Embed Size (px)
Citation preview
Rewiring the Economy Ten tasks, ten years
#RewireEconomy
For 800 years, the University of Cambridge has fostered leadership, ideas and innovations that have benefited and transformed societies. The University now has a critical role to play to help the world respond to a singular challenge: how to provide for as many as nine billion people by 2050 within a finite envelope of land, water and natural resources, whilst adapting to a warmer, less predictable climate.
The University of Cambridge Institute for Sustainability Leadership (CISL) empowers business and policy leaders to make the necessary adjustments to their organisations, industries and economic systems in light of this challenge. By bringing together multidisciplinary researchers
with influential business and policy practitioners across the globe, we foster an exchange of ideas across traditional boundaries to generate new, solutions-oriented thinking. His Royal Highness The Prince of Wales is the Patron of CISL and plays an active role in its work.
A particular strength of CISL is its ability to engage actors across business, finance and government. With deep policy connections across the EU and internationally, dedicated platforms for the banking, investment and insurance industries, and executive development programmes for senior decision-makers, it is well-placed to support leadership in both the real and financial economies.
The University of Cambridge Institute for Sustainability Leadership
Publication detailsCopyright © 2015 University of Cambridge Institute for Sustainability Leadership (CISL). Some rights reserved. The material featured in this publication is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike License.
The details of this license may be viewed in full at: http://creativecommons.org/licenses/by-nc-sa/4.0/legalcode
DisclaimerThe opinions expressed here are those of CISL and do not represent an official position of any of its individual business partners or clients.
Author and acknowledgements This report was authored by Dr Jake Reynolds with support from an editorial team of James Beresford, Tony Juniper, Polly Courtice, Catherine Tilley and James Cole.
The editorial team wish to thank CISL’s fellows, senior associates, business platform members, board and staff who provided expertise and guidance. Special thanks go to our alumni and wider network, over 400 of whom responded to the initial draft with their criticism, feedback and suggestions.
Thanks also to Corporate Culture Group for the design of this report and to James Fenton of Blimp Creative for early concepts.
Reference Please refer to this report as Rewiring the Economy (CISL, 2015).
CopiesThis full document can be downloaded from CISL’s website: www.cisl.cam.ac.uk
ContactTo obtain more information on the report, please contact Dr Jake Reynolds:E: [email protected]: +44 (0)1223 768850
July 2015
Rewiring the Economy 1
Despite many business leaders engaging with their peers, politicians and policymakers to turn sustainability ambition into practice, inequality is still rising, ecosystems are being degraded, resources depleted and greenhouse gas levels are climbing. These trends are detrimental to environments, communities, businesses and long-term economic performance.
1 An economy that does not undermine its own capacity to continue through loss of social and environmental value.
Executive summary
For economies to overcome these challenges there is a clear need to tilt operating conditions in favour of sustainable business practice.
Rewiring the Economy is CISL’s ten-year plan to lay the foundations of a sustainable economy1. It is built on ten interconnected tasks, delivered by three key groups of leaders: government, finance and business. These tasks (see Figure 1) are not unique to the plan. Rather, Rewiring the Economy shows how they can be tackled co-operatively over the next decade to create an economy that encourages sustainable business practices and delivers positive outcomes for people and societies (see Figure 4).
Clearly these fundamental tasks will need to be sensitive to very different institutional and geographic contexts around the world. It is our ambition to work with leaders from across our global network to explore how best to reflect this, through our focus areas of leadership development, business model innovation, sustainable finance and a just transition to a low carbon economy.
Beyond our network, we would like the plan to become a strategic compass bearing for governments, businesses and civil society around the world, inspiring new collaborations and enabling a fundamental change in how the global economy is harnessed for social and environmental good.
Task 1: Measure the right things, set the right targetsGovernments can set bold targets for social and environmental progress, and adopt new measures to track how well the economy is delivering them.
Task 2: Use fiscal policy to correct externalitiesGovernments can internalise environmental and social costs in economic activities through fiscal policy, benefitting sustainable business models.
Task 3: Drive socially useful innovationGovernments can use every opportunity to create drivers and incentives for innovation aligned with core sustainability goals, and should exemplify and enable sustainable business.
Task 4: Ensure capital acts for the long termInvestors of capital can demand more from their money, using their influence to drive long-term, socially useful value creation in the economy in the interests of their beneficiaries.
Task 5: Price capital according to the true costs of business activitiesCapital providers, and those who regulate them, can jointly consider how to reflect social and environmental risk factors in the cost of capital.
Task 6: Innovate financial structures to better serve sustainable businessFinancial intermediaries in particular can apply their influence and creativity to increasing the flow of capital into business models that serve society’s interests.
