How an Austrian Economist Could Save the World - The Great Disruption: Why the Climate Crisis Will Bring On the End of Shopping and the Birth of a New World - Paul Gilding

The Great Disruption: Why the Climate Crisis Will Bring On the End of Shopping and the Birth of a New World - Paul Gilding (2011)

Chapter 11. How an Austrian Economist Could Save the World

People respond to the one-degree war plan in one of two ways. One is that everything we’re doing now in this area is pointless and irrelevant, so we might as well just sit back and wait for the world to wake up. I understand this response emotionally, because when measured against what will be required, all of today’s actions and proposals can hardly even be advocated as effective training exercises, let alone a serious contribution to the task at hand.

Other people have a more positive response that goes something like this: First there is great relief that we can actually fix this. That despite the decades of delay, a point will arrive when we’ll wake up and get down to the serious work of fixing the problem. Phew, we’re not going down after all!

They also see that the decades of planning and talking means we have all the answers to get on with the job—we know what we need to do. Then they realize the scale of the response coming and the light-bulb goes on—we better get ready, in fact we better just get to work and do it! They see that now is the time to prepare our companies, our communities, and our lives for what’s coming and start to make things happen. They see a world of enormous possibility open up before them, to think large and act at scale.

They’re right. We’ve got a lot of work to do, and we need to get on with the job, right now. That’s why sitting back and waiting is definitely the wrong reaction.

So how and when will this unfold? And what do we need to do now? We’ll answer these questions for individuals and communities later, but in the next few chapters I want to focus on the economic implications and how the future will unfold for business, including the role of government in driving that. I do so partly because many readers will be working in business and will be wondering what it means for them. I also do so because I have believed for many years that we are going to need business and markets fully mobilized if we are to achieve the historic task ahead of us.

This is where my favorite economist comes in. Both as an activist and as an entrepreneur, I have always been particularly fond of the Austrian economist Joseph Schumpeter and his theories of creative destruction. He pointed out that markets are basically “a process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”

When I first read these words, I realized they could be describing an ecosystem like a rain forest. It is, after all, a stable overall system, but within it there is a process of constant and dynamic change as old things die or are destroyed and new life is created. Like the market, an ecosystem is at once beautiful and brutal. While we look at the rain forest as a magnificent, peaceful place, if you’re an animal being torn apart by a predator, you may have a different view.

Markets are not an entity or a sector of society, but a system and process that we are all part of. This is what led me to advocate while I was at Greenpeace in the 1990s that markets could be a powerful delivery mechanism for social change. In the context of the scale of change we are discussing with the Great Disruption, we will be seeing Schumpeter’s creative destruction on steroids.

First, though, a few comments on business and markets in general. Some people see the behavior of many of our current companies and their executives and respond with a generalized view that companies are bad and markets are inherently destructive because of their single-minded and at times brutal pursuit of financial wealth.

As will be clear from my comments earlier in the book, I agree with the many justified criticisms of our current economic model and of many companies and business leaders. The mess we’re in was delivered by this model, and our companies and their leaders have played a significant role in that process. However, I also see many attributes of business and markets that are positive and effective, especially when you want to build a new economy quickly and globally.

After decades in both the nonprofit and corporate sectors, pondering these issues deeply, I have come to the view that this is not primarily about organizational form (that is, the organizational ownership structure). It is about people, values, and the design of the system.

For example, it’s not that people who work for companies are bad whereas those who work for NGOs are good. Indeed, some of the most genuine and compassionate people I know have spent their whole lives working in the corporate sector, and some of the most destructive people I know work in the not-for-profit community. And of course vice versa. Different types of institutions are simply ways of organizing people to achieve a given outcome. People make them what they are and determine what they do.

