We need to make better decisions to avoid the potentially severe consequences for businesses operating in a deteriorated environment. The social and environmental megatrends will, over time, act as a drag on prosperity as the costs of basic inputs such as water, energy and land escalate in response to scarcity.
To make better decisions, we need to measure what matters and stop considering nature as free and unlimited. It is the duty of the Board of Directors to lead this decision-making and put sustainability at the centre of the company’s strategy, effectively achieving an 'Earth Competent' Board. The Board and its directors must be at the forefront of an organisation’s response to social and environmental risks and opportunities, as well as to act in the long-term interests of the company, exercise due diligence and comply with disclosure requirements.
As we will be discussing at the World Forum on Natural Capital later this month in Edinburgh, this starts with accounting for natural capital. It is a fallacy to think the market alone will solve this, because the challenge is external to markets. Government should set a long-term, stable direction and allow price signals; companies will then price externalities and will definitively change their business models.
We are continuing to see impressive growth in the area of shadow carbon pricing. Companies are anticipating that the price and the real cost will come, so they are using a shadow price to start orientating their portfolio of research projects and investments in the right direction. Again, they are anticipating this change instead of waiting for confirmation, as they want to be the first movers and avoid being stuck with stranded assets. Some are even insisting on a high level of price able to change behaviour internally.
This is a good start, but for the most part, the value chain is unrealistic because the cost of natural capital is not taken into account. The fact that carbon emissions do not currently have a mandatory price does not mean they have no cost; it simply means that we are all counterfeiters, reporting fake profits and distributing fake dividends, whilst passing on the cost to future generations.