Pedro Vormittag, FGV-EAESP Runner-up in the 2021 CoBS CSR article competition, sets the argument for environmental policy to drive business innovation – by giving companies a voice in influencing which regulation to put on the table in international climate negotiations.  

How to Make Environmental Policy Drive Business Innovation, by Pedro Vormittag.

lt has become primary to ask how organizations can innovate to reduce environmental impact. While the agenda is indeed essential, a more urgent mindset must rlse ln the conversation about business and sustainability. lt Is high time organizations figured out how to leverage the challenge of addressing climate change to boost business innovation. Unlike what common sense could state, there is no compelling reason why environmental regulation should hinder competitiveness. On the contrary, if business leaders are able to think strategically, it becomes possible to harness the limitations of environmental regulation as adriver of innovation.

These days, it might be challenging to think of innovation beyond the nuts and bolts of algorithms and new social media platforms. But innovation Is not just about digital technology. Following Bill Gates’ lead in his latest book about climate change, innovation means both new devices and new ways of doing things (Gates 2021, p. 308). Out of the countless managerial choices business leaders have in contributing to climate adaptation, mitigation and restoration, a new mindset of corporate sustainable development diplomacy stands out. Companies should engage in international climate negotiations pitching regulation that helps businesses frame innovation towards sustainability. Here’s how.

Climate change is a fact and it is here to stay

The existential threat of climate change has been fairly debated in the last decades. Long story short, the fossil fuels we have been burning into the atmosphere over the past three centuries are making Earth hotter. Just a few degrees’ increase can have catastrophic outcomes. Rising sea levels in coastal cities and islands can take over land and trigger unprecedented migration crises globally. Structural transformations in hydrological cycles threaten the agricultural industry’s arable land, leading to massive food security issues for underserved communities. Higher average temperatures can prompt the extinction of species and disturbances in biological food chains, bringing about new ecosystems and biomes that are unknown –  and likely more hostile –  to humans.

The numbers are astonishing, either because they are too big or because they are too small. For the past decades, humans have been introducing around 51 billion tons of carbon into the atmosphere. Such an overwhelming amount of carbon might wind up leading to a slight increase of 2 or 3 degrees in global temperatures, enough to change life on Earth as we know it (ibid p. 83).

Why are we not curbing greenhouse gas emissions like our lives depended on it? Truth be told, significant efforts are being made already. But the problem is pace and volume. Fossil fuels lie at the very heart of the global economy. From electricity to transportation, from food production to civil construction, a crucial amount of industrial and technological processes still depends on carbon emission. Only an ambitious agenda of structural transformation in the global economy can have the proportion to stop climate change in our time. This is where business and innovation come in.

Climate change is everyone’ s problem

After all, climate change is such a big issue that humanity must address it as a whole. Unlike previous global problems that drove the diplomatic agenda in the 20th century, such as nuclear proliferation or peacekeeping missions in failed States, the reality of climate change poses challenges to a plethora of political stakeholders beyond nation-States’ borders.

ln dealing with carbon neutrality goals and environmental law enforcement, for instance, private businesses, cities and local governments can often be in a more favourable position to deliver than central governments. Recently, cities like Los Angeles (USA) and São Paulo (Brazil), as well as states like California (USA) and companies like Apple, made the political choice of sticking with the Paris Climate Accords of 2015.

Through the “We Are Still ln” Movement of 2017, for instance, cities, states, businesses and other civil society stakeholders organized to stand up for international climate efforts attacked by former US President Donald Trump’s policies.

Businesses must – and should – engage

Businesses have a moral and an existential urgency to make decisive contributions to global efforts of stopping climate change. The good news is that playing the righteous role in that agenda mlght actually pave the way to a number of unprecedented business opportunities.

When it comes to adaptation and mitigation, at least two inspiring examples can be drawn. One of the trailblazing initiatives dedicated to that very mindset revolution is Mission lnnovation, announced at the COP 21 in 2015 as “an initiative to dramatically accelerate public and private global clean energy innovation to address global climate change, provide affordable clean energy to consumers, including ln the developing world, and create additional commercial opportunities in clean energy. (Mission lnnovation 2015).” On that same path, the Breakthrough Energy Coalition (ibid) gathers private funding to boost the business appeal of pioneer clean energy solutions.

ln the meantime, in the developing world, countries that have historically played leading roles in international climate change negotiations are once again pitching innovative ways to ensure life conditions on Earth. ln the Brazilian Amazon, for instance, a new and profitable bio economy prepares to grow, as trailblazing pharmaceutical products can be discovered by businesses that are willing to ethically harness the traditional knowledge of indigenous people – the best business partners a 21^st century business mindset could hope for (Nobre 2012).

When lt comes to restoration – the newest climate transformation task aims at restoring atmospheric C02 levels to less than 300 to 350 parts per million (ppm) from our current 415 ppm within one generation by 2050 (Khagram 2018 p. 3) – the money can be as big as the challenge itself.

A recent study by Thunderbird School of Global Management has concluded that direct ·market opportunities of climate restoration could range between 1 to 3 trillion USD per year, while indirect economic and environmental benefits could reach up to 5 trillion USD per year by that same period (ibid p. 5).

ln fact, influential voices such as former UK’s Foreign Secretary’s Special Representative for Climate Change Sir David King have argued that “there hasn’t been a wealth creation opportunity as the move away from fossil fuels since the beginning of the industrial revolution. (King 2020).”

