Why Markets Are Sustainability’s Next Giant Leap

After decades in which businesses—plus their brands, boards, business models and value chains—have been targeted, our next challenge is to redesign markets.

JE with Artiphoria

Recall the tale of the drunk searching for lost keys under a streetlamp? Challenged, they admit that this may not be where the keys disappeared—but it’s where the light is. Understandable, but we must now ask whether the global sustainability industry has been doing much the same thing since it woke up to the power of leveraging corporate brands? Does our near-obsession risk becoming a strategic misdirect that could derail the wider system change agenda? If so, how do we get back on track?

Most early sustainability activists were not branding experts, even if leveraging the power of brands ultimately became central to many of their theories of change. Three decades ago, one prominent Greenpeace campaigner told me that discovering the raw power of exploiting multinational brands to leverage wider change—think Coca-Cola, Nike, Shell—had been like discovering the explosive power of gunpowder.

Yet apparent progress in one area can blind us to the growing need to ask deeper questions. So, does our current obsession with individual businesses risk overlooking the critical importance of the market dynamics that most of them are exquisitely responsive to? And, alongside that, ignoring the the looming challenge of redesigning markets to ensure that they incentivize companies to better align with future demand for sustainability outcomes?

With business increasingly seen as our best hope for solving the climate and biodiversity emergencies, in addition to a growing spectrum of other challenges, such questions are ever-more pressing. True, some businesspeople—keen to get back to the way things were—ask whether the anti-ESG pushback in some markets marks the end of all that nonsense? The answer, to channel Winston Churchill, is that this is not so much the beginning of the end for sustainability as the end of the beginning.

Reality Check

The unsustainability of most modern economies cannot be wished away. Indeed, the scale of the oncoming systemic crisis was underscored by the World Economic Forum’s 2024 Global Risks Report. In flagging its “Top 10” risks for the coming decade, it noted that five of the top ten are now environmental challenges, including extreme weather events and critical changes to Earth systems.

The other five are examples of the sort of barriers to change that leaders in every sector and geography increasingly wrestle with. These are social polarization, misinformation and disinformation, cyber insecurity, the growing risks associated with both AI and forced migration. Clearly, we have our work cut out for decades to come.

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But zero in on the business world and superficially, you might conclude that we are making genuine progress. Back in 2022, for example, we learned that 96 percent of G250 companies were already reporting on sustainability or ESG (two concepts that are very far from being the same, let alone fungible). Since then, the introduction of the EU’s Corporate Sustainability Reporting Directive in 2023 has further tightened the screws on stealthier ends of the business transparency spectrum.

Then, again, focus in on Germany, where you find that 90 percent of major DAX-listed companies now have a chief sustainability officer, or CSO. It may be tempting to ask whether we have reached “peak CSO,” but the evidence suggests that this trend is itself only just getting started.

Or dig into the way that the latest Financial Times rating surveys of business schools assess B-school leadership and performance and you find that some 20 percent of current scoring is driven by a range of sustainability metrics. As companies have discovered when linking executive compensation to sustainability-related outcomes, such approaches can powerfully reshape executive priorities.

Still, the Global Risks analysis—alongside the work of pioneers like the Global Footprint Network and the Stockholm Resilience Institute on the degree to which we are now overshooting planetary boundaries—suggests that all is far from well with our world. As a result, we must revisit our assumptions as to what is going to move the needle on these huge, systemic challenges, all now feeding into what some call a “polycrisis.”

This conclusion drove me to issue the first-ever product recall for a management concept, the triple bottom line, back in 2019. At a time when the concept was enjoying considerable—and growing—success, the intention was to provoke a strategic rethink among practitioners. For example, is the concept’s adoption by over 8,000 B Corporations, to take today’s numbers, driving meaningful progress toward systemic change?

The recall was greeted, with few exceptions, in the spirit in which it was intended—though it was clear some people had no clue what a product recall is. As I knew from working auto-makers like Ford, Toyota and Volvo, a recall is not the end of the road for a product. Instead, it involves fixing a recently discovered problem before getting the product back into use.

Our subsequent rethink of the concept, as reported in my 2020 book Green Swans, concluded that the framework still works well—as long as it is not simply used in the context of corporate social responsibility. Rather, it must be seen in the wider context of market and wider societal resilience. Crucially, too, we argued that there must be an intensified focus on truly regenerative forms of capitalism, across the three main arenas of economic, social and environmental value creation.

One area to watch here is regenerative agriculture. A growing number of major corporations have announced commitments to invest in this area, including Walmart, PepsiCo, Unilever, Nestlé and Danone. Great, but public commitments do not guarantee real-world progress. So, we should keep a critical eye on how regenerative these regeneration efforts are proving to be.