Task 7: Set a bold ambition, and innovate to deliver greater value Companies can seek models of value creation that generate a fair social contribution within the natural boundaries set by the planet.
Task 8: Broaden the measurement and disclosure frameworkCompanies can build a fuller understanding of their impacts (and dependencies) on society, including the implications for capital allocation.
Task 9: Grow the capability and incentives to actCompanies can align their capital, talent and senior attention with a sustainable business vision, and ensure people are empowered to deliver.
Task 10: Harness communications for positive changeCompanies can use their communications and marketing muscle to build public understanding of (and appetite for) sustainable business.
Figure 1: The ten tasks
In the context of this new regime, business leaders have an opportunity to work with peers, politicians and policymakers to make significant advances in taking sustainability aspiration into practice. While many are already doing just this, and despite the extraordinary efforts of pioneers, inequality is still rising, ecosystems are being degraded, resources depleted and greenhouse gas levels are still climbing. The ‘Great Acceleration’ (see Figure 2) that began in the 1950s remains at full pace, driven by an economy that has proved its ability to innovate and yet which is, in fundamental respects, unsustainable, with necessary reforms discussed but not delivered.2
The current economy shows no sign of maintaining global temperature rise under two degrees, or addressing key challenges like inequality or natural resource degradation. That this is the case reveals a monumental market failure: current price signals are too weak to change economic behaviour, despite the costs to society that arise from business as usual. Thoughtful companies can mitigate their impacts to a certain degree but, in a competitive market, investment in ‘public goods’ has obvious limits. To go further, business needs to compete on a different playing field.
To respond to this need and seize the opportunities presented in 2015, CISL decided to harness the insights we have gathered over a quarter of a century of working with business, finance and government, along with the wealth of experience in our network, in the development of a new ten-year plan to ‘rewire’ the global economy.
We are setting out to find and exploit the key leverage points for positive change – those places where relatively modest effort could produce a new paradigm. Two such points are public policy and financial services, both with universal influence over business. Together they offer the alluring and achievable prospect of capital seeking social and
environmental outcomes alongside financial returns. This is not to say that policy and finance are the only such influences over business: we recognise that movements in civil society and cultural change in organisations are critical drivers of change, as are the efforts of extraordinary individuals. However this plan concerns the three dominant actors in the economy: government, finance and business.
If the operating conditions for business were to change – the policy environment, accounting techniques, cost of capital and business norms of particular industries – so too would the economics of sustainable business. We are confident that this prospect, combined with the dynamism and innovation that is typical of business leaders (including many in our network), could unlock huge positive impacts for societies.
Changing the operating conditions for business will demand a new quality of relationship between business, finance and government. Many business leaders are anxious to see this. An agenda that was in the past driven by civil society is now widely recognised by companies that believe their supply chains, markets and stores of trust are at risk without it. There is of course a healthy debate about how to bring this transformation about.
Some business leaders believe that ‘bads’ such as pollution and the negative impacts of goods and services (carbon, obesity, scarcity) should be taxed more punitively than ‘goods’ like labour and profit. Others favour regulatory responses or pricing mechanisms to control resource use, waste, inequality, discrimination, and so on. They see the challenge as raising the bar on business practices by ‘tilting’ the operating conditions in favour of innovations that bring social and environmental benefits. Others see transparency as key, and want governments to mandate disclosure of social and environmental performance to allow stakeholders to make up their own minds about business behaviour.
Background
2015 is an exceptional year that sees the convergence of a number of important international agreements on sustainable development, culminating in the long-awaited climate change summit in Paris in December. These new frameworks, some of which have been years in design, are intended to shape economic growth and prosperity long into the future in order to secure the wellbeing of societies across the world.
2 Steffen, W., Broadgate, W., Deutsch, L., Gaffney, O. and Ludwig, C. (2014), The trajectory of the Anthropocene: The Great Acceleration, The Anthropocene Review, 1–18, January 2015.
3 ibid, map and design: Félix Pharand-Deschênes/Globaia.
