Volkswagen (VW), the second biggest car manufacturer in the world, had employed an illegal device to defeat emission monitoring on its vehicles during tests, thereby falsifying its emissions data allowing the vehicles to produce 40 times more emission than allowed. This issue raised in the US, resulted in about 44% (£25 billion) being wiped off the share value of VW, with the initial share value at £122 now trading at about £68. This as well opened the firm to further litigation charges that could range from £12 billion to £26 billion. This is a significant sum when compared against its pre-tax profit of £11 billion from last year. This would certainly put VW in the red for the next few years. This has also had ripple effects on the auto-manufacturing industry, as share values of Renault, Peugeot, Nissan, and BMW have also taken a dive too. All over the world, several other countries have lined up, promising to carry out investigations on VW, and I have also seen plans being canvassed for this from first world to third world countries. Martin Winterkor, the Chief Executive of VW, ultimately did lose his job, and this was a lose-lose situation.
The VW emission rigging scandal has cast another light on the very need of a deep-rooted and entrenched corporate strategy on sustainability, at the board level. The scandal came at a wrong time, 3 months away from the hosting of a December UN conference in Paris, France, on striking accords on global climate change. The last of such conference held in Durban, South Africa in 2011 nearly came to a standstill if not for the astute diplomatic efforts of Conni Hedgaard, the EU climate boss, geared up Germany, the home of Volkswagen and champion of climate change in the EU. The credibility of the EU and more especially the corporate world of business was dealt a hefty blow by this VW incident, at a time when it is expected that the corporate world should now lead the paradigm shift towards a low carbon economy. Notwithstanding, I am still strongly opined that corporations are now in a vantage and necessary position to champion sustainability, and I will posit why. This postulation has recently engaged the top minds of scientific, government and corporate entities.
Sustainability, which took its roots from the commission sponsored by the UN – Our Common Future – in about 1989, has taken its roots round the world, as people now want to see how commercial success is carefully hinged on social and economic welfare, with associated little impact on the environment. Sustainable Development, as it was then called, has gradually transformed, leaving the word ‘development’ out, as many see development as actually the problem creating an unsustainable economic and political system, especially in the developed world. I have the following reasons for stating that corporations now need to be at the forefront to champion the goal of sustainability, as they are both seen as both the genesis of the trilemma of balancing profits against environmental and social index, as well as the solution.
_______________________________________________________
The Current World Market - Globalization
Linkages between Global Economies - The world market is becoming more global, and effects from one country can spring ball within a day to another country, as products now have a more global supply chain. An example is that with the recent relatively low oil price, several fossil-fuel based companies have been struggling to match their forecast profits, and have been weathering the storm by cutting jobs and capital spend on new or existing assets. It is anticipated that investors would sell off about $2.6 trillion worth of assets from fossil-fuel based firms, as claimed by divestment campaigners, while low carbon companies are gradually beginning to make in-roads into taking more chunks of the energy supply chain. The decision of the far-flung OPEC countries to keep oil production up against the backdrop of a sluggish demand after the last global economic recession, is causing significant job losses in the North Sea in UK, has nearly closed down the unconventional oil business in the US, and stifled growth in other oil producing countries with a smaller alternative revenue base. Also, the recent VW scandal in the US spiraled to other countries in the world within a day, with huge knock-on effects via product recalls. This demonstrates the linkages between global economies. As another example, a Princeton study has shown that a single cup of Starbucks coffee, could have a supply chain spanning 19 countries from the paper, to the coffee beans, to the sugar, to the milk. The state of evolution of humanity means that people are becoming more and more sensitive to environmental matters, and the recent losses by VW on emission issues reflects the fact that of a necessity, corporations need to now lead, order and control sustainability to avoid being caught in the dark with sudden environmental perceptions changes in any country, as the global economy becomes more interconnected.
Huge size of corporations - The sheer size of today’s corporations creates an imperative for them to also lead the goal to sustainability. The IMF and Fortune magazine last year provided data that shows that 40% of the world’s top 100 companies are corporations rather than countries, with the top 50 controlling over £5.8 billion which is equivalent to the combined GDPs of the bottom 161 countries of the world. One of the big corporations alone controls 160 million of hectares of land, which is equivalent to the land mass of about 146 countries put together.