Now It’s Structural

Sustainability champions increasingly talk of the need to move beyond incrementalist mindsets to the pursuit of systemic solutions. Still, an often-overlooked implication of this proposed shift is that truly effective solutions must be structural. Fundamentally, this means restructuring not just individual businesses but also, ultimately, the markets they serve.

Before we go there, however, consider some corporate-level experiments heading in related directions. The Ford Motor Company recently split itself into two distinct operating units—one (“Ford Blue”) focused on the company’s legacy business anchored around the internal combustion engine, while the second (“Ford Model E”) is configured to become a nimbler player in the electric vehicle market.

Ford Model E may be struggling currently, but the increasing urgency of such structural solutions to fundamentally structural challenges needs greater acknowledgement.

Nor is Ford alone in this space. Solvay, a Belgian multinational chemical company, is another pioneer which has gone structural. While its core business has doubled down on established product lines like soda ash, peroxides and specialty chemicals, Solvay has spun out a new venture, Syensqo, to focus on a range of “breakthrough” opportunities in such areas as renewable materials and green hydrogen. The interesting thing here is that the new venture already has revenues well ahead of the legacy business.

By the law of market averages, some such ventures will fail, or seriously under-perform. But history suggests that many incumbent businesses doubling down on business-as-usual—and on sustainability-as-usual—will ultimately feel the full force of Clayton Christensen’s “Innovator’s Dilemma.” New wine can burst old bottles.

On a more upbeat note, expect growing market impetus to come from far-sighted governments and policymakers. Recent examples include: the work of Singapore’s Economic Development Board (EDB) to attract green investors to the city state; the European Union’s “Green” Recovery Plan; and the relevant sections of the US Inflation Reduction Act (IRA).

Inevitably, there are vociferous skeptics, but experience shows that governments can—and indeed must—play a core catalytic role in national and regional economic restructurings. Think of the industrial reconfigurations of Asian countries like China, Japan and South Korea.

The central role of governments in successful economic restructurings is attracting growing attention from economists like Mariana Mazzucato, as in her book Mission Economy. That said, most mainstream economists still operate in a predominantly twentieth century paradigm, their livelihoods dependent on their privileging of profit over “non-financial” externalities.

JE with Artiphoria

Markets Wobble As Politicization Grows

Typically, the more exposed a company is to financial markets, the less independence of thought it is likely to be allowed when it comes to sustainability-directed transformations. So, where people might once have blamed the gods for their misadventures, these days business leaders tend to blame market realities—or political volatility—for their failure to deliver on publicly announced commitments in the sustainability space.

Think of Shell CEO Wael Sawan, following in BP’s wake, with his announcement of a lower ambition for his energy company’s climate targets; of Mercedes-Benz CEO Ola Kalenius throttling back on his company’s target of 100 per electric vehicles by 2030; and of Unilever CEO Hein Schumacher declaring that the FMCG giant’s long-vaunted sustainability goals had failed to deliver sufficient shareholder value—and dialling back on the speed and scale of change in some areas.

This should be no surprise. In fact, we should expect more companies to follow Nike’s model in pushing through a more-than-20 percent cutback in its sustainability team’s numbers, since described as a “sustainability bloodbath.”

Few things worth doing turn out to be as easy as most pioneers imagined. No doubt, the market travails of BlackRock CEO Larry Fink, who found himself embroiled in a furious anti-ESG storm, will be the focus of many future business school case studies. Standing back, it is evident that, even if Fink and BlackRock were correct in their analysis of the longer-term market trajectories, they misjudged the political consequences of the recent boom in market interest in ESG.

Clearly, there are few straight lines in human history. Nor is all this necessarily bad news for the future of sustainability. ESG itself is still far from a definitive concept, while the feeding frenzy that drove the launch of huge numbers of ESG investment funds was always going to fall foul of the sheer weight of this embryonic market’s internal contradictions.

Upwaves in societal pressure always peak. At the same time, however, some of the most interesting and fundamental work is done during the downwave periods that follow. Such down times are becoming shorter and shorter as the wider pressures for systemic change grow, but we still need the respite they can afford to reconsider and, where necessary, reboot.

No-one understanding the dynamics of such change waves would have been surprised by what some now dub the “ESG recession.” Such change agendas, if fully implemented, imply a huge surge in stranded assets. This is something that the Carbon Tracker Initiative has been warning about for years in respect of the global push toward decarbonization. As they argue, assets can be subject to economic, physical and regulatory forms of stranding. And asset owners who are slow to move will suffer.

Still, those appalled by the prospect of seeing their assets devalued tend to have several options. They can play nice, investing in future-proofing their businesses and assets. Or they can decide to play nasty, a pattern seen during all industrial disruptions. The resulting pushbacks may range from intensified counter-lobbying of politicians and governments right through to the ultimate sanction, with the assassination of key activists.