Rewiring the Economy2
Figure 2: The ‘Great Acceleration’3
Rewiring the Economy 3
Billio
n
012345678
Worldpopulation
Trilli
on U
S do
llars
0
10
20
30
40
50
60
Real GDP
Trilli
on U
S do
llars
0
0.5
1.0
1.5
2.0
Foreign DirectInvestment
Billio
n
00.51.01.52.02.53.03.54.0
Urbanpopulation
Milli
on to
nnes
0
100
200
300
400
Paperproduction
Milli
on m
otor
veh
icle
s
0
300
600
900
1200
1500
Transportation
Billio
n ph
one
subs
crip
tions
012345678
Tele-communications
Milli
on a
rriva
ls
0
200
400
600
800
1000
Internationaltourism
Exaj
oule
(EJ)
0
100
200
300
400
500
600
Primaryenergy use
Milli
on to
nnes
0
50
100
150
200
Fertilizerconsumption
Thou
sand
dam
s
01234567
Large dams
Thou
sand
KM
3
0
1
2
3
4
5
Water use
Atm
osph
ere
conc
., PP
M
270
300
330
360
390
Carbon dioxide
Atm
osph
ere
conc
., PP
B
250
280
310
340
Nitrous oxide
Atm
osph
ere
conc
., PP
B
0
500
1000
1500
2000
Methane % lo
ss
0
20
40
60
80
100
Stratosphericozone
Hum
an N
flux
, MTO
N YR
-1
020406080
100120140
Coastalnitrogen
% lo
ss (a
rea)
0
5
10
15
20
25
30
Tropicalforest loss
% o
f tot
al la
nd a
rea
0
0.1
0.2
0.3
0.4
Domesticatedland
% lo
ss m
ean
spec
ies
abun
danc
e
0
10
20
30
40
Terrestrialbiospheredegradation
Tem
pera
ture
ano
mal
ly °C
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
Surfacetemperature
Hyd
roge
n io
n, N
MO
L KG
-1
6.0
6.5
7.0
7.5
8.0
8.5
Oceanacidification
Milli
on to
nnes
01020304050607080
Marine fishcapture
Milli
on to
nnes
0
1
2
3
4
Shrimpaquaculture
Changing the operating conditions for business will demand a new quality of relationship between business, finance and government.
If the operating conditions for business were to change so too would the economics of sustainable business.
The ‘Great Acceleration’ that began in the 1950s remains at full pace.
Socio-economic trends
Earth system trends
It is not difficult to imagine actions for business, government and finance leaders to address this, but one first needs to ask what economic activity is designed to achieve. There are many answers to that question, most based in the betterment of people’s lives, with a healthy environment implicit in that objective. Emerging global frameworks such as the United Nations’ Sustainable Development Goals (SDGs)4 break this down in more detail: ending poverty; education and health for all; dealing with climate change, and so on.
It is notable that the success of economies is generally measured in terms of growth rather than positive outcomes for people, such as those embodied in the SDGs. Clearly some growth will contribute to some of the SDGs, some of the time, but there are no guarantees. We also know that much economic activity does not contribute to the SDGs, and may in fact undermine their delivery. There seems to be a strategic chasm between where the world agrees it should be headed (the SDGs) and the direction of the economy. The sooner the economy is harnessed for social and environmental gain, the sooner that chasm can be bridged.
In their present form, the SDGs are broadly defined, in some cases overlapping, and not immediately translatable into business action. Moreover they cannot be delivered in isolation. It would be hard to imagine ‘ending poverty in all its forms everywhere’, for example, being delivered separately to goals on education, health, energy, water and climate change. We have therefore condensed the SDGs into six broad areas of ambition that we hope will resonate with business, (see Figure 3).
Governments have cited the central role of business in delivering these goals, but they cannot realistically expect that to happen unless they are prepared to establish ground rules that enable economic activity to generate social and environmental value. The dynamic between business, government and the finance system therefore lies at the core of this initiative. We believe that in an appropriately guided economy, business can be an engine of sustainable development, not just economic growth, dealing with challenges such as poverty and climate change as a function of doing business.
What should the economy be delivering?Today, business is regarded by governments primarily as an engine of economic growth. While private enterprise can excel at delivering that growth, there is a problem.
Much economic activity does not contribute to the SDGs, and may in fact undermine their delivery.
Rewiring the Economy4
Sustainable Development GoalsFor the last fifteen years the Millennium Development Goals have provided an overarching framework for global development. When they expire in September 2015 they will be replaced by the Sustainable Development Goals (SDGs).
Condensed from the ambitions of almost 200 governments and shaped further by business and civil society, the SDGs represent a once in a generation statement of direction for
the whole world, guiding the global agenda for the next decade and longer.
The SDGs break down a seemingly overwhelming challenge into seventeen parts, which CISL has condensed further into six. For business to become an engine for the delivery of the goals they must now be turned into a practical agenda, which is the purpose of the Rewiring the Economy initiative.
