Sustainability is complex. The main challenge organizations face is that sustainability indicators, initiatives and ideologies are linked to cultural values and the political and economic interests of various geographies. This is why there is no conclusive definition of sustainability that can be agreed upon globally.
Why sustainability must be linked to profit and growth
My biggest concern, and the core reason for choosing this topic, stems from corporations and governments pouring money into sustainability and ESG (environmental, social and governance) and making important decisions based on approximated, fractured and unvalidated ESG data and, often, bad advice. The pressure on businesses to make sustainable development decisions that don’t yield profit or GDP growth could lead to additional global economic challenges.
Our youngest and eldest citizens depend on GDP growth. For example, most pensions are linked to the growth of pension funds that sustain monthly incomes. Calling to slow profit could affect people’s monthly incomes, leaving them unable to meet their basic needs.
Many large organizations are beset by suppliers that are growing their revenue streams by selling “sustainable” goods and services. Yet many of these suppliers are unchecked greenwashing machines, making gains from false claims that they advance climate and social change.
Any rational economist would ask if these types of sustainable suppliers can actually focus on solving sustainability challenges, given that finding answers could mean the end of their revenue streams. I have my doubts. To paraphrase Upton Sinclair: “It is difficult to get a man to solve a problem, when his salary depends on not solving it.”
Using the principle of game theory to address sustainability
For several years now, well-respected academic institutions have been pounding the drum about using game-theoretic principles to drive corporate sustainability and ESG strategies. What if I said that the key for businesses to embrace the fourth industrial revolution of “doing good and doing well” could be understood through the game-theoretic principles of Nash equilibrium and Tragedy of Commons?
In an ideal world, businesses and individuals would simply make concessions, reductions and trade-offs on global resources, greenhouse gas (GHG) emissions, and financial wealth for a more sustainable future. This is impossible from a game-theoretic standpoint as we could never be certain of the real intentions or actual follow-through. All it takes is one bad actor to make the entire utopia crumble. The Nash equilibrium’s Prisoner’s dilemma illustrates the challenge well.
Five recommendations to unlock the business value of sustainability
So, what must leaders do? Currently, organizations need to navigate over 2,000 ESG indicators, 600+ ESG rating agencies, thousands of sustainability certifications, hundreds of sustainability frameworks, and emerging legislation that affects local and multinational businesses. Throwing money at a problem this complex isn’t a sound solution. Below, I share recommendations based on the game-theoretic principle that can help you advance your sustainability journey while ensuring growth and profit:
- Commit to net-zero emissions. Even if it starts as intention, you’re in a better position than you were the day before, because you’re on the path to sustainability. Most large businesses have already started on this journey by disclosing their Scope 1 & 2 emissions. Not participating is no longer an option.
- Get your house in order. Invest in understanding and keeping inventory of your company’s value chain activities. Intent to become sustainable is of little value, unless you can prove and validate it, and that doesn’t mean buying certifications for millions. It is about enabling transparency and digital traceability of your value chain. It’s a long-term, challenging task, but it will be a lot less expensive than trying to sweep unscrupulous business practices under the rug.
- Improve operations to meet impending legislation. Transparency and traceability will bring to light areas of your business that require improvement. What type of energy is used, where energy or resources are wasted, the worst offending areas for carbon emissions, antiquated systems that need to be replaced, etc. You will be able to cut costs during this process as your business evolves into leaner operations.
- Avoid leaving the job of sustainability to marketing and communications. Many companies do this, and activists are now on to this tactic. While it’s important to communicate your journey, your sustainability vision and messages should come from your company’s top leaders and be rooted in systemic internal change. My colleague, Robert Ylitalo, illustrates how to avoid greenwashing in the mining industry in his blog.
- Future-proof your company. Find new opportunities and business models linked to improving climate and social impacts that are related to your core revenue. Planning and implementing innovative decarbonization actions throughout your value chain will result in a profound transformation. Companies that can unlock these opportunities quickly will gain a decisive competitive advantage at the expense of those that are slow to innovate.
Doing the bare minimum to comply with legislation is better than doing nothing at all, especially if it means avoiding paying rising tax penalties year after year. Inaction is unlikely to keep your company competitive in your market, either. If you come across sustainability consultants who promise improved ROI based on enhancing your reputation, increasing your customer base and attracting new talent, remember to ask for clear empirical evidence linked to revenue.