Corporate sustainability at a crossroad

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The idea and practice of modern corporate sustainability evolved in the 1990s in response to trade and investment liberalization and concerns about the environmental and social impact of corporate activities. With the launch of voluntary initiatives such as the UN Global Compact and the Global Reporting Initiative (GRI) in the late 1990s, corporate sustainability spread across regions and, over time, attracted the attention of regulators, investors, and consumers.

Today, however, corporate sustainability is at a crossroads. A shifting political landscape—intensifying rivalry between and polarization within countries—along with increasing government interventions in markets and accelerating technological changes are redefining the framework conditions within which corporations seek to survive and thrive. In response to these changes, some corporations have already scaled back corporate sustainability activities in areas such as decarbonization or social inclusion. This begs the question of whether the sustainability movement is in retreat.

Power politics trumps market

The post-Cold War "end of history" era has faded, replaced by a world where strategic rivalry and even outright military aggression are taking center stage. The resurgence of power politics and economic nationalism is hollowing out multilateral rules on trade and investment and international cooperation. As a consequence, there is a growing mismatch between geopolitical and national priorities and the need to tackle global challenges such as climate change and poverty.
This shift in the political landscape has added new layers of risks and uncertainty for corporations. Many corporations have already been forced to rearrange and relocate supply chains and establish new ways of "localization" to protect against political disturbances. Global rules are no longer the exclusive overarching North Star. Power politics and national priorities increasingly dictate corporate decision-making. As the multilateral system fragments, the prospect of one set of global rules to cover environmental and social standards is moving further into the distant future.

Sustainability regulation on the rise

Another fundamental shift concerns regulations. Corporate sustainability is increasingly the subject of government-mandated regulation. Over the past few years, regulations covering sustainability issues across a wide range of topics have grown enormously across all regions, with the European Union leading the regulatory charge. There is currently much uncertainty given upcoming elections, and quite a few corporations have used this window to rally against regulations in this area. There may well be a short-term adjustment, but overall, the direction of change is very clear. Sustainability regulation is here to stay, and over time, one may expect more, not less, regulation as related issues increasingly force their way onto public agendas.

For corporations, it would be very short-sighted to jump on a political wagon of reversing regulations. Instead, the smart approach is to recognize that sustainability information is increasingly important for strategic decision-making and should be treated on par with financial information. Owning such information and investing in data infrastructure to better manage and use relevant information is also the safest way to navigate the complex regulatory environment.

Technological change as a key driver of sustainability

Technology has long played a key role in corporate sustainability by enabling transparency and data management on a large scale. But now, sustainability has become big business, as is apparent in the energy sector. As consensus has emerged that we have to decarbonize economies and build circular material flows, investments in green technology have grown across critical areas such as renewable energy, battery cells, e-mobility, and smart grids. Following China’s lead, the US and Europe are now also providing massive incentives for domestic industries to grow green tech capacities.

Technological advances also promise to unlock major improvements in other critical areas such as health, material science, and finance, where AI can now be used to link personal preferences with investment decision-making, as shown, for example, by the Portfolio Dragon.
For corporations, this means that sustainability is no longer an abstract advocacy issue or an annual beauty contest. Finding winning AI strategies for productivity enhancement, data management, and innovation and scaling green technologies to decarbonize are core to survival.

Looking ahead

The classic drivers that have given rise to the sustainability movement, such as shifting stakeholder expectations and risk management to protect brand and operations, are still at play. But now, market fragmentation, social polarization, regulatory requirements, and the commercial aspects of green technology have added new complexities. Corporate executives under pressure to respond to short-term investors may find it convenient to scale back ambitions and commitments.

But doing so would reflect poor judgment on the role of business in society. As transparency continues to rise, such an approach will increasingly be challenged in societies. Moreover, we can say with scientific certainty that playing the short-term game will, sooner rather than later, end in the destruction of assets and workplaces. The deteriorating ecological environment and the growing physical impact of global warming are already starting to show up in prices, from insurance costs to agricultural commodity prices, and productivity and health impacts. It would indeed be foolish to bet against nature. It is much smarter to stay ahead and double down on sustainability activities.

The good news is that many corporations around the world are not slowing down their engagement despite the changing context. This is evident as the membership of the UN Global Compact has doubled since 2015, despite—and maybe even because of—a deteriorating political outlook and growing regulations. Yes, power politics trumps markets, but corporations can make the right choices and support collaboration across political and social divides, thereby countering the dark forces of power politics and hatred. By moving ahead with decarbonization and social inclusion, they can continue to make important contributions to accelerate the much-needed transformation.