4 http://sustainabledevelopment.un.org
Rewiring the Economy 5
Food, water, shelter, sanitation, security and basic
freedoms for all
Limit GHG levels to
stabilise global temperature rise
under 2°C
Health, education, justice and equality
of opportunity for all
Secure, socially inclusive jobs and working
conditions for all
Preserve stocks of natural
resources through efficient and circular use
Maintain ecologically sound
landscapes and seas for nature
and people
CLIMATE STABILITY
HE
ALT
HY
EC
OS
YS
TEM
S
RESO
URCE STEWARDSHIP DECENT WORK
HE
ALT
H A
ND
WE
LLBE
ING
BASIC NEEDS
Figure 3: What the economy should be delivering: six broad social and environmental ambitions
The question is – how do we put these ambitions into practice? Business thrives on a clear long-term plan. To this end we have developed a ten-year plan to empower our network to lay the foundations for a sustainable economy – one that is capable of achieving these ambitions.5
The plan
The plan focuses on creating the enabling conditions for sustainable business: the conditions that, if present, would encourage capital to flow into sustainable business models6 on the basis of their superior risk and return. The vision of the plan is to lift and ‘tilt’ the playing field for business such that, over time, the economy generates positive outcomes for people within safe environmental boundaries. This is an opportunity for business, government and finance leaders to work together on a common, jointly beneficial agenda. If we succeed, the next decade will lay the foundations for a bright future in which humankind thrives.
The process of transformation will require greatly increased levels of ambition, new forms of collaboration and radical innovation to escape the thinking that is holding us back. There will be few instant wins, which is why this plan is set out over ten years, embracing short, medium and longer term actions of a fundamental nature.
The plan is built on ten interdependent tasks, delivered by three key groups of leaders: government, finance and business. These tasks are not unique to the plan – work is underway across the world to address these enablers of change, though in many cases it is too fragmented and suboptimal in scale to achieve the desired impact.
The plan shows how these tasks can be tackled co-operatively to encourage business practices that deliver the sustainable development goals (see Figure 4).
Building a sustainable economy requires the creativity and determination of business, finance and government leaders. Rewiring the Economy calls for a step up in this process. It is a catalyst for change, requiring extensive and diverse collaboration over the next decade to deliver its aims.
Clearly these fundamental tasks will need to be sensitive to very different institutional and geographic contexts around the world. It is our ambition to work with leaders across our global network to explore and learn how to achieve this, through our focus areas of leadership development, business model innovation, financial system reform and a just transition to a low carbon economy. Read more about working with CISL on pages 15–16.
Beyond our network, we would like the plan to become a strategic compass bearing for governments, businesses and civil society, inspiring new collaborations and enabling a fundamental change in how the global economy is harnessed for social and environmental good.
This is an opportunity for business, finance and government leaders to work together on a common, jointly beneficial agenda.
Rewiring the Economy is a catalyst for change, requiring extensive and diverse collaboration over the next decade to deliver its aims.
Rewiring the Economy6
5 A sustainable economy does not guarantee a sustainable society – factors like basic freedoms and universal healthcare and education lie beyond the control of business.
6 Business models that produce positive social and environmental outcomes alongside financial returns.
SOCIAL OUTCO
ME
S
ENVIRONMENTAL O
UTC
OM
ES
BUSINESS
FIN
AN
CE
GOVERNMENT
DE
CE
NT
BASIC
ECOSYST
EMS
HEALTH AND
STE
WA
RD
SH
IP
STABILITY
RE
SO
UR
CE
CLIMATE
WO
RK
NEEDS
HEALTH
Y
WELLBEIN
G
1
2
3
4
5
6
7
8
9
10
TE
N I
NT
ER
CO
NN
EC
TE
D T
AS
KS
SI X
OU
TC
OM
ES
OF
A S
US
TA
INA
BL
E E
CO
NO
MY
secu
rity
and
basi
c
shel
ter,
sani
tatio
n,
Food
, wat
er,
freed
oms
for a
ll
of opportu
nity
justice and equality
Health, e
ducation,
for all
and working inclusive jobsSecure, socially
conditions for all
through efficient
of natural resources
Preserve stocks
and circular use
and seas for nature
sound landscapes
Maintain ecologically
and people
temperature rise
to stabilise global
Limit G
HG
levels
under 2°C
targets andS
et the right
measures
externalitiesC
orrect
with fiscal policy
useful innovation
Drive socially
acts for the
Ensure capitallong term
costs of business
Value the true
activities
financialInnovate
structures
ambition andSet a bold
innovate
measurementBroaden
and disclosu
re
and
ince
ntiv
es
Grow
cap
abilit
y
com
mun
icat
ions
for
Har
ness
posi
tive
chan
ge
Rewiring the Economy 7
Figure 4: Ten tasks for business, finance and government to lay the foundations for a sustainable economy
Rewiring the Economy8
Task 1: Measure the right things, set the right targets
Governments can set bold targets for social and environmental progress, and adopt new measures to track how well the economy is delivering them.