Across this spectrum, we are seeing the politicization of attempts to accelerate the installation of energy-efficient heat pump systems in Germany, and the ultimately effective protests by farmers and others against climate- and wildlife-focused agricultural reforms in the EU. All of this even before we get to undercover attempts by fossil fuel lobbyists to slow the inexorable—and accelerating—shift to radically different energy systems based on ever-cheaper renewable energy, batteries, smart grids, electric vehicles and AI.

Progress always triggers counter-measures from those economically or ideologically trapped in the old order. So, as the transition builds, expect growing tensions and climbing casualty rates, whether for humans or businesses. As a result, once again, there is a key role for governments in ensuring that the actual and potential victims of such transformations are compensated, or reskilled and re-employed, wherever possible. Orderly transitions in disrupted times are still rare, but farsighted governments can ease the pain—and cut the risks of political opposition stalling progress.

Market Redesign 101

So, why do we need to redesign markets for sustainability outcomes—and what is the role of business leaders in making this happen? To the first question, one reason for pursuing this track is that sustainability is still often seen as a discretionary agenda. A business leader may have a personal epiphany, be challenged by younger family members or by employees, or begin considering what sort of legacy they want to leave. But all this leaves their initiatives vulnerable to the Unilever or Mercedes calculus that sustainability, in current market conditions, is not rewarding shareholders.

We must become less dependent on the goodwill and good citizenship of individual business leaders, both of which can be fragile foundations for sustained commitment through periods of market and political disruption.

Indeed, if sustainability is to deliver on its implied promise, our understanding of what it means must also expand. It is no longer simply about transforming businesses, important thought that may be. Increasingly, too, it must be about transforming markets—to the point where necessary outcomes are secured by new market default settings. In the process, business leaders must be helped, like it or not, to move from the “Why would I?” mindset to “Why wouldn’t we?”

There is a growing number of examples where businesses are moving in the right direction, though currently they tend to be disproportionately concentrated in sectors like family-owned enterprises and cooperatives. We must also consider the critical roles—and huge footprints—of state-owned enterprises and sovereign wealth funds, particularly in sectors like fossil fuels production and processing.

Talk to most CSOs, meanwhile, and you find that they are increasingly happy to talk about business models but may be significantly less comfortable when it comes to discussing wider economic models. For that, it can be more productive to turn to the smaller number of Chief Economists in business. They include some of the most interesting—and provocative—thinkers in today’s private sector.

As Dow Chief Economist Rafael Cayuela told me recently, “sustainability is our biggest market failure—but solving these challenges is our biggest-ever market opportunity. We are seeing a phase change in key markets, where sustainability shifts from being considered simply as a cost, an additional set of constraints, to an increasingly powerful set of market drivers.”

The capitalist paradigm, in short, is shifting. As a result, the redesign of markets will be central to tomorrow’s sustainability agenda. One problem, though, is that market design is not yet a widely known discipline. Instead, most of today’s markets evolved rather than being consciously configured like a building or an aircraft. For those wanting to dig deeper, the evolutionary story of markets is wonderfully told by John McMillan’s in his book, Reinventing The Bazaar.

For a more recent exploration of the evolution of a specific market, that for refrigeration and the global cool chain, there is Nicola Twilley’s highly entertaining—and profoundly illuminating—book, Frostbite.

JE via Artiphoria

Critical issues in market redesign will include how to evolve both corporate and market transparency mechanisms. Al Gore and David Blood’s Generation Investment Management recently concluded that, “a global revolution in sustainability disclosure is under way. Regulators across the world are developing rules that will compel businesses to report on an unprecedented array of sustainability issues, including their greenhouse-gas emissions, as well as on climate-related risks and opportunities.” 

Happily, a growing range of platforms is now evolving to feed on the resulting data, in pursuit of strategically useful market intelligence. Paris-based EcoVadis, which I have been involved with since 2007, has grown from a few employees back then to over 1,700 today, tracking over 130,000 businesses worldwide. A race is now on between competing market intelligence platforms to control—even dominate—the resulting oceans of data, as I learned from Datamaran co-founder Marjella Lecourt-Alma.

Even more central to the market design challenge is shifting mindsets in the linked worlds of economics and finance. Financial markets may often have lagged the curve, but commodity markets are now acutely conscious of the potential global impact of natural phenomena like the El Niño-La Niña oscillation in the Pacific. Insurers and reinsurers are increasingly sensitive to climate-related risks. And as the inevitable rules and standards proliferate, the impact on key sectors like commercial aviation is causing growing concern across the sector.

