WHERE ARE THE REGULATORS?

In an economy based on competition, we simply cannot rely on individual businesses to self-impose sustainability rules that take priority over profit. Sustainability boundaries must be implemented collectively in order to be effective. While law and regulation would be the traditional avenues for addressing these broad concerns, governments themselves suffer from collective action issues in a global economy where jurisdictions compete for jobs and revenue. Moreover, the power of corporations simply overwhelms governments, as any review of campaign finance reveals.

In light of government’s failure, is there any way to impose the boundaries on business that are necessary to address sustainability?

Yes.

INSTITUTIONAL INVESTORS MUST TAKE RESPONSIBILITY FOR BUSINESS SUSTAINABILITY

The global investor community, including institutional investors like pension funds, has the power to create social and environmental boundaries on corporate activity. Through investment in public companies and private equity, institutional investors control a huge portion of private enterprise around the world. Modern investing techniques lead these investors to diversify their holdings; as a result, they are “universal owners” whose returns depend upon the performance of equity as a class and not the relative performance of individual companies. As sustainability decision-makers, they would be better off ignoring competition among companies, and focusing on the success of the economy as a whole.

MANDATING HONORABLE PROFITS

Capitalism and its pursuit of profit are just tools we use to bring together resources, financial capital and labor to find solutions to production and distribution problems. The reason business has become unsustainable is that we fail to distinguish between profits that come from solving problems and profits that come from endangering our future or exploiting others.

In contrast to stock-laden executives, universal owners can make that distinction and insist on honorable profits because they are not subject to the same competitive burdens. They can impose limits on unsustainable practices when (1) the activity hurts the overall economy and thus their own returns (like the climate crisis), (2) the activity directly affects the welfare of their human beneficiaries (for example, depressing salaries by paying low wages) or (3) we share a common understanding that some things are simply wrong (like slavery and child labor). In each case, imposing a boundary won’t interfere with competition, because no single company (or shareholder) will be peculiarly disadvantaged or forced to choose between the right thing and the profitable thing — that decision will already have been made. Corporations will then be free to chase profits within sustainable boundaries.

This would open up a huge opportunity for executives who are eager to pursue genuinely sustainable strategies. Once exploitation is taken off the table, innovation in humane and circular business models that focus on creating widely shared value will be able to rise to the top. If, on the other hand, investors do not take up this challenge, there is no clear way out of the arms race of unsustainable practices that have already led to deadly storms and heat waves, political instability and a world running out of water. This really may be our last chance.

Our new non-profit organization, The Shareholder Commons, is dedicated to catalyzing an investor movement for a sustainable future. Please contact us if you want to be a part it.

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