Why companies are willing to reduce profits to reach climate goals

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The UN climate change conference (COP26) that ended in Glasgow in November may have put the climate issue on the world’s agenda, but in the absence of practical resolutions or sanctions, the goal of limiting global warming to only 1.5 degrees Celsius seems unrealistic. While it’s clear what countries are being called upon to do – curb emissions, halt damage to habitats and forests and reduce the use of coal – it is not clear how they will translate the promises into action, especially given the demands of the businesses within their borders.

In order to meet these goals, countries need cooperation from the business sector, and it’s not certain they’ll be quick to get it. The obstacle is not just the regulatory difficulties any country will encounter upon trying to meddle in the firms’ interests, but also the challenge of creating multinational coordination and uniform regulations in an era of a global economy. Some countries may succeed in imposing production and pollution restrictions on businesses within their borders, but there will always be others that fail to create effective environmental regulation, or prefer growth to environmental protection. They will try to woo industries to relocate to their countries, in order to stimulate the local economy. The limited enforcement on climate issues is similar to that on global taxation. When firms transcend local frameworks, operating wherever their interests take them around the globe, it is hard to reach an international consensus on these issues.

This situation has many implications for the climate issue on the global agenda. It is clear that cooperation by many business actors around the world is necessary to advance the global aim of safeguarding the climate. And indeed, many firms around the world, both global and local, are voluntarily adopting corporate climate responsibility plans as part of their environmental, social and governance (ESG) criteria, even when doing so clashes with their immediate commercial interests. Such steps include reducing emissions and pollution, shifting to renewable energy and minimizing soil damage.

This clash between climate goals and bottom-line imperatives raises the question of why companies are adopting these restrictions. What makes them willing to reduce their profits for a goal that is not their own? At least three answers to this question are plausible.

Saving the world

Newer generations of executives understand the inevitable connection between the pursuit of profit, and its deleterious effect on the environment and the climate. These executives, along with the more forward-thinking members of the old guard, will choose the new way of doing business, in which untrammeled self-interest does not automatically take precedence over the interests and needs of others, including future generations. To them, the old story of business, as told by Milton Friedman in the 1970s, is both irrelevant and incorrect, and businesses are not to be judged only by their profit statement, but by their overall contribution to society.

Riding the bandwagon

Alongside government regulations, which are considered “hard,” there is “soft regulation” adopted by business stakeholders and even by the public at large. The public understands that the climate crisis is real, and that if the business sector doesn’t change course then the damage will be irrevocable. Soft regulation is shaped by public opinion, media sentiment, public protests, demonstrations, and civil society collaborations. Unlike government regulation, which is usually slow and involves many political considerations, soft regulation is just as powerful but far faster. It is also global and impacts firms in different arenas — be it in the willingness of consumers to purchase goods made by polluting firms, or in the unwillingness of workers, suppliers and financial stakeholders to go along with such conduct.

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Firms understand this, and direct their business operations to meet social expectations. They don’t do so out of a genuine interest in avoiding climate change, but out of self-interest and to maintain their reputations and profits. In this case, the moment another issue occupies public attention, the brakes can be eased and old ways resumed, which raises doubt as to how helpful this factor will be in protecting the environment.

Saving the system

Following the global financial crash of 2008, management scholars Michael Porter and Mark Kramer wrote a seminal paper on the theory of shared value (“Creating Shared Value: How to reinvent capitalism – and unleash a wave of innovation and growth,” 2011.) The paper is considered a trailblazer for an approach combining business and corporate social responsibility, alongside a crisis of the overall capitalist system.

According to Porter and Kramer, the business sector must find a way to innovate business-wise, but at the same time make sure that its activity is contributing value to the “non-business” sector. Porter and Kramer note this right at the beginning of the paper, stating that capitalism is under siege. They raise the concern that if corporations don’t restrain themselves, society at large and countries will demand the system be changed, and revoke the “license to profit” enjoyed by businesses today. The danger is that instead of capitalism, which they call “an unparalleled vehicle for meeting human needs, improving efficiency, creating jobs and building wealth,” we may get another, less sympathetic system.

This specter has been haunting Western countries for more than 100 years. After wars and socioeconomic crises, there is the possibility that governments will resume management of the economy, rather than permitting free markets – or worse, they will embrace socialism or communism, in which the economy is micromanaged and planned without permitting individual freedom. Against this backdrop, it’s easy to understand the business sector galvanizing to deal with the climate crisis. The climate crisis is an economic crisis, to be dealt with by economic means, and any government interference in business processes should be prevented as much as possible.

Porter and Kramer’s words, written against the backdrop of the financial crisis, resonate with the current crisis as well. It was only a narrow concept of capitalism that prevented businesses from harnessing their full potential to meet the challenges. In addition, the business opportunities that lie in the current crisis are being ignored in a way that may jeopardize the entire system. They also note that only businesses that operate like businesses, and not like charities, have the power to solve the pressing problems facing us.

In this light, the enlistment of different firms and sectors around the world in the fight against the current crisis can be seen as stemming from an understanding that it is not merely a climate crisis, but a crisis of capitalism itself – and that only joint action and the adoption of a new concept of capitalism that incorporates social and climate responsibility can save the system.