Many policies are geared toward growing GDP without sufficient regard to the quality of the growth achieved. Such a limited strategy can be counterproductive in terms of meeting social and environmental goals. Governments should consider how well they are served by GDP, and whether their goals and strategies may have been distorted as a result of its ubiquitous application. New metrics that integrate changes in social and natural capital alongside economic output provide a more rounded view of economic progress.
Measurement is only one part of this story, the other being the targets that governments set on the basis of the metrics they agree. Clear, measurable commitments from governments are essential in areas such as binding carbon emissions targets, achieving or surpassing zero net waste, and rules and incentives to achieve zero net deforestation, integrated with goals relating to skills, employment and living standards.
Without clear targets, backed up by integrated measurements, legal mandates and political commitment, then other government actions – for example social and environmental policies – will continue to work against the grain of the economy rather than through it, producing mixed messages for business.
New metrics that integrate changes in social and natural capital alongside economic output provide a more rounded view of economic progress.
The ten tasks
Tasks for government
Governments set the rules of an economy, steering its development. Their role in building a sustainable economy is simple: provide the signals and conditions necessary to adjust economic behaviour, a responsibility that takes in government policy, regulation, spending and public service practice. Three shifts, supported by finance and business leaders, are needed to achieve this.
Rewiring the Economy 9
Task 2: Use fiscal policy to correct externalities
Task 3: Drive socially useful innovation
Governments can use every opportunity to create drivers and incentives for innovation aligned with core sustainability goals, and can exemplify and enable sustainable business.
There is a clear need for innovative approaches, technologies and systems to tackle the fundamental sustainability challenges facing the world. Government has a central role to play in driving and sustaining such innovation. There is no better way for governments to demonstrate their commitment to building a sustainable future than to use regulation, public spending and other policy instruments consistently to achieve this aim.
Public procurement, service delivery, planning policy, education, research funding, innovation support and other levers of industrial (and infrastructure) policy can all be harnessed to enhance ‘public goods’ such as living conditions, employment, public space and environmental quality. At a minimum, government activities should not be associated with undesirable outcomes such as low pay, excessive waste creation, or damage to important and vulnerable ecosystems, landscapes, communities and the climate. At best, government activities can be a powerful lever for change.
Are governments effective at driving innovation? Are they aligning efforts to drive and support innovation with their sustainability goals?
Governments can internalise environmental and social costs in economic activities through fiscal policy, benefiting sustainable business models.
Novel fiscal policies are required to ensure that the true costs of environmental and social externalities are borne by the economy rather than being offloaded on society. Examples of externalities include carbon emissions, various forms of pollution and waste, resource depletion, ecosystem loss and a wide range of social inequalities. This task could be tackled, for example, by differentially taxing business activities according to their environmental and social impacts – and rewarding positive performance. An example of this approach would be the use of revenues raised from carbon pricing to enable private financing of low carbon, climate resilient infrastructure.
Another powerful way to reflect and manage true costs is to remove or redirect subsidies that otherwise make unsustainable economic activity cheaper, for example in relation to fossil fuels, soil damage, biodiversity loss or the perpetuation of poverty. Governments should consider whether their current approach to subsidies may in fact be encouraging economic activities that run counter to sustainable development goals.
Are governments using fiscal policy to correct market failures that prevent business from delivering socially useful goods and services? Are governments setting a carbon price that reflects the full economic risks posed by climate change?
Governments should consider whether their current approach to subsidies may in fact be encouraging economic activities that run counter to sustainable development goals.
Are governments aligning efforts to drive and support innovation with their sustainability goals?
Rewiring the Economy10
Task 4: Ensure capital acts for the long term
Tasks for finance
If governments steer the economy then finance provides its fuel. As a universal influence on business, the role of finance in rewiring an economy is simple: to steer capital towards economic activities that support the future we want, and away from activities that do not. Three collective shifts are necessary.
What would it take to incentivise the financial value chain to seek long-term performance?
Investors of capital can demand more from their money, using their influence to drive long-term, socially useful value creation in the economy in the interests of their beneficiaries.
In broadening their expectations on capital, investors can reward companies for incorporating long-term risk and value creation in their business models. Expectations can be set and reinforced in numerous ways. These include the agreements established between different intermediaries in the financial value chain, shareholder votes on policies that do – or do not – align with long-term value creation (such as remuneration and environmental performance), and the tools used to translate future business opportunities into present-day value.
