Softness isn’t the road to a sustainable economy

February 7, 2011

In response to the financial and economic crisis some people argue that we need a “softer” economic model. Especially when considering the impact of the global economy on the ecology and societies many voice the need to “back-off” economically and recalibrate our relationship with nature.
We do not believe that this would be the roadmap to a more sustainable economy. Primarily because it is not realistic to think that the growing population in emerging and developing countries will settle for lower standards of living than we have in the West. (Nor will the population in the West accept suboptimal economic returns). But more importantly, we believe that only economic toughness will guide a transition to a more sustainable economy that appreciates ecological and social considerations.
Instead of turning down the capitalist model of shareholder value, we argue that it is necessary to recalibrate it. In that we suggest to focus on two elements, which are very much interrelated.
Firstly it is important to recognize that many investors have mistaken shareholder value  creation for maximizing quarterly profits. This has resulted in a one dimensional financial drive which has ultimately contributed to the massive destruction of shareholder value that we have seen over the last two years. It is therefore crucial to accept that maximizing shareholder value requires a different time horizon than getting a haircut in the traditional physical sense.
Secondly: in order to focus on the longer term, we believe that companies and investors alike should apply the way they manage economical returns on other critical resources than capital. Currently, many of those other critical resources are economic externalities, but increasingly they are potential game changers for business continuity. Increasing resource productivity could become as important as increasing capital productivity. Consider water for a brewer or beverage company. The cost of water is often very low, but water scarcity or availability is a real risk in many geographies. Although there may be little economic urgency to consider water as a critical resource, the potential impact of neglecting the issue may be the difference between output or no output. Similar examples can be given for CO2 emissions in the process industry, wood supplies for the furniture sector etc. Moreover, this thinking is equally true for social aspects in industries where people are critical resources.
As an example, business routinely prune activities where the value added per dollar of invested capital is low. Similarly if a beverage company would know its value added per litre of water or a chemicals company its value added per ton of non-renewable resources, they could steer their business towards to higher value added and/or more sustainable products. Both of these would stand better chances in a more resource scarce environment.
Critics and market purists will say that markets efficiently price scarce resources. But people in the real world know that markets do not, not even for capital. Managing critical resources in this way will result in more productive use of critical resources. This not only benefits the company but also society at large. Companies need to take a hard look at these ‘softer’ issues and these softer issues would benefit from a harder look. The tougher companies will embed the management of critical resources in their economic models the better for global ecology.

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