Has sustainability become unsustainable?

After much progress in recent years, it is clear that the current circumstances of the corporate sustainability movement are far from ideal. But the field has been in motion, with successive setbacks and breakthroughs since its inception, and there are good reasons to believe that current political headwinds, although substantial, can only be temporary.

The ideas and practices of modern corporate sustainability emerged in the 1990s in response to trade and investment liberalisation and accompanying concerns about the social and environmental impact of the expansion of economic activity. With the launch of global initiatives such as GRI and the UN Global Compact at the close of the last century, corporate sustainability took off and developed around the globe. Over time, the movement has attracted the engagement of consumers, regulators, and investors. A watershed event occurred in 2004 when the UN Global Compact launched the “Who Cares Wins” initiative which gave rise to the ESG movement. In 2019, roughly 90% of S&P 500 companies had published a Corporate Social Responsibility report – covering sustainability principles – up from just 20% in 2011.

Today, however, corporate sustainability finds itself at a crossroads. A shifting political landscape – intensifying rivalry between nations and social polarisation within countries -are redefining the conditions under which corporations must seek to survive and thrive. Some prominent companies have already begun publicly pulling back on key sustainability initiatives such as decarbonisation and social inclusion. Others simply believe the business case for investment has not yet been fully realised, favouring short to medium-term gains over long-term bets. Among many examples, some key car manufacturers are scaling back their electric vehicle plans globally, and at least three major energy companies are scrapping long-anticipated green plants due to reduced consumer demand and slow growth. At the same time, five of Canada’s largest banks and the six largest US banks have recently left the Net-Zero Banking Alliance – a UN finance initiative. Many more are quietly scaling back sustainability activities and reconsidering their relevance as they search for new strategies to cope with changing business conditions.

This begs the question: has the corporate sustainability movement become unsustainable?

Politics trumps other considerations

Arguably, the most significant development of recent years is the resurgence of power politics. The post-Cold War “end of history” era has faded and has been replaced by a world in which strategic rivalry between major powers is, once again, taking center stage. Many are referring to this as the post-globalisation era. The Russian invasion of Ukraine and an escalation of conflict in the Middle East exemplify this shift. Once co-operative allies are increasingly revisiting international endeavours if they feel they are at all at odds with their national agendas, for example, the US announcing its exit from the World Health Organisation.

Of course, climate is a driver of geopolitics, too. As of mid-2024, a record 120 million people were forcibly displaced due to violence, conflict, and the impact of climate change. Three-quarters of all forcibly displaced people are hosted in countries with high-to-extreme exposure to future climate-related hazards. Displacement and migration have further exacerbated frictions between nations.

In this new environment, power politics and security considerations trump market priorities. Trade and investment policies are no longer designed solely to foster economic growth and well-being. Instead, they are used to defend and enhance geopolitical aspirations. The directing of billions of dollars to create a domestic microchip manufacturing base in the US through the CHIPS and Science Act is one example of this, although this is currently being opposed in order to meet another national priority – paying down debt. This rise of geopolitical rivalry has led to economic nationalism and a weakening of global norms and practices which have long supported sustainable development goals. Increasingly, nations are moving away from globalisation. This undermines the incentives and mechanisms countries have depended upon to cooperate on global sustainability objectives.

The shift has several immediate negative implications for corporate sustainability. While it does not entirely remove pressure on corporations to improve supply chain performance on environmental and social issues, it does introduce new priorities, such as rearranging supply chains for resilience against geopolitical disturbances. Greater complexity, cost, and uncertainty result in sustainability considerations garnering a lower share of mind.

Second, the rise of power politics and the emergence of new political blocs make global rules and standards for environmental, social, and governance issues much less likely and potent. A fragmentation of regulation and standards and their instrumentalisation for national purposes – as is arguably already the case with regard to human rights – seems more likely. The wider this divide becomes, the further we get from addressing this global imperative in a timely, holistic, and consistent manner.

Third, power politics and militarisation and the deterioration of international cooperation between countries not only diminishes prospects for finding solutions to global sustainability challenges but also reduces the capacity to respond to health crises and other humanitarian emergencies. The tragic consequences of this shift are evident when comparing the relatively effective coordinated international response to the Ebola outbreak of 2013 with the response to COVID a few years later, when vaccines became a tool of power politics.

Fourth, prioritisation of national economic growth is increasingly seen as competition with sustainability ambitions. The British Chancellor saying that economic growth trumps ‘other things’ when asked about plans for controversial airport expansions at Davos this year exemplifies the shift in mindset.

