Corporate Governance for Sustainability Needed for a Green Economy

Filed under: 1sdn,Business Sustainabilty | |

Rio-de-JaneiroMeeting the challenges of climate change and a global transition towards a sustainable economy is such a monumental task that it requires the suitable governance structures that are able to channel corporate and other resources toward sustainability. This post covers some of the issues in this important subject including carbon lock-in, shorthand for the “interlocking technological, institutional and social forces…that perpetuate fossil fuel-based infrastructures in spite of their known environmental externalities”. It suggests a four pronged approach combining regulatory requirements, economic incentives for sustainability, public pressures, and finally to restructure the foundations of corporate governance to serve multiple stakeholders.

by David Levy, Chair of the Department of Management and Marketing at the University of Massachusetts, Boston. He recently founded and is now Director of the Center for Sustainable Enterprise and Regional Competitiveness. David edits the blog Climate Inc. on business and climate change.

The Boston University Pardee Center recently released this report on Governance for a Green Economy: Beyond Rio+20: Governance for a Green Economy. The report was released at a recent UN meeting preparing for the 2012 Rio+20 conference. Below is an edited version of my chapter in the report.

A global transition to a sustainable economy requires the large-scale mobilization of our financial, technological, and organizational resources. Climate change is one of the major concerns of this century, and it has been estimated that annual global investment of more than $500 billion will be needed over the coming decades to keep warming within a 2 degs. C limit. The vast scale of these investments and the need to integrate sustainable technologies, practices, and products across the supply chains of every economic sector highlight the importance of creating governance structures that will redirect corporate resources toward sustainability.

Growing concern about an international “governance deficit” has fuelled this embrace of private resources and capacity. It is important, however, to recognize that large companies are already, de facto, highly engaged in the fabric of global environmental governance systems in their roles as polluters, investors, suppliers, buyers, innovators, lobbyists, and marketers. Private decisions over products and processes, technologies and research, and distribution and sourcing have vast environmental consequences with wide societal ramifications and broad geographic reach.1

The Complexity of Carbon Lock-In

It is our current governance systems over energy and transportation that produce carbon lock-in, the “interlocking technological, institutional and social forces…that perpetuate fossil fuel-based infrastructures in spite of their known environmental externalities.”4 Lock-in is more than an

economic and technological phenomenon. Institutions such as the mass media, unions, government agencies, and professional certification bodies generate standards, rules, norms, routines and cultural practices that stabilize the dominant technologies. The automobile, for example, is intimately connected to our patterns of work, leisure, and shopping. Organizations with vested interests associated with existing technologies, such as industry associations and unions, become powerful actors who perpetuate the status quo. An understanding of the complexity, interdependencies, and inertia of the current system highlights the challenges of a sustainability transition.

Against this background, what governance institutions and mechanisms could generate change? Here we must heed Machiavelli’s warning to avoid wishful thinking and start with the world as it is. It is pointless to preach to consumers to abandon their cars and plane travel, or to admonish companies to give priority to sustainability. Economic activity is deeply embedded in economic and social institutions, and companies are constrained by corporate governance, capital markets, competition, and the wider consumer culture. It is naïve to simply specify “ideal” governance institutions that would, for example, create a high global price for carbon, mandate clean production systems, and empower non-financial stakeholders. Meaningful change requires careful study of the contested terrain of corporate environmental practice and governance, and a long-term strategy to win new allies, reframe the issues, shift norms, realign economic incentives, and craft new rules and oversight mechanisms. What we need is a strategic approach to building governance for a green economy.

From Regulatory to Radical: Four Approaches

Four governance mechanisms can potentially shift corporate behavior toward sustainability. First, regulation can direct companies to meet specific goals, such as renewables in the power sector, or fuel efficiency for vehicles. Second, economic incentives for sustainability can be structured through taxes, subsidies, or new financial instruments such as carbon markets. Third, public pressures can lead companies to shift their norms and practices, for example, by embracing information disclosure initiatives such as the Global Reporting Initiative (GRI) and the Carbon Disclosure Project (CDP). The fourth and most radical approach is to restructure the foundations of corporate governance so that productive organizations internalize the drive to serve multiple stakeholders and goals, including the workforce, the community, and the environment.

Each of these approaches has possibilities and limitations. Regulation is the most traditional means of influencing corporate behavior, but it can face huge political hurdles, as illustrated by the current post-Kyoto climate regime quagmire and inaction in the U.S. Congress. Regulation not only generates corporate opposition but also frequently faces reluctance from politicians more concerned about competitiveness and employment than sustainability. Some have made a spirited argument for a Global Environmental Organization to overcome problems of collective action and coordinate national regulation, but others are wary of the centralization of unaccountable power.5 Providing economic incentives harnesses the private sector’s profit motive, but these incentives are often driven by political rather than environmental considerations, as in the case of ethanol subsidies. They can have unintended and perverse impacts, driving up the cost of food. They strain governmental budgets and are frequently opposed by vested interests.

