CommentSeptember 8, 2021

Sustainability: Let business lead the way

Comment by Prince Michael of Liechtenstein

Reading time: 7 min

To achieve development goals, we will have to balance economic sustainability, social factors and ecological necessities. Already, business is making strong progress on this front. Governments’ role should be to set sensible parameters.

Several years ago, the World Energy Council coined the term “Energy Trilemma” to describe how energy policies – from local to global – would need to balance three factors: energy security, energy equity and environmental sustainability.

The United Nations Sustainable Development Goals, which comprises 17 aims (see box) became the basis for many sustainability programs and are also subject to a three-pronged challenge. Implementing them will require finding an equilibrium between economic sustainability, social factors and ecological necessities.

Globally, however, imbalances are already visible across various regions. In the United States, social factors – under the umbrella of diversity (gender, race, etc.) – have become the priority, though this overlooks some basic needs and ignores cultural traditions across the globe. Europe is strongly focused on the ecological necessities. In some less developed but highly populated areas of the world, reducing poverty and protecting jobs are the top priorities.

The most effective tool to reduce emissions would be a price on CO2.

Facts, nuance, science-based approaches and a lot of common sense will be required to make economies more sustainable. Dogmatic thinking should not supersede a frank debate of the pros and cons, both scientifically and socially. Without such conversations, useful initiatives could get bogged down in bureaucratic or ideological morass.

Today, much of the focus is on carbon dioxide. The most effective tool to induce governments, businesses and individuals to reduce greenhouse gas emissions would be a price on CO2. Ideally, the price would be uniform. However, politicians have tended to favor heavy regulation and government control, rather than more efficient market tools.

Market solution

A strong economy is an important foundation for making progress toward sustainability. Europe, the U.S. and Japan have expended great effort, and had great success, in reducing waste and pollution. But highly developed countries still have much work to do. A more circular economy – like those that once existed in rural areas, where people found ways to reuse almost everything – could help. Already there has been good progress in recycling and separating waste. Still, in some European countries, up to a third of the food goes straight into the trash.

Over the last 40 years, business and markets have helped pull some 1 billion people out of extreme poverty. We should be wary of halting this progress or undoing this achievement by allowing the three elements of the trilemma to fall out of balance.

Socialism and crony capitalism are poor replacements for free markets.

Areas with strong market economies, robust innovation, creativity and a competitive market have not only progressed in terms of their prosperity, but socially and environmentally as well. Places with state-planned economies, socialist governments or high levels of corruption cannot make the same claim.

Of course, these factors tend to go hand in hand. Planned economies are more prone to corruption than open markets. Unfortunately, people in many less-developed economies chose to follow the path of strong state intervention and have fallen into the corruption trap. Socialism and crony capitalism (which flourishes in countries where heavy state intervention limits healthy competition) are poor replacements for free markets and competition.

Business is already at the forefront of introducing improved standards. Doing so requires a lot of expertise, and more progress is needed. True, some businesses engage in “greenwashing,” but the good news is they can only pretend to be environmentally friendly in the short term. Soon enough, the chickens will come home to roost. Seen from this perspective, even greenwashing – unethical as it is – could end up driving a more sustainable approach.

Long-term thinking

Governments and supranational organizations also play an important role – their job is to set reasonable parameters. Dealing with day-to-day matters can lead politicians to abandon the long-term strategy of balancing the three parts of the trilemma. The European Union and the U.S. government are embarking on huge public spending programs to create a “green economy” (in the U.S. this is also strongly tied to social issues). States will assume trillions of dollars in debt to create what will become economies that are, to a large extent, government-sponsored. Such economies are less innovative than ones that are truly market-based. In the long run, they even provide less social benefit.

All this spending in the U.S. and Europe looks attractive in the short term, promising climate salvation and economic prosperity through government handouts. But the programs threaten to tip the scales of the trilemma by leaving huge debts to future generations.

Incurring huge debts now to the detriment of the future cannot be the solution.

Still, we must make more progress, and this is where business can and should take the lead. Already, much has been accomplished. For example, industry and professional organizations have begun to establish environmental standards for their members.

For a long time, forestry has followed the principle that only as many trees should be felled as can grow back. Transferred to the capital markets, the philosophy would call for investors to think sustainably and long term, and to put their money in socially and environmentally responsible companies.

Economic infrastructure – finance and logistics – also play a key role in achieving sustainability. In this context Zeno Staub, vice-chairman of the Association of Swiss Asset and Wealth Management Banks, told Neue Zurcher Zeitung: “We are risk managers, and climate risks are, above all, investment risks. If [most of] the global economy is to stop producing greenhouse gases by 2050, and in China by 2060, numerous industries will experience enormous shifts. There is a great danger of sitting on worthless parts of, for example, oil pipelines or coal-fired power stations. It is agreed that the transition to a CO2-neutral world also offers investment opportunities.”

Financial institutions are advancing sustainability in investment, which will be yet another strong driver of further progress. The so-called Environmental, Social and Corporate Governance (ESG) score is becoming an important benchmark, helping to reach the Sustainable Development Goals through business. Banks and their associations worldwide have begun to take up the cause – one impressive example is the commitment Liechtenstein’s financial institutions have made to focus on long-term sustainable investments.

Global companies are logistics enterprises on their own, but pure logistics and transportation firms are also becoming more sustainable.

There are some pitfalls. Excessive regulation and government planning could create unnecessary costs while limiting innovation and competition. The inappropriate allocation of capital and unnecessary risk through technocratic attempts to engineer the economy could knock the trilemma off balance. Incurring huge debts now to the detriment of the future cannot be the solution.

Furthermore, an approach that is too fundamentalist could deter nearly all investment in certain areas, like coal, oil and gas – even those that could help reduce carbon emissions and negative environmental impacts. Humanity will continue to need hydrocarbons (though probably in reduced quantities) for the foreseeable future.

Just as markets and trade brought about huge reductions in extreme poverty and hunger over recent decades, the same mechanics can help achieve the UN’s Development Goals. Only a prosperous economy – a result of free markets – can form a successful foundation for attaining the goals.