(I published the below, my annual list of the top 10 stories in sustainable business, last week in HBR. One change this year: I won't call evidence of climate change a "story." So consider the extreme weather that has devastated lives and businesses in Chennai, India. That’s not fodder for a top 10 list. It's unfortunately just part of the harsh reality of living life and doing business in the 21st century. It should be obvious that climate change is here and, as Citi calculated recently, will cost the world unfathomable amounts of money if it goes unchecked. And it's increasingly obvious that building the clean economy is good for business. So here it goes...)
The year 2015 was a pivotal time when humanity turned more decisively toward building a thriving and sustainable world. On our largest shared challenge, climate change, most of the major hurdles to action — both imagined and real – started to crumble. And an unlikely group of new voices joined the fight. From the Pope to global CEOs to almost all the world’s political leaders, the most powerful people got on board.
It was a year of amazing progress — mostly. Here are eight cross-cutting themes and stories from 2015 that are driving us toward a sustainable world (and two that are doing the opposite):
1. The Pope reminds us that we’re all connected. The Pope’s encyclical, Laudito Si, is a manifesto asking that we reconsider how we treat each other in a threatened and divided world. He challenged the current form of capitalism and made a powerful case for tackling climate change and inequality on moral and economic grounds (I’ve summarized his paperhere and here).
The Pope is, at least nominally, the moral leader of 1.2 billion Roman Catholics around the world. His voice carries enormous heft with all leaders. By adding a weighty moral dimension to the discussions of climate and equity, and for linking them effectively, I believe his manifesto and continued vocal support for the issues make this the top story of the year.
Ideas can affect the world more deeply than even historic treaties or agreements. Consider that other power brokers, such as Jim Yong Kim, President of the World Bank, echoed themes similar to those the Pope raised. Kim said in September, “we have no hope of ending extreme poverty unless we tackle climate change.”
2. In Paris, all countries say with one voice, “We will tackle climate change.” The deal reached on December 12 might be one of the first times in history that representatives of every human being on earth agreed on, well, anything. It’s big news and a very good start, but the deal has a major flaw: the commitments will not keep the world from warming 1.5 degrees Celsius, or even 2 degrees (the stated long-term goals). That said, with 187 countries pledging collective action to cut carbon emissions, the deal will have vast repercussions for business, particularly as governments put into place policies to remake our energy, transportation, and building systems.
The lead-up to Paris gave us a taste of what’s to come. For example, China committed to implement a carbon cap and trade system, Britain said it would phase out coal plants by 2025, and President Obama vetoed the Keystone pipeline. Besides possibly saving humanity, the deal has another big upside — it signals to financial markets and businesses that the low carbon economy is worth investing in. Multi-trillion-dollar markets are in play and there will be many more winners than losers.
3. Companies line up like never before for climate action. One of the reasons the Paris talks succeeded was the clear support of the business community. CEOs from some of the world’s largest companies put out public statements backing a strong climate deal. Sectors calling for action included banking (Bank of America, Citi, Goldman, JPMorgan, Morgan Stanley, Wells Fargo), the apparel industry (including Levi, Gap, Adidas, VF), and the World Economic Forum, which brought 79 CEOs together to urge action. Even oil giants from Europe (including BP, Eni, Shell, Statoil, Total) advocated for a price on carbon.
Some big names went even further than this nudging and took direct action to lower their carbon emissions and costs by buying large amounts of renewable energy. The giants contracting for hundreds of megawatts of wind and solar included Apple, HP, Kaiser Permanente, Google, Dow, Amazon, as well as GM and Owens Corning. Many of these companies are also shooting to use only renewables.
4. Companies and global governing bodies set visionary global goals. Goals matter. Big, aggressive targets drive organizations (like the ones above) and countries forward. And we’ve seen a lot of them this year.
To start, the UN, in a parallel with the climate negotiations, released in September the ambitious Sustainable Development Goals. Also called the Global Goals, these 17 statements (and 169 targets) create a vision and destination for building a thriving world — no poverty, zero hunger, health and well-being, equity and equality, and action on climate change, just to name a few.
Many companies also set visionary goals this year, often based on science — and some achieved big targets like Coca-Cola’s 100% water replenishment goal. A few examples:
This all leads to a huge breakthrough:
5. The vision of an all-renewable energy system comes into focus. In November, two professors from Stanford and the University of California at Davis mapped out how 139 countries could rely entirely on renewable energy by 2050. As the progress countries and companies are making shows, this isn’t just science mixed with wishful thinking. The world has already begun the shift — and the numbers bear it out.
Of all the new power generation built globally over the past two years, renewable sources accounted for over half. In the U.S., in the first six months of 2015, 70% was renewable. This is in part because every clean energy technology is rapidly getting cheaper. As Bloomberg reported in August, for example, “fossil fuels [are] losing cost advantage over solar, wind.” This means that solar will reach the point where it costs the same as traditional options — what’s called “grid parity” — in 80% of the world by 2017. To keep the renewable sector humming along toward that economic watershed mark here in the U.S., the congress passed tax credits for solar and wind at the last minute this year.
6. Wall Street wakes up. For years, asset owners with longer-term horizons, like pension or sovereign wealth funds, have pressed companies to better manage environmental and social issues. This year, the shorter-term investors (shorthand: “Wall Street”) started to join in.