Whether an organization is for-profit or not, it is certainly the case that its culture and purpose are critical issues, I think perhaps the most important ones. I am dismissive of the idea that companies can exist with a central goal of generating wealth for shareholders. This to me is a shallow and wholly ineffective way to organize people, which is what companies do—organize people to deliver an outcome. Even though this runs counter to the dominant thinking in most companies, it is not actually a radical idea and is well discussed in the business literature. Even the so-called father of shareholder value, former GE CEO Jack Welch, came out after his CEO tenure and said, “On the face of it, shareholder value is the dumbest idea in the world.… Shareholder value is a result, not a strategy.…”

It is also the case that markets and business work well only when adequately guided and controlled by society as a whole, through regulation and goal setting by government and by active consumers and community groups holding companies to account. As free market advocate Tom Friedman said, “I don’t want to kill the animal spirits that necessarily drive capitalism—but I don’t want to be eaten by them either.”1

One of the realizations I had when we were running campaigns at Greenpeace against corporations was that we were part of the market, that campaigns attacking company brands based on their performance on environmental or social issues could be seen as market forces. Another way of characterizing this was as community regulation.

In the public debate, we often hear questions like “Are you in favor of free markets or regulation?” This is a false dichotomy and dangerously simplifies the issues. Markets work only because of regulation. At its most basic level, for example, business could not function without contract law, which is simply regulation to put structure and rules around social expectations of trust. Regulation makes business function, and good regulation makes business function better. On environmental regulation, many, such as Harvard Professor Michael Porter, have long argued that tighter environmental regulation is a key source of competitive advantage for nations, and benefits rather than inhibits business success—a concept known as the Porter Hypothesis.

As argued by Jared Diamond in The Third Chimpanzee, in genetic terms we were quite recently apes, and it is our conscious choice to control our negative genetic tendencies. Regulation is the manifestation of this conscious choice to be a civilized society, with the definition of “civilized” developing and changing over time.

Within climate change, what we now need is for society to set clear and precise guidelines as to how the economy as a whole and each business within it is going to have to behave with respect to greenhouse gases. Likewise more broadly on sustainability. If government does so, I am convinced that business and markets are a key and effective delivery mechanism for the change we need.

First, though, back to the economist whose concepts best describe why markets are a good vehicle for the transition through the Great Disruption.

Schumpeter describes the process we need perfectly when he refers to incessantly revolutionizing the economy from within, destroying the old one and creating a new one. Despite being a fan of well-regulated business and markets, I can see clearly that we need to destroy large parts of the old economy and create new parts. This requires Schumpeter’s “destruction” of many existing companies, some of which desperately deserve it. We all have candidates we’d like to put on that list; at the top of mine is ExxonMobil.

We need to do all this, however, while keeping the system as a whole as stable and productive as we can, delivering jobs, goods, and services to the people this economy serves. This is where we need to clearly separate the system—the global economy and society—from the components of the system—individual companies, technologies, and products.

Businesses and markets work inside such a system. A system where NGOs can campaign to hold companies accountable for poor behavior. A system where consumers can reject products and employment from a company that is damaging to society. A system where governments, acting in the interests of the people, can change the rules as needs demand and in doing so put some companies out of business and create the conditions for new ones to emerge. Of course, these things don’t always happen, but they all sometimes do. This is what the system design allows, so it shows what’s possible for us to create within it.

Where we’ve gone wrong in managing this system is that we’ve put the economy on a pedestal as a god that must be protected, with economic growth the metric and our current companies as the foundation of that pedestal. The assumption has been that if government focuses on driving economic growth, all other things will follow.

What we need now is for the conditions to be right for brave government to recognize that the economy serves the people and their quality of life and then acts to deliver this outcome. I accept that individual components of the system, companies, workers, and investors, will naturally and often legitimately argue against change. No one likes to give up what they have, so we all resist. We need government to say: “Yes, I hear your concern, but the greater good demands that change occurs, so let’s talk about how to manage that change fairly and equitably. But change is going to occur.”

Of course, in detail this becomes a matter of degree. During the public controversy that raged on climate change legislation in Australia in 2009, I had a private conversation with a CEO that summed up the challenge well. He was telling me how they should be compensated for the “completely unexpected” shift in regulation to control CO2 emissions. I thought to myself, “If this is unexpected to you at this stage, after twenty years of public debate, then you are clearly incompetent as a business leader. If you couldn’t see this coming as a key risk, then you simply weren’t doing your job.” Mind you, I didn’t say it to him quite like that!

