Sustainability of the firm

In recent years, aggressive environmentalists in government and the non-profit sectors have successfully pressured many firms to endorse positions that make no sense for their shareholders, employees or the communities in which they operate.

Few businesses would publicly endorse central planning or back restrictions on economic growth. But the rational fear of demonization, boycotts or even legal action by government or advocacy groups has encouraged many businesses to seek compromise by endorsing “sustainability.”

What went wrong? To many business people and to the general public, sustainability is the buzzword for thrift, resourcefulness, and long-term planning. Aren’t such qualities good for businesses and within families? But sustainability has grown into an ideology marked by dark skepticism toward human ingenuity and progress.

The roots of “sustainability” go back to a 1987 UN report, Our Common Future, in which the bureaucrats endorsed the idea that economics is a dismal zero-sum game. Sustainability presumes that using resources now necessarily means having fewer to draw upon in the future, a very dubious assertion. As sustainability became a leading movement in American culture, firms rushed to adopt and brand their “sustainable” business practices. That’s a rational response to their incentive to showcase risk management skills. But much of what goes on in the name of “sustainability” is economically unwise or wasteful.

A Google search for “corporate sustainability report” will generate roughly 110,000 hits. Sustainability has the allure of vagueness. That frees companies to define the word in different ways. Rachelle Peterson and her colleagues at the National Association of Scholars, which see, have shown light into dark corners of the sustainability movement. Many businesses note that sustainability rhymes with “corporate social responsibility.” Unfortunately, this tune never satisfies activists and is thus discordant.

As of this writing in January, 2017, the federal government and many states are transitioning to new political leadership. Should the business community take this opportunity to reconsider its stance on sustainability? Is it time to unwind corporate policies executives justifiably felt they had to take in order to avoid persecution by bureaucrats, the plaintiff bar or aggressive advocates?

We asked that of a senior staffer at a leading energy supplier. The firm initiated programs, entered negotiated settlements and joined organizations, the participation in which didn’t pass the smell test. They did so to get along by going along. To summarize his answer, “We exercise discipline so projects flagged as sustainable really deliver operational benefits. There’s continuous pressure to go into areas where [that breaks down.]” Even that discipline couldn’t keep them free from high-profile experiments on air emissions and related technologies. Some were priced in nine digits but the stakeholders’ benefits vanished. At least one negotiated settlement was worded so an environmental regulator and its activist backers could proclaim they inflicted punishment although the “remediation” was previously initiated as part of evolving operational standards.

ExxonMobil’s experience is instructive. During the late 1990s, at the time of the Kyoto Protocol, Lee Raymond, then Exxon’s CEO, took a strong and principled stance on climate change. He made clear and definitive public statements that the company was opposed to the too speculative climate agenda some parties advocated.  The result was the demonization of the corporation by climate activists. Rex Tillerson, the former CEO of ExxonMobil and US Secretary of State-designate, has sought to defuse the controversy by supporting carbon taxes and advertising broadly about ExxonMobil’s research on carbon capture and other technologies.  It’s not at all clear that this approach is helping shareholders, either, because the firm remains a target of fierce criticism and of litigation.

Regulatory and non-profit environmentalists cannot be kept at bay by companies explaining that their operations are clean, safe and energy-efficient, so their businesses are therefore “sustainable.” Caterpillar, for example, issues a “Sustainability Report” every year, while selling $8 billion annually in mining equipment. Komatsu, another major mining equipment manufacturer, is an active member of the World Business Council on Sustainable Development. Joy Global, also a major US firm in that sector, touts its “sustainability” by noting the low carbon emissions of its factories. A significant share of these companies’ well-earned profits comes from sales to the coal-mining industry, which is by far the largest carbon dioxide emitter in the world. Climate activists don’t want the coal industry made more efficient, they want it gone.

How can a firm keep its license to operate, meeting the expectations of both the broad public and of financial stakeholders? By accepting a few facts about today’s American and global society then pulling back the curtains on the sustainability charade.

Don’t Appease: Companies have a natural inclination to try to avoid confrontations with activists. However, a balanced approach better serves companies. That allows firms to respond to appropriate public concerns about safety and the environment. But balance keeps executives from crossing the line into acquiescing to alien viewpoints, appeasing critics or making commitments that they don’t believe or have no intention of meeting.  For years, oil companies Shell and BP publicly supported the disturbing climate agenda and tried desperately to portray themselves as “green.” BP’s “Beyond Petroleum” campaign was perhaps the most embarrassing example of this failed effort. Companies need to recognize that nothing they do will ever get the activists off their backs, since many of those folks simply don’t like private enterprise, shareholder ownership of energy resources or free markets. Appeasement simply invites the next attack.

Scale Hurts: The public doesn’t particularly like big companies, particularly oil companies and utilities. Ordinary people don’t really care what businesses think about public policy issues.  Consumers want to know that companies can do their jobs responsibly without cheating the public or blowing things up.

Confirm Reality: Some public affairs staffers try or hope to redefine sustainability in a harmless way but the reverse is occurring. The term has increasingly come to mean support for the alarming climate agenda and the forced phase-out of fossil fuels through government policy, litigation and divestment pressure. Pretending otherwise is a losing proposition.

Keep Better Company: Appeasing activists is a short-sighted play. Appeals to financial analysts and journalists showcasing the fundamentals of the firm will bring the right sort of investors while reassuring customers and employees. Too many businesses join initiatives such as Ceres, the Paris Pledge for Action and similar organizations in order to get shelter from activists’ downpours. When a business asserts that it has joined one of these clubs, it’s hoping it can hold up an umbrella, at least for a time. Sooner or later, this approach springs leaks. Better to stick to the fundamentals.

Maintain Charity Logic: Basic corporate philanthropy supports brand value and serves shareholders’ interests. Focus on clearly beneficial, local and timeless activities like education, social service, community support and health care.  Few companies are credibly criticized for doing these things. Advertising a company’s strong safety record is also generally above reproach.

Assert Standing: Companies have a right and responsibility to lobby government officials on legislation and regulations that affect their businesses but need to do so in an open and transparent fashion. That avoids any hint of cronyism or rent-seeking. Companies also need to fight back hard against legal persecution, particularly from states’ attorneys general.  Peabody Coal of St Louis signed an accord with Eric Schneiderman in New York. They are now in bankruptcy.  ExxonMobil has mounted a strong counter-attack against the cases various attorneys general threaten. The oil company appears to have the stronger case but the process is far from over.

We hope that new leaders in Washington and the state capitals inspire firms to rethink their approaches to these problems. The first step shuts down appeasing the sustainability crowd. We’re better off if companies focus on the basics and enhance shareholder value. That beats the alternatives while providing economic resources people can use for all the environmental investments that they may care to make personally.

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