Extending the timeframe over which financial risks and returns are modelled, and opening the analysis to key environmental, social and governance (ESG) risk factors, will build alignment between the way capital is deployed and the interests of its ultimate beneficiaries – the public.
This big and urgent reform faces an uphill climb against a well-known culture of short-termism in the finance sector, and warrants action from governments, regulators, capital owners, financial intermediaries, consultants, risk experts and business.
What would it take to incentivise the financial value chain to seek long-term performance?
The ten tasks
Rewiring the Economy 11
Task 5: Price capital according to the true costs of business activities
Task 6: Innovate financial structures to better serve sustainable business
Capital providers, and those who regulate them, can jointly consider how to reflect social and environmental risk factors in the cost of capital.
The cost of capital is a key factor in business decision-making. It is influenced by multiple drivers that interact with one another, including the business strategies of individual capital providers and the requirements set by regulators. Ultimately, the assessment of risk and return that underpins cost of capital calculations dictates how capital is deployed and hence which business activities are able to flourish.
Today, the cost of capital rarely reflects the true costs of business activities across equity, debt and insurance. This means that one of the key drivers of business decision-making is at best sending unhelpful signals to companies, and at worst allowing important risks to society to accumulate in the longer term. This danger is already being recognised by some central banks and financial regulators, who, for example, are asking whether the by-products of unsustainable economic activity, such as climate change and income inequality, could threaten financial stability.
Some individual capital providers are identifying strategies that enable them, on a unilateral basis, to reflect more closely the true costs of business activities in their cost of capital. For example, some banks require customers to meet certain environmental, social and governance (ESG) standards as a condition of business, while some investors integrate these considerations into their asset choices. These efforts need to be brought front and centre of financial institutions’ thinking, enabled as necessary by fiscal, monetary and regulatory interventions.
Though they are regarded by some to be simply good risk management, how consistently are they being applied, and how visible is this to business?
The cost of capital rarely reflects the true costs of business activities across equity, debt and insurance.
Businesses that address society’s changing needs are almost certainly the brightest businesses of the future.
Financial intermediaries in particular can apply their influence and creativity to ramping up the flow of capital into business models that serve society’s interests.
In recent decades financial intermediaries, such as banks, have demonstrated incredible creativity in extracting financial value from business and society, to the point where many stakeholders now regard them as an economy in their own right, serving their own purposes rather than the underlying needs of the ‘real’ economy that others inhabit.
It is critical that this same powerful instinct for innovation is now underpinned by social purpose. Business models that address society’s essential needs are emerging all the time. In many instances, the companies that invent them struggle to access mainstream capital because the risks are perceived by financial intermediaries to be too high or the scale of their operation too small – take off-grid renewable energy in Africa. They find themselves reliant on government or donor capital, or turn to unconventional sources, which can make their growth more costly, slow or even not possible – yet they are almost certainly bright prospects for the future.
More work is required by institutions across the financial value chain, governments and businesses to understand how innovative financial services, including public-private financing structures, could be deployed to support and scale up sustainable business models. Patient capital, risk-sharing mechanisms, innovation support and capability building are all part of a rich picture of financial services that will fuel a new generation of businesses that contribute to global challenges such as poverty, inequality and climate change. It will also help the incumbents to grow in new, socially relevant, ways.
Could an improved understanding of this transition enable financial intermediaries to better support their clients?
Rewiring the Economy12
Task 7: Set a bold ambition, and innovate to deliver greater value
Tasks for business
If finance is the fuel of an economy, then business is its engine. Any serious rewiring of an economy must therefore be based on full business engagement and leadership. We present four strategic enablers that business can progress with government, financial and educational institutions.
Companies will need to consider how value can be created while making a fair social contribution with neutral or positive impacts on the natural world.
Businesses can seek models of value creation that generate a fair social contribution within the natural boundaries set by the planet.
We know that for many businesses, the current operating model isn’t going to be sustainable in the long term, and companies will have to transform their value-creation system. This will, for example, require sustainable production methods for agricultural commodities, circular manufacturing and consumption models, blends of product and service approaches, and a revolution in the energy system.
The shift business needs to make is dramatic and multi-year. It will be incredibly challenging for many companies, and unlikely to happen without clear aspirations and a strong imperative for change. For many companies it will mean working differently with partners and suppliers, and understanding the full lifecycle of their products and services. For incumbent players, this level of disruptive innovation is challenging, and is likely to lead to the rebalancing of corporate portfolios.