One of the reasons Schumpeter’s market works is that individual companies and investors take risks and manage these risks based on their likely return for doing so. If they get it wrong, they fail and pay the price. Government’s job is to ensure that the overall economic system functions effectively, not to protect all the component parts from change.

So in the case of the CEO above, yes, there is a legitimate role for government in helping the transition occur as smoothly as possible, particularly when change wasn’t forecast. But companies must bear the loss for making bad risk decisions, and on climate change, the risks have been clear for a long time. Going forward they are even clearer, so losses should and will be borne. That’s how markets should work.

This raises the question of what role business can and should play in sustainability more broadly. While some people judge business and markets too harshly, risking throwing out the baby with the bathwater, others have unrealistic expectations of what business is able to do voluntarily. I had both these views reinforced by spending a large part of my working life inside the corporate sector as an adviser to CEOs and senior executives at major corporations across the United States, Europe, Asia, and Australia.

I formed Ecos Corporation in 1995 after leaving Greenpeace. I was keen to pursue the idea that business could be mobilized to drive change on sustainability and so formed Ecos to test the idea. Some of my friends who were experts in this field argued that 1995 was too early for there to be a viable commercial business in this area and I should consider forming a nonprofit foundation to work with companies.

I realized, though, that coming out of twenty years in activism, I would need to be in business myself to earn the trust of business leaders. I also wanted to understand business properly, and that meant knowing what it felt like to be an entrepreneur, to have your family’s income and security depend upon the performance of your business. As I soon learned, whereas in a well-funded nonprofit organization you can have the wrong idea for years, the market is far more ruthless with mistaken views of what the world needs. This meant being in business kept us focused on what was real for market participants and kept us from getting too far off track with respect to business relevance.

The business ended up being very successful and operated for thirteen years until it was sold in 2008. We built a team of twenty incredibly committed and skilled professionals working around the world advising companies on how to see sustainability issues as market forces and integrating them into business strategy. Our clients cut across all sectors and many countries, with companies like DuPont, Ford, Diageo, BHP Billiton, WMC, ANZ Bank, Insurance Australia Group, China Light and Power, Zurich Financial Services, Placer Dome, KPMG, and Anglo American.

I mention this to point out that my views on business weren’t formed just from being an observer. They were developed through my experiences as a business owner and entrepreneur working for over a decade at the top levels of companies around the world, seeing what’s possible and what’s not for companies that seek to lead in this area.

We always advocated to our clients that business strategy should be centered around a clear social purpose, for the reasons previously discussed. However, we recognized that our clients’ bills had to be paid, along with a reasonable return on capital. This wasn’t a casual afterthought, an “oh yes, you need to make money”; it was central to our work. Around this time, the focus in corporate responsibility was on the “triple bottom line,” a phrase coined by my good friend and one of the world’s outstanding corporate sustainability pioneers John Elkington, founder of the U.K. firm SustainAbility. It meant that companies should deliver and report on social and environmental performance as well as profits.

In contrast, we centered our strategic advice on what we called “single bottom line sustainability,” meaning that the pursuit of profit, without which no company can succeed, and the pursuit of sustainability should be a single mission, not separate, parallel efforts.

In 2002, Don Reed and Murray Hogarth, two of our most experienced advisers, and I released a major report with the title Single Bottom Line Sustainability. It caused quite a stir in the corporate sustainability community around the world because we argued that companies should take only those actions in sustainability that delivered definable financial benefit to the company.

It wasn’t that we believed in shareholder value as an end in its own right. Ecos followed its own advice and was clearly purpose focused. We were transparent about being in business to drive change toward sustainability, not to do whatever our clients wanted to pay us for. However, we recognized that unless we gave advice to clients that delivered value, they wouldn’t keep following it. If we wanted to drive sustained action on sustainability, that action had to deliver measurable financial reward for the companies involved.

