Don’t wait for the markets to save the planet

A current theme in management writing is that companies’ green behaviour leads to greater success.  Green business guru Andrew Winston has recently blogged about the way Dow and The Nature Conservancy are trying to show the “business logic” of protecting the environment.  And some of that logic is right – reductions in materials use, lower energy consumption, and a green reputation can sometimes bring long term, economic benefits that greatly outweigh their costs.  Yet companies still overexploit the seas, pollute the air, and dump waste.  Why?

Companies are not fooled.  Green behaviours that have value to society – public goods like clean air, stable climate, and healthy ecosystems – do not always benefit the company enough to offset the investment made.  Some companies will do it anyway, because of ethical beliefs, or a strategic view that they’ll benefit later.  But many green practices are not worth what they cost the company – at least not to that company.

One proposed solution is to solve this through markets, for example through carbon taxes, or the pricing of “ecosystem services”.  This is a very good idea.  However it involves a lot of negotiation and international agreement to be effective.  Even then, we know that some firms will make the “wrong” decision, particularly in failing to pursue the long term gains from efficiency that current investments could make.  Long term gains are uncertain, and often require a lot of effort to assess them.

It should be no surprise, then, that recent studies in areas such as behavioural economics have shown that purely rational decisions are not the whole story.  Decision-makers use many criteria that lead to apparently irrational outcomes.  And these apparently irrational rules of thumb are actually used far more consistently than the mathematically pure economic models that MBAs are taught.

Why focus solely on a fragile case - that saving the commons is in businesses' self-interest - when the argument doesn’t match people’s decision-making processes anyway?  The evidence base suggests that an important additional approach would be to harness the things that really drive many decisions – and the most promising in my view is the “social contract”.

A social contract is simply a commitment made to others, which has the effect of making the planned outcome more likely to happen, and often encouraging others to make similar commitments.  Weight Watchers uses this very tool, helping people lose and keep off weight by making their goals and progress public.  Companies are led by people who are just as susceptible to this as the rest of us.  If a CEO meets her counterpart at a conference, and hears them say they’re going to reduce their firm’s carbon footprint by 10%, she may well feel that she ought to say something similar – not because it’s economically advisable, but because her peer is doing it.  Once she has made the commitment – particularly if it is done through the media – it will be hard for the company to back down, even with a change of management, and certainly with her in place.

Such commitments are rare and typically small.  At the same time as Sir Terry Leahy told Davos that he would build zero carbon stores in the Czech Republic and Thailand, he also urged governments to put market mechanisms in place.  The belief that markets will solve the problem is still dominant – but there is still a chance that social contracts will catch on.