Sustainable development and climate change: a business perspective.

Twenty years after the Brundtland Report asserted it was in the common interest of all peoples and nations to establish policies for sustainable development, the pace of sustainability is finally accelerating. Notwithstanding a number of serious political and security issues that politicians are struggling to effectively address, the case for sustainability in a global context has become more apparent, and even mainstreamed in some countries, during the last few years.

The Millennium Development Goals (MDGs), anti-corruption and human rights initiatives and the climate challenge have all contributed to the notion that not only is collective action between the public and private sectors warranted to address these challenges, but also that sustainability has become a compelling value-creating proposition for business.

Information technology has accelerated our world towards becoming "flatter", smaller and more inclusive (even intrusive), with no place or time to hide anymore. Interconnectivity results in more interdependency and volatility--cultural, political and economic differences become more apparent and are drivers for tension and conflict. Therefore, we need to rebalance the fragile equilibrium of our coexistence, which requires urgent recalibration and redesign of standards, directions, governance structures and priorities, with the active involvement and shared responsibility from the developing "South+East", resulting in a new form of global purpose and solidarity. We cannot "walk alone" anymore.

Twenty years before the Brundtland Report, there was a race to put man on the moon. Once we got there, we looked back and realized that there was a major unfinished job on Earth, particularly as it is expected to house 9 billion people within 50 years, putting even more serious pressure on its already scarce natural capital. Moreover, if today's world may be characterized as "survival by a majority, and greed and waste by a minority", then in the next 50 years--which anticipates increased prosperity and wealth creation worldwide and, optimistically, the realization of the MDGs--greed will be a more dominant driver. Current undesired dependency on aid and philanthropy will be substituted by broad-based self-empowerment and entrepreneurship.

The new race to create a just, peaceful and sustainable world has begun. As the race to the moon was financed from government sources, the new race will essentially be private-sector funded, enabled by adequate regulatory frameworks and incentives. In this context, we are also realizing that our investment decisions, both in the public and the private sectors, are based on a number of wrong premises; we operate with a "broken economic compass". Many impacts of our decisions are not adequately taken into account in our analyses, resulting in wrong decisions. This essentially and often unknowingly leads to offloading the consequences on either the rest of society today, the future generations or others on this planet, rather than including such "externalities" into our economics. The greenhouse gas (GHG) emission problem has triggered this debate as an urgent issue to be addressed by academics, business and politics. In addition, the role of the nation-state is under pressure. Internationalization and societal dynamics are changing the primacy of our political democracy to a more holistic, instant form of governance: "market democracy", with "markets" meaning all goods and services offered to all people, whether in their role of voter, investor, consumer or employee.

The Brundtland Report gave a universal definition of sustainability: "Development that meets the needs of the present without compromising the ability of future generations to meet their own needs." Although such definitions are useful, they vary from country to country, from community to community. The "hook" in India may be poverty alleviation, water and biodiversity; for Brazil, it may be deforestation and poverty; for sub-Saharan Africa, water and peace; for many developing countries, access to opportunity, education, finance and markets; for the European Union (EU), the United States and China, it may be energy security and climate change. On a global basis, the issue of sustainability is "global equity".

The essence is that we do not just "talk" about how to define and address our own challenges, but rather "walk" them in our own lifestyle and behaviour, our political priorities and our business agenda. We are collectively and individually part of the problem, and therefore must also become part of the solution. "Thinking big" is fine, but there is a need to "start focused and small within your own sphere of influence" and "act quickly". Do your own impact analysis and act on it! Governments should offer an enabling environment through proper governance structures, policy directions, promotion, regulatory frameworks with enforcement, utilizing such limitations, incentives or guarantees, and early-stage technological support, supplemented by multilateral agreements, with the United Nations playing a critical convening role herein. Civil society groups, academics and the media should be engaged by raising awareness, as well as actively collaborating in finding and realizing the right solutions. Defining core principles must be included in education (such as the Earth Charter principles), business operations (such as the UN Global Compact principles) and more industry-specific codes. Active engagement of the "next generation" is crucial.

A very important driver for the sustainability agenda has become the climate challenge. Its impact and need for adaptation and mitigation go well beyond environmental issues. Its expected impacts cause it to be a global development, as well as an ethical issue, with profound demographic, global equity and security consequences. In a recent report by the Intergovernmental Panel on Climate Change (IPCC), experts concluded that "changes in climate are now affecting physical and biological systems on every continent". Its Working Group III report suggests that there is substantial economic potential for GHG mitigation over the coming decades at financially affordable levels relative to global gross domestic product. But the impacts and hence the financial requirements will be unevenly distributed across the globe, with the "South" being more affected than the "North", thus raising an important global "equity" issue. Gains under the MDGs will be lost and the impact on business will be equally profound; values at risk will be material, and technological/situational licenses to operate may become obsolete.

