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03/21/2012

Beyond Firm-Level Sustainable Capitalism


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Generation Investment Management’s recently released white paper calls for a “paradigm shift” to Sustainable Capitalism. It is an admirable and important contribution to the discussion about how to make individual firms more sustainable. Beyond this effort, we need the sustainable business community to join the ongoing systems level conversation about how to make the whole global economy truly sustainable, not merely less unsustainable. Without such a systemic shift, the sum of individual firm sustainability efforts will not translate into sustainable capitalism.

In the spirit of contemporary Chinese artist Ai Weiwei’s belief—quoted in Sustainable Capitalism—that “liberty is about the right to question everything,” we offer five questions as a beginning to this critical dialogue:

  1. Can we find the answers to economic unsustainability within conventional economics?

    The profound ramifications of climate change (and other such market failures) impact not only firms and their financial value, they impact our economic, social, political, and ecological systems. To recognize this reality, conventional economists would have us price (“internalize”) the effects of this externality. But the compounding interconnections between global temperature rise, sea level rise, soil degradation, biodiversity loss, etc., make accurate pricing impractical, while some risks such as climate change have consequences that simply cannot be priced. Furthermore, the discount function embedded in conventional financial analysis all but ensures that the costs to be borne by our grandchildren tomorrow are not valued today.

    We have therefore concluded that looking at the sustainability challenge through the lens of conventional economics and finance reinforces the error that got us into our current difficulties. As Einstein famously said: “We can't solve problems by using the same kind of thinking we used when we created them.”

    Instead, we should look to natural systems science to understand sustainability because it is by definition sustainable—unlike our modern global economy. Leading new economy thinkers from the sciences like Janine Benyus, author of Biomimicry, are already working on this new way of thinking.

  2. What does nature teach us about sustainable capitalism?

    If we look to nature as the model and measure for sustainability, we find that nature does not maximize the goals of its parts. Rather, nature limits the goals of each species to that which can benefit the system without drawing down on its future viability. A “framework that seeks to maximize long-term [firm-level] economic value creation”—the definition offered for sustainable capitalism—must first be constrained by the need for the economy writ large to carry on.

    Innovative models, such as the Evergreen Cooperatives in Cleveland, are sprouting up all over the country. Inspired by the $20 Billion Mondragon Cooperatives in Spain, Evergreen has, for example, established an umbrella organization to provide a source of continuity for all of its cooperative enterprises. All cooperatives are expected to support a fellow coop in distress, absorbing its excess labor capacity. Rather than reinvest or distribute all its profits, each coop contributes to a fund that a distressed coop can tap and that helps finance the next generation of cooperative businesses.

  3. Can we live within our ecological means?

    A natural system cannot continue to exist if it depletes the resources it depends on or ruins the capacity of its host to recycle its wastes. Sustainable Capitalism begins and ends with quotes from two leading thinkers on this issue, Herman Daly and Tim Jackson, but it fails to address the core challenge they have put to economics, mainstream finance and capitalism: how can an economic system that depends upon finite natural resources continue to grow exponentially? Resource constraints and limits to growth must be addressed in any credible discussion of the future of capitalism (see Jeremy Grantham).

    A paper by Johan Rockström published in Nature in 2009 detailed what he and his team call the “safe operating space for humanity.” To stay within the safe operating space requires that we not cross any of nine planetary boundaries, including three we have already crossed—atmospheric carbon (climate change), runaway biodiversity loss, and nitrogen cycle disruption.

    The goal of perpetuating the healthy function of the ecosystem must trump the profit-maximization goal of individual firms. This means we must design, as the Mondragon and Evergreen Cooperatives have attempted in more regional ways, a governance system that can set the priorities and enforce naturally defined limits on the global economy.

  4. How long-term must “long-term thinking” be?

    Lester Brown defines a sustainable society as one that “satisfies its needs without diminishing the prospects of future generations.” Short-termism is certainly a problem throughout society, and nowhere worse than in finance, as Sustainable Capitalism points out. However, the real issue is not the difference between hyper intra-second trading (destructive as that can be), quarterly earnings guidance, annual bonus cycles, and three-year performance metrics. Markets are wonderful human tools that work best in short timeframes, but they offer no protection against long-term resource depletion threats, as we have learned from our forests and fisheries and now climate change. We must not expect even better structured markets, with more transparent information, to perform tasks they are not designed for. Instead, we need markets designed and governed by something like the “7th generation” decision-making process of the Iroquois. We need what E.F. Schumacher called an “economics of permanence.”

  5. How can we go beyond sustainability?

    Generations’ Sustainable Capitalism says “sustainability does not involve a trade-off between profitability and improving the environment.” We believe the authors meant “harming or using the environment less,” not “improving the environment.” Discussions of sustainable business often confuse the two, and fail to take up the hard choices. If we are to achieve the sustainability of natural systems, we should be searching for a regenerative capitalism that rebuilds, rather than breaks down, the social and ecological support systems we depend on, promoting true prosperity in the process.

    With their path-breaking approach to integrated value investing that seeks to break free from the myopic reductionism of conventional financial analysis, Generation Investment Management has made a courageous and valuable contribution to addressing the “wicked challenge” of our lifetime: unsustainability.

  6. To move forward, we can think of no better metaphor than the “fresh canvas” the authors of Sustainable Capitalism call for. The canvas forces constraints on the artist. Like our planet, its boundaries are fixed. Within that constraint, the artist’s discipline and creativity flourish. So too will human resourcefulness, innovation, and collaboration be stimulated by the discipline of operating the economy within the earth’s physical boundaries.

    It is our great challenge, at this time, to transform the global economic system. Let us look to nature’s wisdom as our guide, rather than be confined by the limitations of conventional economic and financial theory. There is no more urgent task for a genuinely sustainable capitalism than to envision, define, and negotiate how to share and enforce the human economy’s “safe operating space” in an equitable way. The hard work lies ahead.

—John Fullerton

John Fullerton is the founder and president of the Capital Institute. He is also the principal of Level 3 Capital Advisors, LLC, an investment firm focused on high impact sustainable private investments. This article originally appeared on his blog, The Future of Finance.

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