E3G

Environment and Business in the 21st Century

By Tom Burke

There are two dimensions of risk that must be considered. The more familiar risks are the direct impacts of these stresses on markets and operations. They will largely appear as increased cost or lost revenues. Droughts and extreme weather events will interrupt operations causing lost production. Water stress will lead to higher charges for supply and more stringent wastewater treatment requirements. Competition for grain will increase prices. Rising water, food and energy prices will drive up wage demands.

These risks are, for the most part, forecastable and manageable, or at the very least insurable. Businesses have a wide array of tools for dealing with them and personnel with the skills and experience to use them. As always, for the better managed companies, there will also be opportunities for new technologies or products.

The second dimension of risk is policy risk. This is much less familiar ground for the business community. Maintaining the integrity of the four pillars of prosperity is, classically, a task for governments. Ensuring all forms of security is a first responsibility of governments. It is this that we pay our taxes for. Business traditionally relies on government to provide the stability necessary for investment.

The scale and urgency of these challenges is such that this may no longer be wise. It is not so much that we cannot identify solutions to the problems. Nor that we cannot afford them. At the moment anyway, all four pillars are capable of being renewed.

It is the politics that is the issue. These are all problems that fall under the banner of the hard politics of the environment. Effective action on anyone of them will generate many more losers than winners. There is a strong Mickawberish voice, which when it is not protecting its own economic or ideological issue is simply in denial. Solutions require both vigorous international and inter-departmental coordination.

These are all deterrents to timely political leadership. The pillars of prosperity are public goods. They will not be reliably provided simply by the operation of markets. The most likely response to these challenges by governments will be first to paddle in the shallows of response - cosmetic actions that generate headlines but not much else.

When the problem gets much more pressing, governments will move into prevaricate mode. This can last for a very long time. It is essentially where we are now on climate change and water security. There will be much wringing of hands and talk of painful choices. New national or international legislation with ambitious aims will be announced, even introduced, but the process of passing it will be long and with each passing day the politically sharp edges will be blunted by the persistent winds of compromise.

Finally, when the damage to the pillars is so apparent it begins to cause public outrage, governments will panic. At that point they are most likely to implement the most costly measures to address a problem that by then may be beyond solution. This is not a scenario that will be good for business. At this point, the risk of highly disruptive regulatory or fiscal policy tools, with very short lead times for their implementation, is high.

Businesses are not well prepared to deal with these risks. On the whole they are much better at reacting to policy proposals from government than at thinking through the policy framework that would best allow government and business to work together to offer society solutions to the kind of systemic problems we have been discussing.

For the most part, today’s business leaders possess neither the knowledge nor the skills to think strategically about the hard politics of the environment. They certainly do not have the time. Few, if any companies, have developed the internal processes to connect their conversations about these issues to their core business conversations.

The result is an inadvertent conspiracy of inaction. Governments understand the need to act decisively on these issues but are inhibited from doing so for fear of damaging the businesses on which the success of their economy depends.

Businesses, which often recognise the importance of these issues without fully understanding how they affect the future of their business, wait patiently for government to give a clear and consistent signal of what they expect from business.

Governments have the problems. Businesses nearly always have the solutions. This ought to be a marriage made in heaven. Instead it is a structurally dysfunctional relationship whose failures are bad for both parties and worse for the world as a whole.

Finding the ways to create a much better founded relationship between government and business, particularly with respect to maintaining the pillars of prosperity, is a key part of meeting the challenges of the 21st century.

Stability is a system condition for investment and therefore for business success. Business traditionally relies on government to maintain stability. In the 21st century, as the pillars of prosperity come under increasing stress, governments may find it increasingly difficult to play their assigned part.

I do not believe that we are fundamentally short of the resources, capital and technology to provide a higher standard of living for eight billion people. But we are woefully ill-prepared to put those resources, capital and technology together in ways that are sustainable.

The only resource we are truly short of is time. If we do not quickly build the more effective relationship between business and government that is central to maintaining the integrity of the resource pillars of prosperity then as the 21st century progresses we will find that governments are as increasingly unable to discharge their responsibility to their citizens as managements are to their shareholders.