Renewable Matter # 4 / June

The Future Is in the Hands of Corporations

Interview with Pavan Sukhdev

edited by Marco Moro, interview with Pavan Sukhdev

The Indian economist explains why big corporations will play a crucial role in the transition to the circular economy.

 

Pavan Sukhdev - Photo by Beatrice Törnros

 

How much are ecosystem services worth in monetary terms? How much are rain, oxygen, climate, biodiversity – services used by our economies for free – worth? And once the price has been calculated, who should pay for it? According to Pavan Sukhdev, corporations should deal with this problem in order to become the crucial drivers of a type of development that instead of plundering the planet promotes inclusive and lasting prosperity.

“Good banker” and “nature’s banker” are two nicknames used to describe Pavan Sukhdev, the economist who, on behalf of G8+5 and UNEP, organized the research study that lead to the publication in 2008 of the memorable report The Economics of Ecosystems and Biodiversity, also known as TEEB Report.

The importance of the TEEB Project is effectively described by Gianfranco Bologna’s article presented in this issue of Renewable Matter.

After presenting the report, in 2011-2012 Sukhdev was Visiting Fellow at Yale University and it was in this period that taking into consideration the evidence that emerged from the research for UNEP, he started elaborating behaviour principles and action models for businesses, especially for corporations. His work led to the publication of the book Corporation 2020, which has now been translated in several languages.

These are the topics that we talked about during his recent visit to Italy for the Global Alliance for the Future of Food and the launch of the Italian edition of Corporation 2020.

 

Sukhdev P., Corporation 2020. Trasformare le imprese per il mondo di domani, Edizioni Ambiente 2015; tinyurl.com/p7be88l

 

A first, general question: Why could corporations be a good instrument for environmental and social sustainability?

Today, private sector account for 60% of global value addition and 70% of jobs. In countries like the USA, perhaps 75% of GDP and jobs.

The first point is: if we could solve the matter from the bottom up, from micro to macro, if we had all corporations behaving like green corporations, then we would have a green economy, one that would deliver the world to the right development. Then we would have the solution. But today’s corporations are the cause of the problem, they are not driving the solution. And the problems are externalities, all externalities of corporations: we are talking about issues like greenhouse gas emissions, fresh water extraction, water pollutants, chemical pollutants, poisoning of land, use of land in order to use it for private business, climate change... If you take all those externalities together, you see that the costs are huge, they are driving the Earth’s system towards planetary boundaries, because the size is so big.

That’s why – both in terms of managing the negative externalities and in terms of changing the model towards the green economy – corporations are so important.

To me, due to its size, the private sector of the economy is the single most important institution of our times.

 

Second question: How could an improved attention to natural capital drive the economy towards new and more positive relations with resources... like the circular or bioeconomy?

The need of a circular economy is clear, because today’s economy is based on a linear model: take, make, waste.

As any linear model, it cannot be empowered, because it is based on two assumptions: that resources are infinite and the earth capacity to absorb waste is infinite. Neither is true, because resources are finite, and earth capacity to absorb waste is finite. 

Today’s model cannot be circular, it cannot be the answer.

Corporations must identify ways of generating profit and being successful, while still maintaining circularity, designing their products in order not to create waste. There are corporations already doing so, getting involved in changing rules and regulations, changing the way in which taxation is done or accounting is done. Or changing the way financing is provided, or advertising is done. And for this, corporations need to work with different regulators: accountancy regulators, tax and finance Ministries, advertising associations.

They need to do this, they need to drive the urgency of the change and the direction of this change. 

Today, the only people politicians would listen to are the CEOs, because politicians are supported by corporations. Corporations today are paying most of the taxes, providing most of the jobs and 70% of GDP, and are also paying most of the political campaign contributions. These are things that politicians need for their job, so the first reason why they should move or not move is what corporations think. And they are listening to corporations.

 

So do you think that corporations should be the “first mover”?

Certainly, they must be the first mover, for whatever reason. It could be because of their vision or their own leadership, it could be because customers say so, or because of the risks or opportunities. Whatever the reason, the first movers must be corporations.

 

How will corporations react to some trends which are now taking place and could help socially – like sharing economy – which in fact reduce monetary transactions?

Corporations can react by positioning themselves. They have huge capacities, capitals, human capitals, connections, organization. All these are very helpful elements for any kind of venture.

Let’s have an example for circular economy or sharing economy. Instead of today’s model of business, let’s say making and selling a laptop and immediately start designing a new one so that in six months there will be a new one to sell to Mr. Sukhdev, and then a new one and a new one... No, no, what a corporation should do is creating a laptop with the best available technologies, then offer Mr. Sukhdev a license to use it, maintaining the property of it, so that Mr. Sukhdev does not need to get mad about keeping it organized, then when he is through using it, taking it back and offering it to somebody else to use it again and again. So the maker of the laptop can maintain the ownership of the product and lease it to Pavan, and another Pavan and so on. Maybe I want to use your laptop when you want to change it, since I prefer someone else to set it up before me. So corporations would provide utility, would provide services, not a product. It is a different way of behaving. Personally, I don’t need the ownership of a computer, I just need the service.

There are many companies already offering leasing instead of sale, mainly for biggest equipment: for examples aircrafts are leased, not sold.

Then we can have another look at the matter if we speak of social economy, where people don’t rely on the producer of this laptop, but people have enough trust in each other, have enough “social capital”. So I can give you the product and you will look after it, take care of it and if something goes wrong, you will fix it. But this could not work, because if the laptop has a problem and you ask Apple, they’ll answer “No, we sold it to Pavan Sukhdev, who are you? Who is Marco Moro?”. You see, in a shared economy comprehension plays an active role; even if we both want to share the same product, if something goes wrong, who is going to look after the problem? The product needs a manufacturer for that.

 

How can a corporation play a positive role in promoting social inclusion and participation?

It’s a question of recognizing that a corporation is not only a matter of operating in a small space of physical capital, factories and offices and products and manufacturing. We must not think that whatever a corporation owns is the only thing that matters, because a corporation operates on human capital. It doesn’t own the human capital, the employees, but it leases the human capital and pays a salary for it. In a way, it has a leasing to use the social capital. 

In the same way it invests in the society in which it works, making people happy, providing offices and services, negotiating nicely with suppliers and buyers, maintaining good relations between suppliers and buyers so that it can’t happen that... oops, it ends up recognizing that it can’t do any good because its suppliers have decided to stop. So relations must matter, since relations are social capital and social capital has to be maintained.

But, what happens if a company impacts social or human or natural capital which has to be used all the time, with the need to have clean atmosphere in which to work, supply of clean water, supply of fuels and so on? A company never measures its impacts on all these elements, and that is the problem. So, just start to imagine the impact on these capitals, not only on financial capital: that will generate a new level of corporation, Corporation 2020.

 

A question focused on Italy. Does an economy based mainly on small or medium companies – not corporations – have the same principles and use them effectively?

I would argue that it has more potential than an economy based on large margin actions. Because an economy based strictly on the model “take, make, waste”, with the old model of investing huge amounts of capital in order to achieve scale economies, then sells lots and lots of products... that historically makes investments go all the wrong direction, that’s brown economy.

Instead, if you have small companies, with little physical capital but possibly with good social and human capital, you’ll have more possibilities to change, more ability to transition from Corporation 1920 to Corporation 2020.

So, I would be more positive for a country having small and medium enterprises than for a country with a majority of big companies, because the chances for change without destroying all of its capitals are higher.