As is the case with governments, robust measures and targets, aligned with the UN’s Sustainable Development Goals (SDGs), will be required to drive execution, alongside investment in strategy, R&D and corporate venture capital. Parallel innovation will be needed from the financial sector to provide capital, and from governments to set the right enabling conditions.
Companies will need to consider how value can be created while making a fair social contribution with neutral or positive impacts on the natural world. Is their strategy consistent with maintaining global temperature rise under 2°C, with a fair distribution of earnings between tax and profit? Do all staff and workers through the supply base receive at least a living wage?
The ten tasks
Rewiring the Economy 13
Task 8: Broaden the measurement and disclosure framework
Task 9: Grow the capability and incentives to act
Companies can build a fuller understanding of their impacts (and dependencies) on society, including the implications for capital allocation.
Business leaders say they must measure what they seek to manage. In recognition of this basic assumption, companies need to understand new facts about their business: the real rates at which the resources they use, such as water, soil, biodiversity and clean air, are being depleted; the actual risks their business is exposed to from market failures such as climate change; and the true impact of their operations on society. Companies can achieve this by adopting new standards for three major groups of decisions: financial accounting, management accounting and capital allocation.
By working with the accounting community to broaden the use of environmental, social and governance (ESG) reporting, companies can send a clear message to capital markets about their longer term approach to value creation. By accounting for natural capital, companies can develop a clearer appreciation of the true lifetime costs of their goods and services and make informed decisions about how to manage them. Finally, by building a true appreciation of the real costs of capital and lifetime risk profile of an investment, companies can enhance their capital allocation processes.
The transparency resulting from integrated reporting and disclosure by listed companies (as well as large private companies and public institutions) will facilitate a more informed dialogue with stakeholders about the role of business in meeting societal challenges.
What is the net contribution of a company, and how is it handling trade-offs?
Companies can send a clear message to capital markets about their longer term approach to value creation.
Companies will benefit from developing the people and skills to operate in new ways that are consistent with sustainable business success.
Companies can align their capital, talent and senior attention with a sustainable business vision, and ensure people are empowered to deliver.
In any fast-moving transition, the ability to learn and adapt is critical. In this case, companies can build their capability by educating and empowering individual leaders, organisations and wider industries to take a longer, broader view of value creation consistent with sustainable business success. This will involve purposefully reallocating capital, talent and senior attention from current models towards the allocation required to deliver on sustainable business ambitions.
Resource allocation is notoriously ‘sticky’ in most organisations, and there is evidence that active reallocators outperform the market. This is an important capability for organisations to build. Companies will benefit from increasing their human capital and developing the people and skills to operate in new ways that are consistent with sustainable business success.
Incentives matter and companies of all kinds – including in the financial sector – can review their reward and recognition schemes to ensure that managers are not facing perverse incentives to preserve the status quo, and are effectively rewarded for long-term, sustainable performance.
A simple test: is sustainability good for your career?
Rewiring the Economy14
Task 10: Harness communications for positive change
Companies can use their communications and marketing muscle to build public understanding of (and appetite for) sustainable business.
A significant proportion of the information citizens and governments receive is via the communications, marketing and public relations undertaken by business. These powerful influences could be used to help stakeholders across civil society see why sustainable business makes sense, why a sustainable economy is not only critical for survival but a great place to live and do business. Our popular culture is based in large part on our relationships with brands. If those relationships could be harnessed for sustainability, then the shifts the world needs to make will be more likely to occur.
Marketing and communications professionals, as well as public affairs experts, have a vital role to play in building awareness and engaging in an informed debate about sustainability. Key starting points are customers, suppliers, investors, regulators, and the business schools that train the future employees of the firms concerned.
Given what is at stake for business in the transition to a sustainable economy, this is no time for greenwash. Not all stakeholders – including governments – are currently on board with the challenges, or pedalling hard to find solutions. Deploying corporate influence for positive policy and cultural change is an essential characteristic of a sustainable business. For example, how does a company show its investors that it is making capital work in the long term? And how is it communicating the need for effective enabling policies to governments?
Marketing and communications professionals, and public affairs experts, have a vital role in building awareness and engaging in an informed debate about sustainability.
The ten tasks
Tasks for business
Rewiring the Economy 15
Laying the foundations for a sustainable economy will require widespread and long-term commitment to collaborative action
The University of Cambridge Institute for Sustainability Leadership (CISL) is committed to working with leaders from business, government and finance, and work is already underway on many of the tasks outlined in the plan. Rewiring the Economy helps connect the dots so that we can see how these efforts add up to put us on a path to a sustainable economy.
