The business case for the planet

Stay informed with free updates

Simply sign up to the Sustainability myFT Digest — delivered directly to your inbox.

Richard Barker is a member of the International Sustainability Standards Board and professor of accounting at Oxford university’s Saïd Business School, where he served as deputy dean.

The greatest change we face is the sustainability-related transformation of the global economy. We can either figure out a way to make economic activity sustainable, or the system starts to break down.

There are two alternative outcomes. The first is that global warming remains within the Paris Agreement target of 1.5C. This will mean the change in how we power and operate our economy will be fast and dramatic, and will create winners and losers. The second is if we maintain our trajectory of global warming beyond Paris limits, where the transition to a sustainable economy will be too slow to prevent unprecedented disruption. Winners would be outweighed by losers. Either way, there is change and uncertainty, and thereby opportunity and risk.

A lead indicator of this change is the auto industry, where the transition to electric vehicles has already been disruptive. Tesla is a relatively new entrant, yet its market capitalisation is now roughly equal to the rest of the global top 10 automakers combined. This disruption continues. A truly zero-carbon vehicle is also carbon-free in production. Porsche set a target of (net) carbon neutrality throughout its value chain for new vehicles from 2030. Others will follow.

The case for decarbonising arises because a sustainable economy is more valuable than one heading for collapse

Inevitably, the implication is that Porsche’s suppliers must decarbonise. An example is Norway’s Hydro, which is investing in recycling to produce aluminium with a carbon footprint 30 times lower than the industry average. In turn, there are implications for mining and other industries.

Transitions such as these are not philanthropic, but business decisions, to enhance economic value. The case for decarbonising arises because a sustainable economy is more valuable than one heading for collapse. As this becomes increasingly evident, companies that better manage climate-related risks and opportunities will be the suppliers of choice. There will be more regulation (and taxes or subsidies), changes in consumer preference and greater social pressure on the licence to operate.

This enhances the business case for sustainability, increasing the opportunities for innovation and the risks from business as usual. One example is in electricity generation, where solar and wind have become economically competitive and are gaining market share.

While the climate-driven transition is under way, other transitions will follow. Climate change is one of nine “planetary boundaries” that economic activity cannot sustainably exceed. Others include biodiversity loss, water use, change in land use (like deforestation), and pollution.

With water, withdrawals already exceed sustainable levels in several regions. This problem is set to grow as the effects of climate change reduce flow in glacier-fed rivers. Non-dairy milk is growing, given that oat milk uses 600 litres less water per litre of milk than its dairy alternative. Likewise, the market in second-hand clothing is increasing, reflecting the fact that a cotton T-shirt takes 2,700 litres of water to make.

Land use is integral to food and other renewable natural resources, manufacturing and construction, waste management, climate mitigation and access to critical minerals. All economic activity depends in one way or another upon the resources of nature.

Companies that finance, insure, advise or provide other services to industries are indirectly dependent on natural resources, creating risks and opportunities. In the 2024 World Economic Forum ranking of global risks over a 10-year horizon, the top four are all environmental: extreme weather events; critical change to Earth systems; biodiversity loss and ecosystem collapse; and natural resource shortages.

Executive MBA Ranking 2024

This is an article from the EMBA report publishing on October 14

Your business might be exposed even if its environmental impact is low, such as through vulnerability to climate-related weather events. State Farm, the largest property insurer in the US, stopped offering homeowner insurance in California in 2023, declaring it “necessary . . . to improve the company’s financial strength”. These outcomes have repercussions: the college graduate who can’t get a home loan because she can’t get insurance has an effect on retail banking and on the employer seeking to hire her. Disruption of systems can have widespread consequences, many of them not immediately apparent.

One illustration is pandemic risk, which increases as economic growth causes deforestation and other changes in land use, especially as livestock and wildlife come into closer contact. Preparing for the next Covid-19 might feel like normal business practice in risk management and strategic planning. It should. Global economic activity has reached a scale where a stable climate and an abundance of natural resources can no longer be taken for granted.

Viewed in terms of share price performance and access to capital, investors want to understand how any business is responding to these risks and opportunities. Reporting on sustainability to investors is not a compliance exercise, it is a communication of value creation and business resilience.

IFRS Accounting Standards are now complemented by IFRS Sustainability Disclosure Standards, which are being adopted across global jurisdictions. Both enhance financial reporting, and help companies communicate value-relevant information in the transition to a sustainable economy. 

Views expressed are those of the professor and may not reflect those of the ISSB