Watching the media’s coverage of climate and sustainability issues, it would be easy to miss just how firmly those questions have arrived into global economic thinking in the last few years. For most of my 20 years of focus on corporate strategy in this area, and for all of my 20 years in activism before that, it really was ethically-driven, this was ‘the right thing to do’ – for our children and their children. There’s always been something powerful about that as a motivator, but there’s also something inherently weak about it in a market context. It implies ‘you should do this’, as opposed to you want to do it! It was not be about making money or economic success. For decades, that was the context for sustainability, both as investors and in business strategies.
This has now shifted. A whole range of issues around sustainability, both social and environmental, have arrived in the economy. I could give you a two hour talk about the data without talking about the science or moral issues, and quote Dupont, Unilever, the OECD, the International Energy Agency or investors and financial analysis like Jeremy Grantham or HSBC, all people who look at this issue economically. It’s now about the market and making money.
Why the big shift? Very simply, we have hit the limits of the earth’s resources to support the global economy’s continued growth in the old model. We’ve reached the point where the physical evidence of sustainability limits is now playing out in the economy, in prices and availability. Not the literal availability but supply at the right price, right time and right place. It’s the beginning of a process that’s been long understood –infinite growth has its limits. So now people are responding by necessity, and that’s very different from doing it because we should or because we ought to, or our long term future depends on it.
This is also not like any other social question we think about in history. This is not about ‘it’s not as good as it could be’. For example, if we didn’t ban slavery in most countries, that would have been tragic, but we would have carried on regardless. This issue is not about making the world a better place. If we don’t change, we’re quite simply screwed. The system won’t work any more – at least not in the way we’ve come to expect it to.
If you doubt the inevitability of change, look at China. Think about all the issues and constraints on growing their economy at the moment at 7% pa, a quadrupling in only 20 years, and then consider all their current constraints on water, on air quality and on social instability and multiply the challenges by four in 20 years. You just can’t imagine that they’re not going to change. If they don’t, both the Communist Party and the Chinese economy are in trouble. That’s the global situation on steroids. Our model of growth will break if we don’t change.
So change is no longer optional. Business as usual and the assumptions on which every company and government operates are fundamentally wrong. The scale and pace of change are bigger than any of us are expecting. And when it happens, we’re all going to be surprised. And it’s not philosophy or ideology – it’s basic physics, chemistry and biology.
When we see shifts in regulation and policy, business leaders often talk about it being unexpected change and seek compensation, as the coal-driven power companies complained when the carbon tax came in. Like they were surprised by the climate change issue coming to the market after 20 years of forecasts! This transformation is like that – inevitable, clear and straightforward. There will be major changes in technology, transport, buildings and energy, or it’s the end of growth. Given that choice, you know what we’ll do.
We’re surprisingly passive about the inevitability of this. I’ve spent the last couple of years travelling the world and talking about my book The Great Disruption, and almost nobody challenges the core analysis. And then they say, “Isn’t that interesting”. My response no, it’s not “interesting” – it requires a response or the market change will leave you in its wake.
Business needs to think deeply about their strategies in this context. Think about how markets will change, because as a company, you otherwise may fail in that changing world. Frankly, as a society, we don’t care if a particular company survives, we don’t care if you go away and get replaced by other companies. The value that you add is the products you create and the jobs that go with them – not your existence. But if we no longer want your products, the market will sort it out and sort you out in the process. That’s how markets work. But if you’re running a company, you don’t want to be running things when your company fails. So it matters to you.
So what does this mean for investors?
First, accept the inevitable. Many past assumptions on how the economy works will no longer apply. That does not give you the answer on what to do, except to say your current strategy is probably wrong.
Second, it’s about to get messy. The world will not come to some simple ordered agreement to restructure. There won’t be a disaster hitting New York which leads to a meeting of world leaders reaching an agreement to change. It won’t happen because life’s not like that and markets are certainly not like that. It will be ugly, a lot of people will go broke and a lot of people will become rich. And that makes it an investment question.
I use as an example the incredible way the German utility industry has lost half a trillion dollars in market capital in recent years by not seeing what was coming in the huge growth in solar and the transformation of the energy sector. To summarise, German feed-in tariffs favouring solar drove large scale production in China to meet the demand, which led to phenomenal falls in prices and large installations of solar panels globally – even in places without strong climate policy like America. This drove further Chinese production, with the resulting 80% drop in solar prices meaning it now makes economic sense to put solar panels on your roof in places with no climate policy. The collective result was significantly reduced cost of generating electricity in Germany and a collapse in the margins for utilities at peak consumption times – thereby causing huge loss of value for utilities in Germany.
Thus German policy drove Chinese production which drove price drops that led to high US installations. Messy, complicated, unexpected and at the cost half a trillion dollars in market cap to investors in previously reliable utilities. There are similar examples everywhere, such as reductions in security of coal mine investments due to uncertainty around climate change, huge growth in solar and growing supplies of shale gas in the US. The Australian installation of solar is also an incredible story, a million installations in four years – watch that space for more disruption.
Change is coming. It will be messy and hard to manage but get ready or face the consequences of being asleep at the wheel.
This is an edited transcript of the keynote address at the 2013 Responsible Investing Association of Australasia Conference in November 2013. Paul was the executive director of Greenpeace International, and for the last 20 years, has consulted to corporations globally on sustainability strategies. He is the author of The Great Disruption. Paul’s talk at the opening of the annual TED event in Long Beach, California in 2012, entitled ‘The Earth is Full’, is linked here.