January 4, 2017
In 2015, the world pivoted in a historic way toward sustainability. Debates about climate change melted away. Every country committed to action in the form of the Paris Agreement. Even the Pope spoke to the issue, reminding us that we’re all connected. It was a productive 12 months, to say the least.
Then came 2016.
Every year, I find big themes or specific company stories that I feel are impressive, important, or indicative of where the world is going. In 2016, two dwarf the rest: the election of Donald Trump and significant action on climate change. The context for sustainable business in 2017 may center on the competition between these two stories; that is, how will Trump and his team impact or impede progress on climate and other sustainability issues? So let’s focus on these two first, and then run quickly through seven other interesting stories.
1. Trump Shocked the World
It’s not yet clear what Trump’s election means for issues that impact companies’ efforts to manage environmental and social issues. Climate change, building a clean economy, reducing inequality and raising wages, providing health care to support general wellbeing — all are big unknowns now. The early signs from the Trump team are not promising, in my view. He wants to appoint as head of the EPA a man who denies climate change and led legal battles against the EPA. His pick for Labor Secretary is staunchly opposed to covering overtime pay or increasing minimum wages (something many leading companies have been doing on their own since 2014. His choice for Secretary of State is the CEO of ExxonMobil, a company that has, for decades, attacked climate science when it knew better. A leaked memo from the Trump transition team shows an intention to move away from the Paris agreement and almost all climate and clean economy action.
In response to Trump’s election and his statements doubting climate change, many countries that signed the Paris climate accords in 2015 made it clear they would power on (China in particular — see story number three, below). Former French president Nicolas Sarkozy even proposed taxing U.S. goods if the country pulled out the Paris agreement. And throwing his weight in, former New York Mayor Michael Bloomberg publicly declared that cities would fight on, with or without Trump. Finally, hundreds of companies signed the latest declaration from Ceres showing their support for Paris. This is all promising. For this and many other reasons, the sustainability journey in business will continue.
But given Trump’s likely stance, any global progress on climate will happen in spite of headwinds from the U.S. federal government. In the U.S., the action will have to move to states, cities, and the private sector. Businesses in particular will need to lead in a way they never have before — and they will.
2. Public and Private Sector Action on Climate Change Increased
For most of 2016, the world moved quickly on climate. I’ve already mentioned the historic Paris agreement, but there are more positive steps worth noting. With the support of chemical companies, more than 170 countries also agreed to phase out HFCs, the high global-warming-potential chemicals used in air-conditioners and refrigerators everywhere. The UN also agreed to slash emissions from the airline industry. Norway banned deforestation and both Norway and Germany moved toward banning fossil-fuel-powered cars. This week, Canada announced it would tax carbon nationally by 2018.
In the U.S., the Obama administration started to incorporate the “social cost of carbon” in decision-making and the Pentagon made climate change a military priority. President Obama, with his counterparts in Canada and Mexico, agreed to some aggressive regional targets on renewable energy and efficiency. At the state level, New Jersey passed a big new gas tax, and Oregon, Illinois, and California developed robust energy and climate policies. All of this will affect companies of all stripes.
Business itself wasn’t quiet on the climate front either. Many invested heavily in renewable energy (see number five on this list), and some big companies dove into policy debates this year. More than 100 companies called for action on the Clean Power Plan (Obama’s big move to reduce power sector emissions), with tech giants Apple, Google, Amazon, and Microsoft even filing a legal brief in support of the policy. Nine big brands with operations in Ohio publicly pressed the state to reinstate energy efficiency and renewable energy portfolio standards. Many previously quiet companies, like food giant General Mills, spoke out about how important it was to their business to tackle climate change.
Why all this progress? First, evidence of a radically altered climate system has become crystal clear. After 2015 shattered climate records, 2016 got even hotter and more extreme, creating weather events that brought physical destruction, massive economic costs, and loss of life. Second, the financial world is getting better at evaluating what’s at stake. The World Bank estimates that $158 trillionworth of assets are at risk from increased natural disasters. The London School of Economics tells us trillions of financial assets are also vulnerable. And in the U.S. alone, floods in Louisiana and North Carolina caused $10 to $20 billion in damage.
3. China Stepped Up
While many countries accelerated their climate and clean economy work this year, China is a special case. Early in the year, China said it would halt new coal mine approvals, close 1,000 mines, increase wind and solar by 21% in 2016, and even eat less meat to control carbon emissions. But last month the country also indicated coal use would rise until 2020 (albeit at a slower rate than the growth of renewables). So it’s not totally clear where China’s emissions will head. But the country clearly wants to lead the world in the clean economy transition. Speaking from this year’s UN global climate meeting – which happened to coincide with the U.S. election — Chinese ministers sent a message to Trump that climate change is no hoax. Then China’s President Xi said he’ll be attending the annual bigwig gathering in Davos for the first time, with reports of China’s interest in filling trade gaps left by Brexit and possible leadership gaps on climate left by Trump.