But despite the urgency of structural changes in the way businesses deal with their carbon neutrality decisions, and even despite the remarkable profit opportunities waiting to be harnessed, the pace of industry adaptation and innovation is still not as agile as necessary to curb irreversible damage to global climate temperatures until 2050.

Governments must lead· the way in setting the agenda of a new green economy, enacting policies that point to the ways through which sustainability can be consolidated as a key proxy for profits and productivity.

Businesses have power in international politics

Among all the contributions businesses can make in solving climate change, it all comes down to innovation. The pace of creative destruction that companies can unlock for fighting climate change is tremendous. There seems to be little controversy over the idea that economic agents have power over environmental regulation. However, explanations tend to be too broad, often labelling the whole category of economic stakeholders under the label of “capitalism”. What remains unexplored is the potential that businesses have to push the boundaries of environmental regulation. Business actors translate abstract economic forces into concrete, observable facts of political life. Their dual role as economic and political actors makes them pivotal players in the search for global environmental solutions. (Falkner 2008, p. 4)

At least, this is what the history of international environmental policy shows. While businesses were initially resistant to the very idea of environmental policies back in the 1970s, as the environmental agenda stayed relevant throughout the 1980s it became clear that environmental issues had to be acknowledged by business decision-makers. Businesses and industries were faced with the choice between complying with increasingly strict environmental regulations in the countries they established their business or moving to a country with less strict regulations.

Evidence shows that they overwhelmingly chose to remain in their place and comply with the regulations (ibid p. 130). As companies would increase their engagement in environmental policy, several organizations and fora were born. The United Nations and the International Chamber of Commerce created the World lndustry Conferences on Environmental Management, the first one ln 1984 with over 500 business and government leaders. The second one gave birth to the Business Charter for Sustainable Development, a set of 16 principles for environmental management.

The input that might help mobilize environmental needs towards innovation frameworks depends on businesses lobbying in international climate negotiations with the goal of unlocking regulations that make innovation the only alternative. The idea that regulation can drive rather than hinder competitiveness Is not actually new. To the extent that competitiveness depends on innovation, good regulation can trigger innovation that may partially or more than fully offset the costs of complying with them (Porter and Linde 1995, p. 3). What we know as the Porter hypothesis is the idea that certain governmental restrictions might be beneficial to business to the extent that it forces firms to innovate (Porter 1990, p. 104).

The corporate diplomacy of innovation

After all, within a company, innovation can spring from technology, for sure, but also from the finance department, customer relationship protocols, marketing insights, human resources policy and virtually every realm of a business. Why not in corporate diplomacy?

One key aspect of international negotiation that one must bear in mind is that seldom do parties act or think as one single, coherent bloc. While it might be that one country plays a certain role in the international field, its position is the product of several internal factors pushing one way or another. An insightful explanation of how domestic and international dynamics influence each other can be found in Putnam’s classical definition of a two-level strategy. As Robert Putnam {1988) puts it, quoting the trailblazing work of Walton and McKersie {1965), “unitary-actor assumption is often radically misleading.”

Following such reasoning, it is up to businesses to influence governments on the content of the environmental legislation they should pitch in international climate negotiations, aiming for policies that leave businesses no alternative rather than invest in innovation – the key driver of competitiveness in the contemporary global economy. The question then becomes: given this state of affairs, how can we (if at all) enact cities and businesses as pressing stakeholders in climate diplomacy, especially in contexts where national governments seem to resist progressive environmental policies?

A great deal of the challenges is addressed by conquering the hearts and mlnds of business leaders. The overwhelming challenge of curbing greenhouse gas emissions and reaching net-zero carbon emissions by 2050 is a matter of survival for humanity, one that cannot possibly be addressed unless private businesses engage thoroughly.

The fact that such a level of engagement might lead to increases in productivity is the one decision-making input that nobody can afford to ignore. It is up to business leaders to make such a case clearly to society and to government authorities and policymakers, especially given the international climate summits programmed in Kunming (China) and Glasgow (United Kingdom), end-October 2021.

Useful links:

• Link up with Pedro Vormittag on LinkedIn
• Download this article and others in the special anniversary issue of Global Voice magazine #18
• Discover Latin America’s leading educational institution FGV-EAESP
• Study a Master’s in International Management (MPGI)

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The Council on Business & Society (The CoBS), visionary in its conception and purpose, was created in 2011, and is dedicated to promoting responsible leadership and tackling issues at the crossroads of business and society including sustainability, diversity, ethical leadership and the place responsible business has to play in contributing to the common good.  

In 2020, member schools now number 7, all “Triple Crown” accredited AACSB, EQUIS and AMBA and leaders in their respective countries.

• ESSEC Business School, France-Singapore-Morocco
• FGV-EAESP, Brazil
• School of Management Fudan University, China
• IE Business School, Spain
• Keio Business School, Japan
• Trinity Business School, Trinity College Dublin, Ireland
• Warwick Business School, United Kingdom.