Fifth, less international cooperation and a deteriorating political climate mean higher risks, greater costs, and less cross-border investment. Realigning supply chains, dealing with sanctions, and in some cases, selectively divesting have already become standard practices to mitigate political risks. Last year, 14 western nations formed a coalition to attract private investment in critical mineral supply in a concerted move to reduce reliance on China. Government affairs and political risk management have taken center stage in navigating the shifting landscape and various strategies to “localise” operations and ownership to mitigate against political risks are being employed. At the same time, industries deemed to be of national strategic interest are compelled to align even more closely with political agendas. Reduced mutual dependence means having less in common, further fueling divergence between nations.

Turbulance in sustainability regulation

With the new US administration withdrawing again from the Paris Agreement and retreating from in-flight sustainability investments, a rapid de-emphasis of climate and environment seems all but certain in the near term.

At the same time, Europe is facing a backlash against burgeoning sustainability regulation, which is perceived as weakening competitiveness. In response, a rollback of sustainability regulation seems to be a plausible scenario. Former European Central Bank President Mario Draghi said the EU faces an ‘existential crisis’ if it doesn’t address its dwindling global competitiveness because of what many corporations deem to be stifling sustainability regulations.

Combined with the geopolitical considerations mentioned above, it may be tempting for companies to de-emphasise sustainability, and indeed many major players have already publicly backpedalled on sustainability and human development matters.

Planet eventually trumps politics

In the short term, therefore, it seems reasonable to expect a further unravelling of the corporate sustainability agenda.

In the longer term, however, there are reasons to believe that several countervailing forces will overturn this short-term reversal and lead to a renewed emphasis on sustainability.

For one, enormous progress has been made on renewable energy technologies and a renewable energy transition, in no small part shaped by China. This has in itself become an object of geopolitical competition.

Secondly, while politics may trump other considerations in the short term, planetary realities ultimately shape politics. A failure to contain carbon emissions and a deteriorating climate situation, revealed through increasingly dramatic events like the Los Angeles fires, must eventually mobilize popular opinion and reshape politics.

Thirdly, the ever-increasing stock of sustainable business model innovations seems set to transform sustainability from an expensive, if necessary, inconvenience to a potentially self-sustaining source of competitive advantage.

Fourth, markets are already responding to physical climate impacts as is evident with rising insurance costs and price increases of agricultural products, and with near certainty there is more to come. Parts of the sustainability agenda have thus transitioned from hopes and moral imperatives to economic self-interest and business common sense.

Looking ahead

So how should companies react to this complex dynamic whereby pressures to adopt sustainable business models are weakened in the short term but likely reverse in the longer term?

The two strategies which are least likely to be viable are, on the one hand, pressing ahead idealistically as if nothing had changed, and on the other, dropping the sustainability agenda entirely.

In transiting from one sustainability regime to another, one should not expect an orderly or predictable trajectory – but rather, as philosopher Gramsci put it, a “time of monsters”.

With so much changing, we can give some rules of thumb for companies to navigate and inevitably messy transition:

• Be guided by the scenario of a rebound of sustainability imperatives and the expectation that this will increasingly be demanded by citizens. This will not only help prepare for the unavoidable situation where society will demand more drastic climate mitigation measures. It will also help build resilience to deal with the physical damage that a warming globe is already extracting.

• Rediscover fundamental values that inform and guide corporate culture to help build bridges between polarized communities and nations. Universally recognized values such as advocated by the UN Global Compact transcend political ideologies and cultural divides and also offer a more stable foundation to build strategies upon.

• Navigating fragmenting policy frameworks and social issues is putting a premium on local adaptation. While this undermines international cooperation on sustainability, there is a silver lining. Encouraging country and community-oriented activities can provide greater resilience and help build trust bottom up.

• Better integrate sustainability imperatives with innovation and technology strategy. Energy and materials efficiency are examples of areas where the economic benefits can be tangible even in the near term.

• Focus on a few core priorities, and prize pragmatic action and impact over comprehensiveness and appearances. Overstretch and politicisation are avoidable if companies focus on the sustainability issues which are core to the long-term interests of their businesses.

• Seize the opportunity to make progress while competitors may be distracted and pursue decisions that emphasise their declared values.

In short, companies can best ensure their own sustainability by looking past the short-term de-emphasis on sustainability and pragmatically navigating towards an inevitable rebound.

This article is also published on BCG Henderson Institute. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.