Perhaps the most significant thing I learned over more than a decade doing this work was that companies’ capacity on issues like sustainability is limited in material impact until the market and regulatory context are in place to reward or punish them for their performance. While we had success in getting our clients focused on the right activities, even the best of them soon came across limits to what they could achieve as leadership companies in front of market trends.

One of our major relationships was with Ford Motor Company, where we worked with many executives, but particularly Jacques Nasser as CEO and to some extent with Bill Ford as chairman. We were joined in this work by Geoff Lye and his team from SustainAbility in the United Kingdom.

Ford faced a classic sustainable business dilemma. At this time they were making most of their profit from selling SUVs and pickup trucks. This had been a very successful strategy, but after a few years it became clear that while sales and profits were holding up, increasing public and regulatory concern about safety and fuel economy meant there was a conflict between the short-term financial strategy and the longer-term business strategy. There was a significant risk that either through regulatory action or customer sentiment change, the market could shift suddenly, leaving Ford vulnerable. Bill Ford even had the courage to raise this dilemma and challenge in public forums.

We worked with a group of up-and-coming executives and Ford’s scientists to review the climate science and what it meant for Ford’s product strategy. What became clear to them was that the market was inevitably going to shift at some point, and because of the long lead times in new products, Ford needed to shift focus onto fuel economy and climate change as a central part of their business strategy, so they would be prepared. Nasser understood the strategic imperative in these issues and brought us into the full executive on a number of occasions to explain the strategy as it was developing and to develop the executive team’s understanding of climate change and other sustainability business drivers. He understood that having a strategy dependent on cheap oil, a price-sensitive, nonrenewable resource with global climate impact, was a risky strategy, and shifting the fundamental direction of a company of Ford’s size was not going to happen quickly.

Many Ford people were passionate about these issues, particularly the up-and-coming executives who saw this as the company’s future, and they worked hard to make change happen. Unfortunately, during this period Ford had a major safety crisis erupt with the Firestone tire recall and the recession of 2001, which distracted the leadership from the longer-term sustainability issue.

Nasser got the issues and was a powerful and entrepreneurial force for change in this very old company—the media even referred to him as the “hard-charging Aussie.” Bill Ford had great personal belief in environmental issues, even advocating a gasoline tax, as well as having the cultural magic of being from the Ford family. But because they couldn’t forge an effective working partnership, Nasser left.

The company floundered for some years following. Ford did some great work after that point, including releasing the world’s first hybrid SUV and developing some excellent small-car models like the Focus that were great successes.

However, Ford faced serious challenges when some years later customer sentiment suddenly turned with rising oil prices and Ford’s key sales strength, SUV and truck sales, plummeted—just in time to be magnified by the global recession. Having launched some more efficient models earlier, they were in much better shape than GM when the crisis hit and didn’t take government funds to keep them afloat. But they never reached their full potential to be an American powerhouse in environmentally advanced cars and were still too reliant on larger, heavier vehicles. They got no encouragement to change from the U.S. government, which kept gasoline prices low and fuel-efficiency standards that were not competitive with the rest of the world’s markets.

This whole experience was an important lesson in the leverage of culture and leadership in driving change. These factors are enormous influences on what companies will and won’t do in this great transition. Ford of course has survived and prospered to date, but whether the company will continue to do so when the Great Disruption takes full hold, only time will tell. And who knows what more could have happened if Nasser the driven change agent and Bill Ford the environmentalist could have forged an effective team.

At least Nasser will be able to put his experience on climate change to good use now that he’s chairman of BHP Billiton. This is the world’s biggest natural resources company with investments across a broad range of commodities, including coal and uranium, thus being on both sides of the climate debate.

Another of our key relationships at Ecos was with the DuPont Company. We worked there with Dr. Paul Tebo, who drove their activities around sustainability and was the most effective corporate change agent I’ve ever known. The CEO during most of my time with DuPont was Chad Holliday, who still stands out as one of the most committed and thoughtful CEOs I have worked with anywhere in the world. Chad was responsible for leading DuPont’s transformation toward sustainability from 1998 to 2008.