4. Renewables Kept Growing and Getting Cheaper
Renewables have been trouncing fossil fuels for a few years as the costs of the newer technologies have
As prices dropped, companies noticed, and corporate purchases and commitments to clean energy grew. Walmart set a 50% renewable target for 2025. In the last few weeks, Microsoft and Avery Dennison announced big purchases of clean power, and GM and Google said they’d target 100% renewable energy within a year. A growing number of companies signed the RE100 commitment to go for 100%. And in Nevada, both MGM and Caesars filed papers to stop purchasing power from their utility, NV Energy, because it doesn’t support renewables. New capital is still flowing to the clean tech — Bill Gates, Jeff Bezos, and some other business leaders just announced a $1 billion fund to invest in “next generation energy technologies.” All of this activity convinces me that Trump can’t stop the clean economy.
5. Investors Focused on Climate, Sustainability, and Short-Termism
Larry Fink, the CEO of Blackrock — the world’s largest asset owner — followed up his 2015 letter to S&P 500 CEOs with another treatise against short-term focus. He disparaged the “quarterly earnings hysteria” and asked companies to submit long-term strategy plans and address environmental, social, and governance (ESG) issues. BlackRock also issued a “climate change warning,” telling investors to adapt their portfolios to fight global warming. Many banks heeded the advice, pulling funding from coal. The London School of Economics also estimated that climate change could slash trillions from financial asset values. Because of this economic and systemic risk, a high-powered task force from the G20’s Financial Stability Board issued important guidelines for companies to make climate-related disclosures. To help investors evaluate their holdings, Morningstar launched sustainability ratings for 20,000 funds, and 21 stock exchanges introduced sustainability reporting standards. Finally, to educate the next generation of analysts, the CFA exam will now include a focus on ESG issues.
6. Business Defended Employees’ and Customers’ Human Rights
Companies are getting more vocal on human rights issues for many reasons. For some, it’s about the commercial opportunity to appeal to a new or growing market of rights-focused consumers. Others want to attract and retain diverse talent. But in general, society is expecting companies to broaden their mission. In one survey, 78% of Americans agreed that “companies should take action to address important issues facing society.” Millennials feel even stronger. A global survey this year showed that 87% of Millennials around the world believe that “the success of business should be measured in terms of more than just its financial performance.” This generation — which will be 50% of the workforce by 2020 — seeks employers that share their values.
And so, after a divisive U.S. election, many CEOs felt the need to email employees, restating their
7. More Evidence Emerged That Economies Can Grow Without Increasing Carbon Emissions
So far this century, more than 20 large countries, as well as 33 U.S. states, have “decoupled” GDP growth from GHGs. One energy hog, the IT sector, has managed to level off energy use in data centers. There’s serious talk again about “peak oil” — not of supply, but of demand.
We’re seeing a fundamental shift in our relationship with energy for many reasons, including the improving economics of efficiency and clean tech (see #5). But companies are also getting more systematic, strategic, and fun — yes fun — in slashing energy. More organizations are using some old tools like “treasure hunts” and reimagining them as “energy marathons” (26.2 days of innovation). Others are competing to slash energy use — see Hilton and Whole Foods energy teams go head-to-head in a streaming reality show.
8. Levi’s Shared What It Knows about Water
Big themes are great, but periodically a specific example of leadership seems worthy of extra attention. In this case, Levi’s had spent a decade identifying great ways to cut water use in the apparel value chain. Realizing that water issues are too big to tackle alone, Levi’s celebrated World Water Day this year by open sourcing its best practices in water management. In essence, the company decided to promote system change and even invited competitors to its innovation lab for the first time in its history.
9. The Circular Economy Inched Closer
With a growing population and ever-rising demand for resources, it’s becoming necessary to find ways to eliminate waste and reuse valuable materials endlessly. We’re seeing some interesting innovation in policy and business practice. Sweden is planning to offer tax breaks for fixing things instead of throwing them away, and six EU countries started a four-year project to help small and medium-size enterprises move to circular models.
A number of companies also made moves into this space. A supermarket opened in the UK filled with only food that would’ve been thrown out. IKEA is expanding its circular offerings like reselling used furniture and creating new products from leftover textiles. More than 25 companies in Minnesota, including 3M, Aveda, and Target, launched a circular initiative to share expertise. The Ellen MacArthur Foundation and Kering both created curricula in circular thinking for fashion and design students. And finally, the Closed Loop Fund, which invests in recycling infrastructure (using funds from some large retail and CPG brands), reported on substantial progress, including launching single stream recycling across Memphis.
What’s in Store for 2017?
Given how far off pundits and prognosticators were this year, I have to proceed with caution. Who really knows what a Trump presidency will bring to the U.S. and the world, or what the corporate sustainability agenda will look like with so much uncertainty?
I do believe companies will expand their horizons, looking more at systems, not just their operations and value chains. They will increasingly partner to tackle big global targets like the UN’s Sustainable Development goals. Demands for more transparency about how everything is made — from consumers, employees, investors, and other stakeholders — are unlikely to slow down. The food and agriculture sectors in particular will feel even more pressure to cut carbon and food waste and simplify ingredients.
And no matter who’s in charge politically, macro trends are hard to stop — a changing climate; increasing challenges around water and other resources; higher expectations of companies; rising concern about inequality and wages; and technological disruption from AI, machine learning, and autonomous everything. These trends will continue and companies will need to adapt — fast.
(This post first appeared at Harvard Business Review online.)