[ILLUSTRATION OMITTED]

Notwithstanding the fact that much public investment is required to address this global challenge, the private sector is definitely part of the solution. Business must and will look at the climate challenge as an opportunity. A long-term regulatory framework is needed, with many countries and sectors covered, resulting in market-based common currency: a reference carbon-price. The operations of the EU Emissions Trading System and the Clean Development Mechanism under the Kyoto Protocol have offered valuable lessons for a future agreement under the UN Framework Convention on Climate Change. The business sector should play an active role in defining the international and local political pro-climate agendas as well.

The role of business is "doing the right business right", foremost for its customers and, ultimately, its shareholders. Its success and competitive differentiation are measured by profitability. Liberalized markets enable business to realize its strategic aims and financial targets. Disclosure about its governance structure, strategic direction and financial performance allow markets to judge and value individual businesses. However, business and markets cannot operate in a vacuum; a clear and effective regulatory framework within which to operate is needed. This is the traditional paradigm and, with such an enabling framework, funding should not be a problem.

But are regulations, business and markets fit for purpose? Are there emerging trends that need to be addressed? Isn't "making a profit by management just for shareholders" being increasingly substituted by a new notion of "value-creation being earned off stakeholders, in which they should fairly share?" In this context, the following imperatives and challenges need to be addressed:

Values, business principles, governance. Weak standards and governance in the private and public sectors are major obstacles for contributing to responsible, sustainable development "within their sphere of influence". National and international voluntary initiatives by leading practitioners in certain sectors, such as natural resources, construction and financial, are important drivers that raise the bar. They create higher standards for a level playing field, putting pressure on laggards, and also create a principle-based approach, such as the UN Global Compact--the world's largest corporate citizenship initiative with participants in more than 100 countries.

Non-financial disclosure. Sustainability reporting, including disclosure of carbon footprint, is of the essence to make forward-looking markets work, as reflected in the Global Reporting Initiative methodology. Investors should be able to assess not only the financial return on equity, but also the social and environmental return (=impact) of companies and their investments. They should also impose on themselves by committing to better analysis, improved carbon footprint disclosure and a principles-based investment approach. The annual communication prepared by each Global Compact participant on its progress in implementing human rights, labour, environmental and anti-corruption policies serves as an important driver to allow "markets" to judge the sustainable development efforts of business.

From products to supply chain. Leading corporations increasingly recognize that the world's poor are a very interesting segment of the marketplace and, more importantly, a powerful learning/innovation platform. Supplier policies may be an effective tool to bring sustainability to small- and medium-sized enterprises, as well as micro-enterprises. But where is the responsible ethical consumer-he hasn't woken up yet?

Formal vs. informal sector. A formidable challenge for developing countries is how to effectively align and eventually include the informal sector into the formal economy to improve their access to opportunity, without unduly affecting the existing core dynamics.

New forms of coalitions. Public-private partnerships, civil society groups, business coalitions, and supply chain alliances are all part of an increasing recognition of the need for convergence of isolated approaches. Among key success factors to realize the "return on collaboration" are: do we understand and trust each other, and do we have aligned objectives?

New hardware technologies and soft-wire business models. These include natural resources conservation, notably energy and water, carbon dioxide sequestration, clean renewable energy, the nuclear challenge and the equitable allocation of scarce resources and GHG emissions, for example.

Incorporating sustainability into business strategy and embedding it into the organization has become a very compelling business case, either for defensive or offensive reasons. The inescapable writings are on the wall and early examples are apparent--peer, customer, investor and societal pressures will continue to increase. In an era of transformation, high performers are most likely also "high learners", as they see the "value of values" and have an open mind and flexible agenda to adapt and adopt. In addition, for businesses, the cost of doing nothing on sustainability may be expensive, just as the Stern Review on the Economics of Climate Change states. The prize for leadership is, however, a source of significant sustainable value creation.

Herman Mulder is Senior Advisor to the UN Global Compact and the World Business Council for Sustainable Development He also served as Senior Executive Vice-President, head of the Group Risk Management and co-chair of the Group Risk Committee at ABN AMRO Bank. Mr. Mulder, the initiator of the Equator Principles in 2002, is a writer and speaker on a wide range of sustainable development issues.

[ILLUSTRATION OMITTED]