unprofitable vaccine development without government subsidy – have battered the global economy via lockdowns, broken supply chains and sickened workers.

Moving forward, can we envisage such index fund pressure beginning to tame these sorts of practices? Bill Gates has called for the establishment of a new global pandemic preparedness agency that would set up monitoring clinics throughout the world, invest in phylodynamic and vaccine R&D and expand manufacturing and distribution capacity long in advance of any novel disease. A ‘NATO for pandemics’. This is likely to cost hundreds of billions annually. Any individual company might rage against the increased taxation required to fund such a body, because while collectively all business is threatened by pandemic risk, a single company’s very existence might be threatened by higher taxes. But an Everything Company doesn’t care about one of its units going under if that means that overall it prospers.

Revisiting his 2016 index-funds-as-communism provocation in the age of COVID, Bloomberg journalist Matt Levine recently offered another fascinating thought experiment 18 . Blackrock, Vanguard, State Street and a couple other hulking index funds, he notes, own almost a third of pharmaceutical firm Pfizer, the firm behind a COVID vaccine whose trials results were recently released showing a staggering and unexpected effectiveness rate of 95% i . And other, smaller investors are also passive index funds. Pfizer of course is naturally interested in maximizing the return on its not inconsiderable, if government-guaranteed, investment in vaccine development. But BlackRock, the biggest Everything Company in the world, owns trillions of dollars of stock in everything else, which will benefit enormously if the pandemic comes to a rapid halt and everyone goes back to work, stat. As Levine writes, if Pfizer 'distributes [the vaccine] as widely as possible – even at cost, even below cost, even for free, even at an enormous loss – it will make [BlackRock and its other owners] richer by many, many billions of dollars.’ Even if Pfizer goes bankrupt in order to restart the global economy, the losses resulting from BlackRock et al’s now worthless Pfizer stock would be dwarfed by the benefits to all the other companies these index funds de facto own. Pfizer here in this scenario would thus be sacrificed, Levine imagines, by its real bosses – not the Pfizer executives but the index funds – as a loss leader, no different to the bargain-basement turkeys essentially given away by supermarkets at Christmas to attract customers. We have no evidence that this is happening. It’s just a fun notion to play with, illustrating the radically novel capitalism the world is experiencing at the dawn of the decade of the 21st century.

Climate change has transformed from a scientific fact that investors nevertheless did not consider a serious investment risk 30 years ago into a threat so dire to value creation that this year, a group of investors managing $118 trillion in assets has all but ordered companies it invests in to provide disclosures in accordance with the Task Force on Climate‐Related Financial Disclosures. This, together with the speed with which the previously fantastical, almost science fiction conception of an existential threat such as a pandemic materialized into an all-too-real one pushed the World Economic Forum (WEF) in March 2020 to put out an ESG white paper 19 on what it termed 'dynamic materiality.' This new concept aims at assisting companies and investors to understand and identify the signals for those ESG issues that while not material today might quickly become so in the future.

It’s good that the WEF is thinking of these investors. But what do we have to say about this as citizens, voters? If the sustainability-minded index funds work to drive fossil fuels out of the global economy faster than governments can, then surely they are a government, or at least view the world economy like one. But who elected this government, we might ask, with such power? It’s not even as if the index fund managers or shareholders appointed themselves rulers. The managers of the Everything Companies are not themselves 'running everything.' It is not the 1% that rules the world. They are blindly ruled by an abstract force that issues the commands: profit, even as this ruler demands rapid and deep decarbonization.

This may still be capitalism, but certainly not as we know it. As the Financial Times put it, the Future of Capitalism indeed.

Picture of Leigh Phillips

Leigh Phillips

Leigh Phillips is a science writer and political journalist whose work has appeared in Nature, Science, New Scientist, the Guardian, the Daily Telegraph, MIT Technology Review, and the New Statesman, amongst other publications. He is also the author of two books, Austerity Ecology and the Collapse-porn Addicts, a progressive defence of economic growth and industry within sustainability discourse, and most recently with co-author and economist Michal Rozworski, The People's Republic of Walmart, a history of the economic calculation debate.


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