University of Oslo
As 2018 is drawing to an end, we have seen some positive tendencies towards sustainability. However, a lack of coherence across policy areas is still exacerbating the unsustainable aspects of existing business regulation, argues Beate Sjåfjell.
With Poland, the host country of this year’s UN Climate Conference (COP24), denoted Europe’s climate denial capital, many of us prepared ourselves for the worst. In the end, there was cause for celebration, but also for strong criticism. We see a repeat of when COP21 concluded with the now famous Paris Agreement: much better than we feared, and so much less than the world needs.
What can we do when our political leaders are (at best) moving forward painstakingly slowly in spite of ever more urgent clarion calls? We all have a role to play and social media abounds with advice on what you can do to change the terrifying direction of climate change.
However, although social mobilisation and individual responsibility is important, ensuring the contribution of business and finance is essential. Without that happening, we are not going to achieve sustainability.
And sustainability is what we need to achieve: not just mitigating climate change (which is difficult enough in itself), or reducing the use of plastic (which has emerged as the hottest issue next to climate change), but to secure the social foundation for humanity now and in the future, while staying within planetary boundaries.
A safe and just space for humanity. Source: Raworth (2017).
SMART report: Obstacles to Sustainable Global Business
The SMART project has investigated to what extent such a sustainable development is facilitated today. We have undertaken an extensive and comprehensive analysis of what keeps market actors on an unsustainable track.
In the report Obstacles to Sustainable Global Business we have analysed possibilities for a transformation of business and investors, for consumer power for sustainability, and for the contribution of the public sector as market actor – as public procurer, shareholder, regulator and legislator.
We have some good news: there is to a great extent consensus on overarching sustainability goals, which resonate with the EU treaties and with many national constitutions.
Emerging norms on responsibility of transnational business and finance offer options for channelling business activity into a shift to sustainability. Innovative initiatives from the EU, such as the EU Commission’s Sustainable Finance Initiative, give hope. We have more knowledge than ever before about what is happening and what needs to be changed.
Systemic barriers to change
Yet, we also identified systemic barriers that are keeping us on an unsustainable track. A lack of coherence across policy areas threatens sustainability goals. The lack of coherence exacerbates the unsustainable aspects of existing business regulation.
Even now, ten years after the financial crisis, we still find a persistent belief in self-correcting ability of fully-informed markets, and a lacking willingness to break from entrenched economic beliefs. Economic growth is elevated to a superior position, to the detriment of people and the environment.
In spite of the consensus on the significance of achieving sustainability, internationally, in the EU and amongst many Member States, there is still a chasm between these overarching goals and implementation.
While the EU adopts directives that are meant to promote sustainability, such as the Public Procurement Directives and the Directive on Non-Financial Reporting, many Member States do not use the scope they are given to exact real change. Instead they fear regulatory competition and choose minimum implementation, leaving the potential of these EU reforms unrealised.
Profit-maximisation, overconsumption and lack of knowledge
Company law in the EU and in the Member States gives considerable room for companies to transition to sustainability but says little explicitly about the role of companies in society. The vacuum this leaves in company law is filled by expectations of maximization of returns to investors, and what we call the shareholder primacy drive remains a major barrier to sustainable business.
Business recognition of sustainability deflects attention away from the fundamental problem of business models based on overconsumption. Consumers, who do not have sufficient information about production processes, receive conflicting signals: contribute to sustainability! And: buy and throw ‘away’ stuff, and then buy more!
Ever more investors, private and public, declare that they wish to invest sustainably. However, they are constrained by short-term requirements for return, and a lack of knowledge about what investing sustainably actually entails.
Public procurements could have been a powerful tool, but procurers tend to lack the motivation and the knowledge to fundamentally transform procurement processes.
Positive tendencies but coherent action is needed
We do see some positive tendencies. Yet, to achieve sustainability, much more coherent action is needed. We need action based on the best available knowledge, and guided by the precautionary principle, and not politics-as-usual and business-as-usual based on an idea that continuing as before magically will lead to sustainability.
We cannot let all the sustainability talk fool us into thinking we are on the right track, because we so clearly are not – yet.
Next step: SMART reform proposals
There is a momentum building with the sustainability discourse moving from niche areas into mainstream. The EU’s Sustainable Finance Initiative is one example, and it is especially encouraging that the Action Plan opens up for possible changes in the duties of the corporate board.
We know from our research that integrating sustainability into the duties of the board is one of key changes that need to be made to achieve sustainable value creation. The EU Commission’s conference on Sustainable Corporate Governance on 24 January 2019 is a follow-up of that point in the Sustainable Finance Action Plan, and I look forward to presenting SMART results there.
Our SMART team will through 2019 work on developing reform proposals in a number of areas, and we look forward to discussing our ideas with other academics, policy-makers and a broad range of stakeholders. We are also happy to continue our industry engagement to find out how we can work together to implement some of our research proposals. Together, we can create change.