The State of the World’s Ecology
As corporations become bigger than governments, and begin to take on more traditional roles handled by the government, including energy supply, water supply, etc., it is very important that they are at the fore-front of the rapidly changing space on the earth. One of such rapidly changing index is human population, which is growing faster than records ever have had it. The human population first hit 1 billion in 1804, and took another 123 years to reach 2 billion, and then 33 years afterwards to reach 3 billion. Since then, the population is now growing by the same 1 billion every 13 years or thereabout, and is set to hit 9 billion by 2050, with an estimate of 2/3rds of this population resident in China and India. The Club of Rome sponsored a research report in 1972, 1992, and 2004 which clearly showed from models that this growth in population would cataclysmically result in a sharp decline in industrial output when the limit of growth is reached in 2100. As the populace are usually the end-market for most corporations, it would be vitally important that they keep tabs on future changes and what it means to their firms.
Also, the Stockholm Resilience Centre in 2009 published a report on planetary boundaries looking at ocean acidification, climate change, land usage, fresh water usage, etc. The report showed that 9 of those planetary boundaries have been over-stepped, with water as an example, an important material for industries, now being the source of conflicts for countries. The current picture for water is not looking rosy, as the price of water surveyed across 122 countries across the world showed that it varied from £0.2 to £1.6 per liter against the price of petrol at £0.4 to £1.4 per liter. This is expected to get worse as more fresh water sources round the globe become more difficult to get. While I in no strong terms support the misconceptions on the views of the Nestle' CEO, Peter Brabeck-Letmathe, on the full-scale commercialization of water, I am of the view that corporations need to take a leading role in managing the world’s resources optimally.
One World – Connectivity in Communication
A new world is in the offing, as the globe is now so connected physically and virtually. A Norwegian saying puts it succinctly thus: ‘There is always a train’. In 2014, there was a peak of about 100,000 flights per day across the globe. It is now quicker and easier to move from one city of the world to another. The world is therefore more connected physically. Also, the landscape has changed a lot for virtual communication, making news transfer almost instantaneously. Social media has transformed the world view and has got billions of people engaged and focused on common issues, with Facebook for example having up to 1 billion unique visits per month, which is bigger than the population of a large number of countries. Twitter, LinkedIn, blogs, 24/7 news media, and many more have all opened the landscape for focused discussions on environmental matters to shape the way business is conducted. People are better able to organize themselves more quickly, with the recent uprisings in the Middle East as a foretaste of that level of organization.
Paradigm Change in Human Consciousness
Whether we are aware of it or not, the collective world view is changing, and there is a gradual shift in human consciousness especially with respect to sustainability and profits. As Monsanto found out in Europe, they ignored public opinion on genetically modified foods, suffered significant losses, and eventually went bankrupt. People are generally now looking out for transparency, ethics, justice and good governance, equitable distribution of wealth and power, and empathy. These views are becoming more entrenched round the world as society and politics are strengthening civil society and pro-democracy movements. _______________________________________________________
Putting these together, corporations need to incorporate sustainability strategies hard-wired into their decision making processes. This requires the simultaneous development of ethics, sustainability, markets and social values together in product/service development and deployment. This puts a huge challenge on today’s CEOs and corporate managers as they not only have to manage their business, but have to manage the market, and now the society. I recently invested in a firm that extracted and refined tantalum, a rare metal used for items such as the iPhone. One key discriminator for me, apart from profit, was the sustainability story told and sold by the firm, and this sentiment I guess, now drives many investors. And although the World Business Council has tended to drive the view that sustainability is about eco-efficiency, it is now important to know that this challenge goes as far as ensuring that CEOs lead corporations in such a way that they deliver goods and services with less impact on the earth. Corporate Responsibility has to go beyond spending a portion of the profits to remedy the impact of the business supply chain.
Like a game of chess, Corporate Strategist, do not know the next counter-move, but have to prepare for it. And like a good chess player knows, attack is the best form of defense. So an early lead by corporations in tackling and implementing sustainability would see them through, better placed for success, including offering competitive advantage over other firms. Businesses need to not only ensure income is above expenses, but also ensure they manage externalities of social and natural capital. And although Adam Smith had written the treatise on the ‘Wealth of Nations’ which is the bedrock of today’s profit-geared society, 30 years later he published a treatise on the ‘Theory of Moral Sentiments, where he described an invisible hand driven by empathy. Corporations are the biggest institutions in the world today, and nothing will change until there is a full mindset change. A new world order in conducting business is therefore to be called upon.
Written by
Tekena Craig Fubara CEng MIChemE PPSE
