6, December 2022
Is Business leading the charge this time?
Companies have a long history of resisting change. Big Tobacco for many years denied the effects of smoke on health; Exxon for many years denied climate change was real; Purdue Pharma denied for many years that opioids were addictive; and the auto industry for many years resisted the use of airbags. There are many other examples. The effect of this was to reduce innovation in the economy.
How are companies responding to the challenges facing us now?
What are the challenges?
In a survey of the World Economy, The Economist magazine identified three major challenges that the world faces in the next decades1:
- An aging population – which results in a relatively smaller workforce, higher pension and healthcare expenses, and (surprisingly) lower interest rates. In Canada, by 2075 the number of people aged 65 and older is more than 50% of those aged 25-64.
- Climate change – which results in numerous challenges including reducing greenhouse gases, transitioning to renewable energy, developing electric vehicles, and many more.
- Geopolitical uncertainties – which results in doubts about future globalization (and the notion of friendshoring in response to doubts about authoritarian regimes); increased military spending, supply chain insecurity and more.
What is the response this time?
There is a very different story now. Many companies are stepping up to and actively advocating for change. Consider the following:
- Pathways Alliance. This is a consortium of the six largest oil sands producers in Canada that produce about 95% of oilsands production, aiming to create net zero emissions by 2050. It involved amalgamating several existing organizations, including COSIA. They plan to spend $24.1 billion by 2030 on the initiative.
- Electric vehicles. The world’s auto makers are planning to spend US$1.2 trillion through 2030 to develop electric vehicles. This includes Volkswagen (spending US$100 billion); Toyota (spending US$70 billion), Ford (spending US$50 billion) and others including Tesla, who plans to build 20 million EVs by 2030.
- Sustainable Market Initiative. This is a consortium of some of the world’s largest food and farming businesses, including Bayer, Mars, McCain Foods, PepsiCo, Waitrose and others. They are calling for immediate efforts to increase sustainable farming practices to avoid “destroying the planet”.
- Glasgow Financial Alliance for Net Zero This alliance of many of the world’s largest banks, founded by Mark Carney, the former Governor of the Bank of Canada, aims for net zero carbon emissions. The alliance has members with total assets of US$20 trillion. They aim to use their lending to reduce carbon emissions.
- Russian Sanctions The Yale School of Management reports that 1000 companies have publicly announced they are voluntarily curtailing operations in Russia beyond the bare minimum required by international sanctions.
- Royal Bank The Royal Bank (Canada’s largest bank) has announced its targets as part of its commitment to net zero by 2050. It plans to reduce its financed emissions on the production side of the oil and gas industry by 35% (on an intensity basis), in power generation by 54% and in automotive by 47%.
- Business Council of Alberta. This group – that consists of about 100 CEOs and leading entrepreneurs of the largest enterprises in Alberta – has developed a plan “Define the Decade” which is a ten year economic strategy for a collaborative approach to developing growth, sustainability and health in Alberta.
- Traverse solar project. This is a $700 million private sector investment to build the largest solar energy project in Canada and one of the largest in North America. Almost all of the output has been purchased by Amazon as part of its commitment to reach net zero carbon emissions by 2040.
Why is this happening?
Could it be greenwashing? Could it be currying favour with government? My view is that a big part of the answer lies in the gradual shift from shareholder to stakeholder capitalism.
Shareholder capitalism is the view that companies should focus exclusively on serving in the interest of shareholders, the owners of the stock of the company. It has been the dominant view of CEOs and Boards from the beginning.
Stakeholder capitalism is the view that, in addition to making money for shareholders, companies have a responsibility to be mindful of their customers, employees, suppliers and generally of their social and environmental impacts. This is a relatively new mindset that has grown over the last 30 years to the point that the vast majority of large Canadian companies produce Corporate Social Responsibility reports. It is similar in many other countries, and in some it is mandatory to produce these reports. Even Exxon-Mobil produces one.
The reason for the shift from shareholder to stakeholder capitalism is fairly simple – society has demanded it. Polls show that the vast majority of Canadians expect companies to be socially and environmentally responsible. It is the same in many other countries. If companies don’t comply they face difficulties with customers, shareholders, job seekers and others, not to mention their corporate reputation.
Of course self-interest is also a part of the reason. Companies that don’t adapt may not be around for long.
It looks as if the stage is set for a fruitful partnership between government and business (or at least a good deal less acrimony than a generation ago) in addressing some of the challenges coming in the next few decades.
- Economist, October 8-14, 2022 46