Blackrock, with $4.7 trillion in assets, has been pushing the investment community to get serious on climate. Larry Fink, Blackrock’s CEO, also sent a letter in April to S&P 500 CEOs suggesting that they invest more for the long-term and stop putting so much money into stock buybacks and dividends (a $1 trillion boondoggle for investors this year). And at Morgan Stanley (in what I believe was a first), an analyst raised the stock price target for companies — in this case three apparel giants (Nike, Hanesbrands, and VF) — based on how well they manage environmental, social, and governance (ESG) issues.
In other investor news, the fossil fuel divestment movement grew quickly, gathering together universities, cities, and other institutions that have more than $3 trillion in assets. And Bill Gates gathered some friends to create the largest clean energy fund in history to invest in R&D. So-called “impact investing” is moving out of the niche world and into the mainstream. Blackrock, again, created a new ESG-friendly mutual fund.
7. Consumers (finally) show interest in sustainable products. Blackrock’s new fund was specifically aimed at Millennials, the group of workers and consumers that are demanding more environmental and socially sound products. A Morgan Stanley report found that Millennials are twice as likely to buy from brands with good management of environmental and social issues, and twice as likely to check product packaging for sustainability performance. For packaged goods and food in particular, it’s the era of what many call the “clean label.” It’s a sweeping change in expectations, as people want to know how everything is sourced, made, and delivered.
There’s real money here for the good actors. Mega-retailer Target, for example, assesses thousands of products it sells and scores them on sustainability performance. For a segment of the highest-ranked products, sold under the “Made to Matter” banner, sales at Target are growing much faster than regular products (and will total $1 billion this year). And Walmart took a fascinating step, trying to help choosy customers by labeling thousands of more sustainable products online as “Made by a Sustainability Leader.”
8. Companies challenged, and were challenged by, their supply chains. For many sectors, supply chains are becoming both a major source of risk and also an opportunity for positive change. The food business is an important case study. At a UN event I moderated in Paris, the CEO of Kellogg’s talked about the risk to the company’s supply chain from climate change. It’s one reason that the food giant set a new carbon reduction goal for its whole value chain – as did competitor General Mills.
Why? The previously mentioned clean label movement is a key part of what the New York Times called “a seismic shift in how people eat.” This shift in consumer demand is rippling up through supply chains as food giants race to change the food system. This year McDonalds experimented with organic beef, Subway committed to buying antibiotic-free meat (following many others in the sector as well as Perdue and Tyson), General Mills said it will drop artificial flavors and colors from cereals, as will Kraft with its mac and cheese. The list goes on, and the trend won’t stop at food and personal care products.
In addition to these steps forward, 2015, like all years, included some steps back.
9. Commodities continue their relentless plunge in price. During the 20th century, the price of nearly everything that goes into making our society – energy, metals, food, and so on – dropped steadily. Then from 2000 to 2014, everything got wildly more expensive, doubling and tripling at least. But since the end of last year, the prices of most commodities have plummeted. Oil is nearing a 14 year low.
This massive shift has many fathers, from overproduction and over-investment in capacity to a general slowdown in China’s economy. And it’s worth noting that lower costs are good for most businesses (except commodity producers) in the short-term. But the rising cost of doing business was a core driver of the move to a more circular, sustainable economy. The logic of tight resources has not vanished, and investments in renewables have not slowed as much as lower fossil fuel energy prices would’ve suggested. But making investments in dematerializing value chains, or in designing products for end-of-life, is harder to justify right now. That’s unfortunate in the long run.
10. VW cheats and Exxon’s true colors. Warren Buffet once said, “It takes 20 years to build a reputation and five minutes to ruin it.” VW quickly learned this this harsh truth when it came out that the company had cheated on emissions tests to make its diesel cars seem cleaner burning. Credit Suisse says VW’s actions could cost the company $86 billion, andsales in November in the U.S. dropped 25%.
But this story does not call into question every sustainable product claim out there. No, this was about fraud. But it does perhaps make diesel less compelling as a clean transportation technology. VW found it was difficult to achieve high fuel efficiency, power/torque, and low emissions … but not impossible. It turns out, by the way, you can get all three: just look at Tesla.
And as for Exxon, it was the least surprising “scandal” of the year that the company knew about climate change for decades and spent millions of dollars calling the science into question. At least the exposure of VW’s and Exxon’s misdeeds demonstrates that transparency is a powerful tool coming for everyone.
Looking Back — and Forward
This year will likely go down as the time we began, in earnest, to make some important and deep changes in “business as usual.” Climate change is becoming an accepted reality to address; renewable energy is starting to outcompete fossil fuels; the private sector is taking the lead in building more sustainable products and pleasing ever-more demanding customers and workers; and investors are following the money toward a cleaner economy.
The coming year will be filled with more companies facing global challenges and considering tough questions about their purpose and role in society. But of course many predictions will go out the window as reality intrudes. Some questions that we can only answer with time:
· Will commodity prices stay low or skyrocket again?
· What companies will take advantage of, or get tripped up by, the increasing demands for more information and transparency?
· Will another storm like Hurricane Sandy hit the U.S. and elevate climate to a top tier issue for the 2016 election?
· As Millennials become a larger part of the economy (half the global workforce by 2020), what will they demand?
· How will technology, big data, and sharing economies drive change in business and help make the world more sustainable?
I look forward to a fascinating and more sustainable year to come. Happy holidays and best wished for a wonderful 2016!
(This post first appeared at Harvard Business Review online.)
(Andrew's new book, The Big Pivot, was named a Best Business Book of the Year by Strategy+Business Magazine! Get your copy here. See also Andrew's TED talk on The Big Pivot. Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @AndrewWinston)