My favorite story involving Chad is a fine example of my earlier point about the importance of organizing a company around social purpose, with shareholder value being a measure of success rather than an organizing principle.

I was giving a talk with Chad to DuPont’s global safety and sustainability leaders. I raised the issue of DuPont as an institution and who really cared about it. DuPont is a proud company with a two-hundred-year history that lives and breathes its culture; you can’t spend time there without getting a sense of it. I provocatively said to Chad and the other leaders: “So why does it matter if DuPont exists? You just produce products and create jobs, so if you cease to exist, we can just replace you with another company that produces similar products and creates jobs.”

The discussion was dynamic, and I could see the lights switching on in people’s eyes around the room. If the company didn’t stand for anything, if it didn’t exist as something more than a machine that produces things and jobs, then it actually had no inherent value to society as an institution. Of course creating shareholder value matters, but it’s not a reason for existence. No one lies on his or her deathbed with the regret “Gee, if only I’d generated more value for shareholders, my life would have been more worthwhile”!

Chad pulled me aside afterward and said, “I now understand what you’re trying to achieve here; keep it up.” He understood that purpose was central to culture and therefore to financial performance. For years after that, we worked with the company on many issues, connecting them to diverse external stakeholders, aligning their portfolio of businesses to sustainability, identifying new business areas to invest in, and helping them focus on changing the regulatory environment in ways that would reward them for being cleaner than their competitors.

One of these projects was a manifestation of this purpose focus. DuPont is world famous for their workplace safety performance, which is truly outstanding. Dr. Paul Tebo, nicknamed “the Hero of Zero” for his relentless pursuit of the idea of zero workplace injuries, had led the programs in this area, building on a two-hundred-year-old company focus on it.

At this time Paul was expanding the company’s focus into sustainability and had been working with Chad and his executives to shift the company’s strategic focus to one of delivering societal value, helping society meet its needs through the use of science. The objective was to deliver social needs with minimal environmental impact and align this strongly with the creation of shareholder value for DuPont—what they called “sustainable growth.” This was a major shift for a chemical company Greenpeace had targeted as the “world’s biggest polluter” when the company topped the United States’ toxic release inventory!

Chad and his team decided that with safety being core to DuPont’s culture it would be the ideal test platform for their new strategy. Under the leadership of Ellen Kullman, they brought their various safety-related businesses, products like Nomex (fire-protective clothing for firefighters) and Kevlar (for cuts and bullet protection), with their safety consulting business, DuPont Safety Resources, led by Jim Forsman, to form a division focused on saving lives. Of course they sought to generate value for shareholders in doing so, but the language of Ellen and Jim’s team clearly showed they took saving lives very seriously, with targets for lives saved by country and region. It was in their language every day. The division grew successfully, and its leader, Ellen Kullman, became the global chair and CEO of DuPont when Chad retired from the role.

In all our work at Ecos with dozens of companies, DuPont was perhaps our most successful because the company fundamentally changed its business model from a shareholder-value-focused chemical and fossil fuel company to a purpose-driven science company that had worked out how to make money by doing good. It was still sharply focused on generating financial value, but it did so under the umbrella of a clear social purpose.

When I recently checked in with DuPont to see how they had progressed since our work there, I was pleased with what I heard. When Paul Tebo retired in 2003 he was replaced by Linda Fisher. Linda’s title was expanded to include chief sustainability officer, reflecting Tebo’s success in helping DuPont see sustainability as a mission, vision, and growth agenda rather than a compliance role. CEO Ellen Kullman has now targeted DuPont’s growth around four megatrends that align well with a response to the Great Disruption—working toward the development of abundant food, reducing dependence on fossil fuels, protecting people and the environment, and growing businesses in emerging markets. DuPont now allocates 75 percent of their research and development dollars in these four areas. Linda’s role is to help business units see such sustainability trends as shaping forces for their business strategies. She tells me they are also now seeing, just in the past few years, more pull from customers about the sustainability of their offerings.

