Capitalism is in crisis. Russian prime minister Vladimir Putin and Chinese premier Wen Jiabao seemed to have fun at the World Economic Forum (WEF) in Davos this year, needling American delegates for what the Chinese premier dubbed their "blind pursuit of profit," aggravated by an "unsustainable model of development characterised by prolonged low savings and high consumption." He called for "a new economic order that is just, equitable, sound and stable" – even if he stopped short of saying “sustainable” in so many words.
But the rapidly deteriorating state of the Russian and Chinese economies suggests that the world is now in the same economic boat, and it is in real danger of sinking. The credit crisis is only part of the story when it comes to the unhealthy state of market-based economies. As notices say on the French railways, “one train can conceal another”. The same is true of crises. The credit crisis is helping to conceal the growing energy and natural-resource crises, which are conspiring to distract attention from the accelerating climate crisis.
The latest WEF Global Risks report, launched before the Forum’s annual summit in Davos, also underscores sustainability concerns, warning against too narrow a focus on short-term economic challenges without remedying the root causes of the current crisis, or sowing the seeds of new ones. Its risk framework identifies a number of sustainability issues that will be closely interlinked with the state of the global economy, including climate change, healthcare and resource scarcity, alongside a new focus on global governance gaps. The report speaks of the need for new leadership on global issues, combining public authority and regulatory capacity with incentives for private sector innovation. Much as the credit crunch has demonstrated on the financial front, our world is too interconnected today to tackle issues in isolation.
What does this all mean for business? In recessions, as in booms, there are winners and losers. Some companies are better positioned to begin with. Standard Chartered, unlike many banks today, is doing well. It believes this is no accident: an emerging markets bank which operates mainly in Asia, Africa and the Middle East, the bank asserts that its presence in these volatile markets has led to tighter risk management and a better understanding of long-term value.
Others are working furiously to adapt their mindsets, strategies and operations to the new market conditions. To take one example, a major pharmaceutical company just reorganized its sluggish research-and-development structure to mimic a venture capital organisation, where scientists compete for funding on the merit of their ideas. In order to ensure that pipeline ideas are aligned with societal needs, public health service payers and providers will be part of the selection board.
But can this broader perspective to business innovation help companies stay on top—in tough times, as well as good? The answer is yes, according to a new report by Sustainable Asset Management (SAM), which argues that the best of today’s business leaders are embracing corporate sustainability as "a key source of competitive advantage”.
SAM creates value for investors both by picking sustainability winners, which it calls “leaders”, and by screening out sustainability laggards, which it sees as future “losers”. When it cross-checked the results over time, it found that the out-performance of investment portfolios built around the winners held true both in good economic times and bad. The analysis corrected for factors like firm size, sector and region, to ensure that there were no confounding factors.
Each year SAM invites the 2,500 largest companies in the world, based on free-float market capitalization, to take part in its assessment. The assessment covers economic factors (such as corporate governance, risk and crisis management, compliance, bribery and corruption), social factors (corporate citizenship, labour practice indicators, human capital development, talent attraction and retention) and environmental factors (such as eco-efficiency and environmental reporting).
“Overall,” SAM concludes, “the findings provide us with credible evidence that firms adhering to sustainability are not contradicting their primary function, which is to maximise the profits of shareholders.” More than that, however, “by investing their assets in sustainability leaders, investors not only enhance their financial returns but also directly contribute to addressing some of the pressing issues related to sustainable development by investing in responsible corporate citizens.”
SAM forecasts that within the next decade 15% to 20% (or over US$26 trillion) of assets under management will be screened based on sustainability criteria, although the details will vary between sectors. What excites SAM, however, is the evidence that sustainability leaders have outperformed sustainability laggards over a seven-year research period. Interestingly, too, the out-performance seems to persist in both bull and bear markets.
We will see how all of this plays out in a protracted downturn, which is bound to create new natural selection pressures in markets. Indeed, at a time when many people are reaching for key economic texts by the likes of John Maynard Keynes, whose thinking helped earlier generations of policy-makers manage periods of intense change, we have been turning back to economists like Nikolai Kondratiev and Joseph Schumpeter. Both of these men argued that capitalism operates on long-wave cycles, with periods of innovation and investment followed, over a 50-to-60-year cycle, by periods of disinvestment and what Schumpeter called “creative destruction”. In the process, new technologies and new economic and business models emerge, as the building blocks of a new economic order.
Kondratiev made the mistake of telling Joseph Stalin in the early years of the Great Depression that capitalism would recover, indeed come back stronger. Stalin had Kondratiev imprisoned and ultimately shot, but that didn’t mean that Kondratiev was wrong. If he was right, we are in for a period of unpleasant surprises, alongside potentially the biggest window of opportunity of our lifetimes.
John Elkington is co-founder of SustainAbility (www.sustainability.com) and of Volans (www.volans.com).
Jodie Thorpe is the director of SustainAbility’s Emerging Economies Program (www.sustainability.com/emerging-economies).
Homepage photo by pfala