On the upside, the scale of the market opportunities mentioned by Dow’s Rafael Cayuela is attracting growing attention from investors and businesses alike. Earlier in 2024, for example, Bloomberg forecast that ESG-linked markets could surpass $40 trillion by 2030.

Among other market forecasters I have interviewed is Rodolphe d’Arjuzon, co-founder of Verdantix, a market research agency.  At one stage, he joked that, “some business forecasts seem designed to make astrology look good!” Fine, but how does he then recommend that interested businesspeople make the best use of market forecasts? “The best way forward,” he replied, “is to look at a number of forecasts on the same area—perhaps as many as 25 for a really big investment—exploring their key assumptions, independence, focus on quality and the strength of the underlying methodologies, and then make up your own mind.”

Still, perhaps the most important early conversation I had on market design was with Richard Sandor, best known for his work on early sulfur emission markets and the Chicago Climate Exchange. I had hoped he would argue that market redesign is now a well-established discipline, well under way. But he did not. Instead, his parting shot on my desire to expand the scope of our work from brands, businesses and their supply chains to wider market dynamics was, “You’re on the right track! How can I help?”

JE with Artiphoria

Five Steps To A Giant Leap

Perhaps the most profound contributions to the future restructuring of our market economies will come from the radical evolution of economics, including concepts like gross national product and discounting. Intriguingly, Liliana Doganova’s insightful book, Discounting the Future, compares the impact of today’s discounting on the interests of future generations as akin to a team of All-Black rugby players (representing today’s priorities) tackling a bunch of three-years-olds (representing tomorrow’s).

None of that is any reason to accept today’s market realities as the capitalist gospel. Instead, business leaders—and leadership businesses—will increasingly adopt strategies that play into the disruption and transformation of the sustainability agenda itself. And, in that context, consider five possible stepping stones toward the impending giant leap.

1.        Think growth, not degrowth

It is fashionable in some wings of the sustainability movement to talk about “degrowth” strategies, which certainly have their place. But sustainability now needs to evolve from an inherently conservative, protective, agenda to one that promotes disruption and—in the right sectors—exponential growth. The work of RethinkX is instructive here, ranging from the electrification of automobility to the imminent boom in humanoid robots.

2.        Expand your ambitions and horizons

Anyone wanting to get a better sense of how all this might play out should take a “learning journey” to China, which is clearly committed to dominating the commanding heights of tomorrow’s economy. Their pro-growth mindset may not be driven by sustainability priorities, at least as we understand them, but their success means that the EU is now having to slap tariffs approaching 50 percent on imported Chinese cars. And they will still be cheaper than many EU offerings.

3.        Build critical mass

Rather than individual companies going it alone, or even combining forces in policy platforms like WBCSD, expect to see more new platforms aggregating sustainability-oriented market demand at ever-greater scales. Consider the Climate Group’s RE100 initiative, with over 400 corporate members committed to consuming 100 percent renewable electricity. Collectively they consume more power than France—and are closing the gap with Germany. In parallel, the Climate Group is building EV100, bringing together companies committed to switching their owned and contracted fleets to electric vehicles, and to installing charging infrastructure for employees and customers by 2030. [case awaits an imminent interview with Climate Group CEO Helen Clarkson.]

4.        Fast forward tomorrow’s markets

Among other market shaping tools, among them the systemic use of taxes, one powerful approach that must find wider application is that of advanced market (or purchasing) commitments. This has been pioneered in sectors like vaccine development (by initiatives like GAVI), in other areas of health care and in space programs. Such “demand-pull” mindsets can fast-forward tomorrow’s markets, bringing their priorities and demand into the present. Challenge prizes, as promoted by the XPRIZE Foundation and Conservation X Labs, can also serve a similar purpose. Taken together, such initiatives signal the way forward for business, markets and, ultimately, sustainability.

5.        Do the politics

For much of recent history, we have tried to keep corporations out of politics. Whether via campaign finance in countries like America, or in other ways, businesses have many ways of influencing politicians and policymakers. Think of the Big Tech folk, including Elon Musk, supporting Trump. Like a number of other politicians, he seems to be scrabbling around under streetlamp in reach of the keys to Make America Great Again.

In any event, and in another part of the forest, one counter-ploy we have been pursuing at Volans has been the use of trade and industry federations to do the dirty work behind the scenes. Our recent study with InfluenceMap for Unilever showed one path to tackling this challenge.

Meanwhile, even if some companies trying to engage in ESG-linked campaigns have been burned in the USA, most notably BlackRock, expanding the change focus from business to markets is now becoming a central political challenge. So, the next giant leap for the global sustainability movement will involve transforming markets to simultaneously drive decarbonization and economic, social and environmental regeneration.

JE via Artiphoria