But even DuPont bumps up against the limits of leadership. They have more products and solutions to customers’ environmental and social needs than the market is yet ready for. With no cost to pollution, their solutions of lighter cars, smarter building materials, and a range of other clever uses of science and technology find a good market but not one that has yet rewarded them strongly for their leadership. Recognizing this, they focus on shifting government policy to tighten standards, with Chad having played a strong and vocal role on issues where many in the business community were not yet with him, such as advocating caps on CO2 pollution. Ellen continues this approach but still finds other companies opposing such measures.

This is not to understate DuPont’s substantial achievements and excellence as an example of what can be achieved by corporate leadership.2 Far from perfect and with many legacy pollution issues, they are nevertheless at the top of their class, and their contribution to society and to the public debates on these issues has been substantial and deservedly recognized. I point to it as an example that even DuPont, one of the most progressive old companies in the world, with sixty thousand employees and a $30 billion turnover, with passionate and committed leadership, can have little impact on the overall market when the framing conditions of the market aren’t in place to reward them for leadership.

That brings us back to the role of government.

With fifteen years working as a business adviser and business owner, I have learned how markets can and can’t contribute to the task at hand. Markets are a powerful delivery mechanism, but companies cannot and will not pursue activities that are not profitable. When companies can pollute for free, they will do so. The best companies in the world can resist this tide, but in the end the tide will wash over them.

The solution is stronger government action, and despite public debate arguing this is bad for business, the opposite is in fact the case. As Harvard professor Michael Porter famously proved, government regulation for tougher standards can make countries and companies more competitive, not less.3 So if the U.S. government had enforced fuel economy standards similar to those in Europe and Japan, Ford and GM might never have faced the crisis they did when oil prices spiked, and DuPont would have sold more lightweight materials to them, creating more American jobs in the process.

Companies will rarely ask for such change by themselves; indeed, the U.S. auto industry fought furiously against tighter fuel economy standards in the mistaken belief they were bad for business. Government needs to apply some tough love to such irresponsible adolescents and put in place the boundaries that will make them better grown-ups.

So the major transformation we are about to embark upon will be initiated and driven primarily by government, when forced to do so by the people. However, when government acts, the change will be delivered by business and markets, and at that point the companies that are best prepared, like DuPont, will win the competitive game. In the meantime, many leading companies, who see this as the right thing to do and in their self-interest, are actively supporting tighter regulation. But government will in the end drive it. That is government’s role—to cage the market tiger.

How will this unfold in practice? When the awakening occurs, governments will, under pressure from citizens and progressive companies, look to the science for advice on what is needed. The science is already clear on this and will be even stronger by then. It will be, for example, to slash CO2e emissions urgently and dramatically, and such advice will frame government policy.

The one-degree war plan outlined earlier gives one scenario of how this might unfold, as well as an indication of what response will be necessary. While the actual program put in place will vary from this, the science suggests the scale and timing are not likely to.

This will then unleash a torrent of investment by old companies and entrepreneurial start-ups that will reshape whole industries. The new companies will pose a serious threat to the incumbents, as we are already seeing in the auto industry, where both global giants and scrappy start-ups are racing to bring electric cars to the mass market. This is just one example of the game-changing transformations we will see that will reshape industries.

Schumpeter’s creative destruction means that many of our current companies simply won’t make it, though many will. It also means that a good proportion of the world’s top one hundred companies in twenty years’ time are names you haven’t heard of yet but exist today and are champing at the bit for the race to start and the opportunity to knock over some of the old players. This is exactly what markets are good at.

What the final shape of all this will be, with what technologies, what companies, and which countries end up winners and losers, is full of uncertainty, but the outcome is not. When we act, we will eliminate net CO2e emissions from the economy in an amazingly fast transformation and then move on to the rest of sustainability.

Slow, but not stupid.