Climate change isn’t just a boardroom issue, it’s a market concern

It’s over 30 years since climate change first became a familiar term in boardrooms, as well as households, across the world. Scientists noticed that global temperatures were rising at a faster rate than had ever been recorded before.

Since then, countries have been working – admittedly some harder than others – to mitigate the effects of climate change, introducing new initiatives to cut greenhouse gases.

In 1997 the Kyoto Protocol was agreed, a global effort to tackle climate change through a commitment from United Nations members. Following its expiration in 2012, new and similar efforts in the form of the Paris Agreement were introduced.

Closer to home, the UK implemented its own policy aimed at reducing carbon emissions back in 2008, with the introduction of the Climate Change Act.

Despite such action, we all know that global emissions and greenhouse gases remain on the rise, with businesses a leading cause of this.

In 2017, a report from Carbon Majors suggested that 70% of the world’s greenhouse gas emissions produced since 1988 came from just 100 businesses.

While that is an enormous contribution of greenhouse gases, we know energy has been on the agenda of business leaders for decades. There isn’t a single large business that doesn’t think about climate change and has put steps – large or small – in place to improve their sustainability. The quandary is why this hasn’t resulted in a reduction in greenhouses gases in any meaningful way.

This question informed our own research at Alliance Manchester Business School, looking at what firms are doing about climate change and the barriers that face them.

One of the main barriers we found was the impact of short-termism.

For any business making changes to how their company operates, the board will rightly have a long-term strategy in mind. A manufacturer that invests in an entire suite of new machinery, for example, may not see the financial return on its investment for years to come, but it knows that the long-term benefit justifies the capital outlay.

But when it comes to energy, business leaders often fail to see such investment through the same long-term prism.

In some senses, companies won’t feel the true effects of climate change for decades to come – it’s possible it will only affect the next generation of business leaders. This makes it difficult to focus on the here and now.

But this problem of short-termism spans wider than just sustainability. It’s a mindset.

Researchers have long been studying why people favour the short-term over the long-term and how we can change this. While many theories have been put forward, the one that has received most attention is “uncertainty avoidance”.

Uncertainty avoidance stresses the lack of information about the likelihood that the expected impact will materialise. In doing so, it drives behaviours that prevent business leaders from tackling issues where there is conjecture around the future impact. Climate change is a prime example here.

Such short-termism has been linked to poor sustainability outcomes at various levels of research. Analysis into the organisational level has pointed to a link between a short-term focus in business and a limited response to environmental issues, including climate change.

How do we change this?

Of course, shifting the mentality of decision-makers within business is key. They have the ultimate power to make some of the significant changes we need to reduce the effects of climate change.

But, crucially, the actions of those decision-makers must have the approval of their investors. It therefore becomes vital investors are enlightened and, where possible, focused on the long-term.

In our research, we found that climate change was historically approached through a “market logic”, which states that climate change mitigations should not occur at the expense of economic growth, share prices or wealth accumulation.

And as we know with the markets, it’s driven by short-term goals. Only when investors have strong beliefs that low-carbon investments can be a driver of growth will that translate into the pressure on boardrooms to properly address the issue at hand.

The market’s preoccupation with share price - and competition to an extent - puts climate change outside of business leaders’ priorities because of the perceived uncertainty around its effects.

A transformational change in management practices would require firms to openly challenge the market logic by embracing long-term thinking in their business practices, along with a more caring attitude towards the natural environment.

But until we change how the market perceives climate change, businesses are limited in the action they can take to improve their overall sustainability.

It’s important for our future that such an enlightenment comes to pass. As Benjamin Franklin famously noted, some 200 years before climate change became a cause célèbre, “An investment in knowledge pays the best interest”.

Jonatan Pinkse