The move toward social and environmental disclosure represents a form of informational governance or “civil regulation” that some herald as a new era of transparency, accountability, and stakeholder engagement.6 Critics have argued that disclosure is actually a privatized form of voluntary self-governance that protects against more onerous regulation and accomplishes little for sustainability or democratic ideals.7 Thee non-governmental organizations (NGOs) who promote initiatives such as CDP seek not only to change corporate practices but also to empower civil society actors as active partners in corporate decision-making.8 Simultaneously, business strives to promote a more corporate version of disclosure geared toward management of reputation, liability, energy costs, and investor relations.

These three mechanisms for promoting sustainability—regulation, economic incentives, and increased disclosure programs—leave intact the fundamental structures of corporate governance in which companies strive to maximize profits and are primarily accountable to capital markets. Any attempt to divert companies from this goal inevitably faces resistance, and companies are frequently able to thwart, weaken, or skirt regulation through the deployment of lawyers, lobbyists, and accountants.

Sustainability advocates enthusiastically make the “win-win” case that improving environmental disclosure and practice actually raises financial performance; indeed, the core strategy of GRI and CDP has been to enlist investors as key allies in creating a demand for disclosure. There is certainly some low-lying fruit in the energy area, but it takes considerable investment and creativity to find real win-win solutions, and they won’t fix all of the massive environmental externalities of our industrial system of production and mass consumption. Even when cost-effective solutions exist, they often face various behavioral and non-market barriers to large scale deployment.

The fourth and most radical approach is to reengineer structures of governance so that organizations internalize not just environmental costs but the sustainability mission itself. A variety of experiments are under way with organizational forms that attempt to combine the economic efficiency and market orientation of the private sector with the concern for social and environmental goals of not for- profit organizations. The Corporation 20/20 initiative has brought together a range of ideas about governance structures to promote a “Great Transition” to a more sustainable society. Marjorie Kelly of the Tellus Institute, cofounder of Corporation 20/20, has described a three-part typology of structures of “for-Benefit companies”: Stakeholder-Owned Companies, Mission-Controlled Companies, and Public-Private Hybrids. “The essential framework of such a company—its ownership, governance, capitalization, and compensation structures—is designed to support this dual mission.”9

The ambitious agenda of Corporation 20/20 hints at the hurdles it faces. Some of the organizations Kelly describes deliberately limit their dividends, profitability targets, and growth rates in order to address their goals. Building an economy based on such organizations would therefore require a revolution in capital markets. While some investment funds apply social screens, constraints on pursuit of returns are anathema to capital markets. Treating stakeholders, such as labor and environmental groups, as active participants in decisions rather than bothersome constituents to be consulted and managed, replaces shareholder supremacy with a more complex and multi-layered form of governance. The tea-party will not be happy.

A Strategic Shift is Necessary

Even if many more organizations become environmentally aware and follow best practice, there is no guarantee that the global economy would be sustainable at a planetary level. As John Ehrenfeld, sustainability scholar and current executive director of the International Society for Industrial Ecology, has described, sustainability is a systems-level phenomenon based on the balance of human activities and the earth’s natural processes.10 The sum total of global production and consumption, from cars and planes to food and energy, puts an intolerable strain on the earth’s capacity to provide fresh water and absorb carbon dioxide and other pollutants. This is becoming strikingly clear with the rapid industrialization of China, India, and Brazil.

Moreover, the redesign of our cities, transportation systems, and energy infrastructure requires such a massive scale of investment and regional planning that individual business organizations, however well intentioned, cannot meet the challenge. Given these challenges, we need to move aggressively, but pragmatically and strategically, on all these modes of governance to create pressures for change. We need sectoral, national, and global institutions, bringing together business, government and civil society, that can play a role in planning, coordinating, and financing the transition.

1 Levy, D. L. and P. J. Newell (eds.). 2005. The Business of Global Environmental Governance. Cambridge, MA: MIT Press.

4 Unruh, G. C. 2000. Understanding carbon lock-in. Energy Policy, 28(12): 817-830.

5 Bierman, F. 2001. The emerging debate on the need for a World Environment Organization. Global Environmental Politics, 1(1): 45–55.

6 Florini, A. 2003. The Coming Democracy: New Rules for Running a New World. Washington D.C.: Island Press.

7 Gupta, A. 2008. Transparency Under Scrutiny: Information disclosure in global environmental governance. Global Environmental Politics, 8(2): 1–7.

8 Levy, D. L., H. S. Brown and M. de Jong. 2010. The Contested Politics of Corporate Governance: The Case of the Global Reporting Initiative. Business and Society, 49(1): 88–115.

9 White, A. (Ed). 2009. Paper Series on Restoring the Primacy of the Real Economy. Boston: Corporation 20/20, Tellus Institute, p.36. Available at http://tinyurl.com/restoringtheprimacy.

10 Ehrenfeld, J. 2009. Sustainability by Design. New Haven: Yale University Press.



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Author: David Levy (1 Articles)

David Levy, Chair of the Department of Management and Marketing at the University of Massachusetts, Boston. He recently founded and is now Director of the Center for Sustainable Enterprise and Regional Competitiveness. David edits the blog Climate Inc. on business and climate change.