A unique partnerCISL is a unique partner in this process. We bring academic rigour to bear on business and policy problems and translate findings into actionable steps. We have the ability to convene across boundaries and create space to initiate difficult conversations and help stakeholders co-create solutions.
We see our role in Rewiring the Economy as follows:
• Convening leaders and groups of companies with a common commitment to change and a desire to achieve things collaboratively that they can’t achieve on their own
• Building leadership capacity through executive and graduate education
• Undertaking applied and fundamental research to build the knowledge base
• Working with individual companies at a strategic level to support transition
• Enabling our active network of organisations and individuals to champion change
We will measure our impact by our ability to catalyse the ten tasks outlined in this plan. In short, how effectively we contribute to ‘rewiring’ the economy.
We believe our strengths lie in four strategic areas:
Building leadership capacity for systemic changeBuilding on 25 years’ experience working with leaders, CISL is developing new approaches to leadership across business, finance and policy. To rewire the economy we must recognise the capabilities, knowledge and mindsets that are required to lead this change.
For example: The Prince of Wales’s Business & Sustainability Programme and our customised programmes for companies convene senior executives to engage and empower leaders to act. Graduate qualifications and online learning tools build capacity and specific skills in individuals and organisations.
Business model innovationMuch of the current literature on business model innovation is dominated by niche, small scale or start-up case studies. We work to build the evidence, co-create solutions and develop new tools to enable incumbent businesses to achieve a step change in practical approaches to reconciling profitability and sustainability.
For example: The Natural Capital Leaders Platform helps progressive companies develop practical tools for businesses to value, measure and manage their opportunities from, and impacts on, natural capital. Our ‘Leadership Labs’ bring together practitioners and executives to learn more about business model innovation.
Making progress on sustainability over the next decade will require the creativity and determination of business, finance and government leaders, all working together. Adapting and implementing the tasks within Rewiring the Economy will be challenging for any organisation, regardless of its scale or the scope of its sustainability ambition.
Rewiring the Economy16
Laying the foundations for a sustainable economy will require widespread and long-term commitment to collaborative action continued
A just transition to a low carbon economyWe support the engagement of leaders across sectors to work collectively and individually to develop pathways to transition and to unlock structural transformations in the economy that cut and ultimately eliminate carbon emissions while addressing the social implications of transition.
For example: The Prince of Wales’s Corporate Leaders Group (CLG) is a group of business leaders convened by CISL to advocate for low carbon transformation with global policymakers. We are committed to working with ‘difficult to deal with’ sectors such as extractives and energy intensives to support their pathways to transition.
A sustainable financial systemWe work with financial institutions, regulators and corporate finance professionals to support change by clarifying future risk and value, setting new business norms and facilitating dialogue with real economy partners.
For example: The Banking Environment Initiative, ClimateWise (for insurers) and the Investment Leaders Group bring together leaders across the finance sector to take action in their own industries and work with leaders in other parts of the economy. We currently work with several financial services organisations to build their leadership capacity through customised programmes of work.
Over to youWe are looking to our extensive and diverse network of leaders to take action and share their insights into the challenges and opportunities they encounter along the way, and wherever possible to collaborate with us over the next decade to deliver this plan.
We invite you to look at your own organisation, at your own niche in the economic system, and consider what it would take for you and your peers to play a part in delivering against these ten tasks. Above all, we are looking to you to take action.
We are committed to joining you on that journey.
Printed by Seacourt.net, naturally responsible printing.Zero waste to landfill100% waterless LED100% alcohol and substitute free100% carbon neutral100% renewable energy100% recycled FSC© stock100% VOC free inks
Head Office 1 Trumpington StreetCambridge, CB2 1QAUnited KingdomT: +44 (0)1223 768850E: [email protected]
EU Office The Periclès BuildingRue de la Science 23B-1040 Brussels, BelgiumT: +32 (0)2 894 93 20E: [email protected]
South Africa PO Box 313Cape Town 8000South AfricaT: +27 (0)21 469 4765E: [email protected]
Cambridge insight, policy influence, business impactThe University of Cambridge Institute for Sustainability Leadership (CISL) brings together business, government and academia to find solutions to critical sustainability challenges.
Capitalising on the world-class, multidisciplinary strengths of the University of Cambridge, CISL deepens leaders’ insight and understanding through its executive programmes; builds deep, strategic engagement with leadership companies; and creates opportunities for collaborative enquiry and action through its business platforms.
Over 25 years, we have developed a leadership network with more than 6,000 alumni from leading global organisations and an expert team of Fellows, Senior Associates and staff.
HRH The Prince of Wales is the patron of CISL and has inspired and supported many of our initiatives.
www.cisl.cam.ac.uk
