Is Corporate Sustainability Dead?

Climate 

Over the past decade, the global average temperature increase has reached approximately 1.2°C, progressing at nearly 0.35°C per decade. Research indicates a high likelihood of permanently surpassing the 1.5°C target by the end of this decade. The IPCC’s Sixth Assessment Report underscores the disconnect between existing climate policies and actions required to remain within the Paris Agreement’s limits. Even aggressive carbon removal strategies are insufficient to prevent an overshoot of the 1.5°C limit by mid-century. Critical earth-system feedback loops—such as permafrost and weakening oceanic carbon sinks—present further challenges, potentially locking in irreversible warming. Some of these life supporting systems are on a tipping point, like the Greenland Ice Sheet, the Atlantic Meridional Overturning Circulation (AMOC), permafrost, monsoon systems, and the Amazon rainforest.

Companies and investors have a fiduciary duty to understand and manage risk. Increasing climate risks, both physical impacts and transition costs associated with regulatory changes such as carbon pricing, need to be considered and reported. The cost of in-action and escalating climate risks can trigger market responses destabilizing financial systems well before the full physical impacts of climate change materialize. Risk assessments and proactive investments are essential to mitigate economic instability. Companies, like the rest of us, cannot escape biophysical realities and constraints, ignoring or denying these realities do not make them go away. The number of climate related disasters has increased with a factor of 5 the last 50 years, of the nine dimensions assessed under the planetary boundaries framework, six have already been breached by 2023. A failure to reduce carbon emissions and more climate disasters, like the recent Los Angeles fires, will eventually mobilize popular opinion and enter politics. 

The canary in the corporate climate risk coal mine may be the insurance industry: global warming has led to losses totaling about $600 billion over the last two decades, and climate-related insurance losses have jumped from 31% to 38% in the last decade, according to the report from the Insure Our Future network.

Finance 

Global debt amounted to USD 250 trillion in 2023. As a share of GDP, 237 % of global GDP. These growing financial claims sit on top of a declining biophysical reality with important constraints on the extraction and use of fossil fuels and critical minerals. Renewables and other sustainable technologies are part of the answer, but as long if we do not move from the current linear economic growth model that is based on cheap energy without pricing of any externalities, servicing the debt will mean more emissions, extraction and the build out of more physical infrastructure. The real question is how we can move to a more sustainable and regenerative economy. The debt overhang, however, is an obstacle for such move and is a “musical chair situation” (Nate Hagen) of what people think they own and what the underlying infrastructure and the natural resource balance sheet will support. This spills over to the geopolitical situation because if all countries cannot use all the resources at the same time something has to give, and nobody will want to draw the short straw. The basic assumption of having access to resources against cheap (energy) prices and cheap credit will be challenged. 

Not mutually exclusive 

Sustainability can be linked to traditional value drivers like cost reduction, margin improvement and risk mitigation. Minimizing waste and efficiently use resources such as energy, water, and raw materials, streamlining processes and eliminating inefficiencies can lead to cost savings. Renewable raw materials recycled and biobased products can enhance performance and increase brand value. More sustainable products can increase resilience; against carbon pricing, supply disruption and shifting consumer preferences. Companies that are “build for the future” generate superior shareholder returns have corporate leadership that is aligned around a corporate purpose that integrates sustainability, are able to attract and retain world class talent, have an operating model enabling agility and resilience and an open innovation culture.  

Defossilization is not only associated with cost reduction, but also with new offerings aimed at demand gaps in nascent markets and implement value based prices and product premium, and tapping into new of adjacent value pools to benefit from early demand for net zero products and advantageous financing and regulatory support. 

Osmosis capital with almost $18B under management selects large cap equity based on resource efficiency strategies with emphasis on water, waste and energy efficiency and combines good financial with environmental outcomes. Resource efficiency leadership and the attention to operational metrics details as water, energy and waste may well be a proxy for good management and a leading indicator for long term value creation.

Headwinds

The shifting political landscape in the US—intensifying rivalry between nations, increasing social polarization, and a populist backlash against sustainability efforts—is redefining the conditions under which corporations must operate. Some companies are backpedalling on their sustainability efforts or refocus on their core and short-term efficiencies. Companies that have already transformed sustainability from a necessary inconvenience to a self-sustaining source of profit and advantage, will stay the course. Companies that are “on the fence” and are reliant on cheap fossil energy for their business models, may hit the pause button. Investors, however, will demand risk assessments, resilience against carbon pricing and supply chain disruptions, new growth platforms, compliance with regulation and financing options and the impact of changing consumer preferences. 

Meanwhile

Climate change and physics continue exist. What’s least likely to be effective in this complex situation is to either press ahead idealistically as if nothing had changed, or to drop the sustainability agenda entirely. Companies should continue to prepare for the situation where society will demand more drastic sustainability measures, which will also help build resilience against actual effects of climate change and regulation. Companies should integrate sustainability with innovation and technology aimed at resource efficiency, circular economy, new materials and emissions reduction for example, with tangible and defensible economic benefits. 

Technology 

Companies that prioritize the short term and refocus on the core will focus on technologies with a high readiness, funding tailwinds and near-term customer demands. Last mile delivery options, synthetic fuels, electrification and energy storage solutions are examples. Other technologies, to defossilize industries with high process temperatures and fossil feedstocks, like carbon capture and utilization, alternative fuels and biobased materials will move from pilot and demonstration to scale and need to be derisked by consortia of venture investors and industrial companies. Other sustainable technology opportunities may benefit from existing and transferrable industry capabilities, for example in geothermal, natural hydrogen, carbon capture and next generation electrolyzers. In any case, unit economics, reasonable time to market, capital efficiency and scalability (access to infrastructure) are important. Opportunity can also be found in energy efficiency and management, mining efficiency and minerals circularity, localized and modular manufacturing, food security, carbon markets and infrastructure adaptation. 

AI-driven sustainability opportunities exist for example in the discovery of battery chemistries that reduce dependence on critical minerals, reduced use of construction materials in building designs, characterization of nanomaterials and the stabilization of plasma in fusion technology. 

In 1987, the United Nations Brundtland Commission defined sustainability as “Meeting the needs of the present without compromising the ability of future generations to meet their own needs.” Surely all parents can relate. To deny or eliminate support for climate science and sustainable technologies is irresponsible and does not consider the interest of future generations. One wonders if the call to stewardship is well understood by some politicians and leaders.  Company leaders, however, can find opportunities in sustainability but need to align people, process and purpose with external trends and drivers to connect sustainability initiatives to long term value creation.