Awareness of environmental issues has increased in the 21st century
Experimental feature

Listen to this article

Experimental feature

Only one company listed on the first Dow Jones index in 1896 remains listed there today — General Electric. Many of those “first-listers” still exist, at least in part, within other conglomerates. But others have also failed.

This is hardly surprising given the vast differences between today’s economy and that of the end of the 19th century. However, the business models of many modern companies remain based on an economic philosophy unchanged from the industrial revolution: the linear supply chain. An open loop that begins with raw materials extraction and ends with post-consumption waste disposal.

The linear supply model is dangerously outdated in the economy of the 21st century. The economic landscape has changed fundamentally from even the 20th century. One big difference is digital technology, but another is our awareness of environmental issues.

The Global Footprint Network, a non-profit organisation that measures human impact on the Earth, estimates that if all the world’s 7bn people enjoyed the standard of living of those in an average developed nation, resource demands would equate to more than three Earths. Despite this ecological overreach, the general commercial approach to the environment remains mired in 20th-century economic assumptions. “Sustainability” for most businesses is an operational issue — one affecting marginal costs, branding and regulatory compliance, but largely detached from core strategy. The popular mantra “reduce, reuse, recycle” essentially involves only the incremental greening of those linear supply chains.

That approach to sustainability is incapable of supporting continued economic growth without hitting standards of living. While an improvement on the traditional take-make-waste model, the three Rs are inevitably a system of sustainable degradation.

In contrast, corporate longevity in the 21st century will require a strategic approach to sustainability. An approach that recognises economic capacity is dependent on ecological capacity — the ability of the environment to regenerate resources and assimilate wastes. An approach that embraces transformation to a new economic model — one of innovation and collaboration between businesses within closed-loop value chains, with embedded life cycle responsibilities. In short, sustainability must be a core strategic imperative.

This is basic maths. Two or three planets’ worth of resources into one Earth does not go. Many economists believe we will always invent our way out of an impending resource limit through efficiency enhancements and the development of substitutes. But this necessarily requires that someone will innovate. In that process there will inevitably be winners and losers in the market. And as the economic impacts of environmental constraints continue to intensify, so too does the likelihood that market players not strategically positioned to exploit — or at least manage — environmental issues are likely to be at a significant competitive disadvantage.

This is not to say that a business with a successful traditional model cannot continue to enjoy prosperity and a long life. But it must keep an eye on the future, rather than defaulting to a historical formula — one cannot drive a car looking only in the rear view mirror.

Forward plans need to be tested against 21st-century realities. Plans that are not robust or flexible enough to deal with a range of potential futures will need to be reconceived. At a minimum, resilience and adaptive capacity must be built in. And investments that have been historically profitable will need to be reassessed.

Otherwise, those businesses that bet everything on doing business as usual may consign themselves to the same fate as all but one of those Dow Jones first-listers.

Sarah Barker is a Melbourne-based lawyer and award-winning adviser and academic specialising in environmental risk

Get alerts on Companies when a new story is published

Copyright The Financial Times Limited 2018. All rights reserved.

Follow the topics in this article