The Greening the Economy - the Great Transformation
Ecology as the source of rejuvenating the economy sounds like squaring the circle. It certainly poses a great challenge. The aim is to cut, by the middle of this century, global CO2 emissions by half. This means that the "old" industrial centres will have to reduce their output of CO2 by 80 to 90 %. This is nothing short of a new industrial revolution. During the past 150 years, the enormous growth of industrial society has been based on the earth's fossil fuels: coal, oil, gas. This form of development has now reached its ecological limits - not because these resources are physically depleted but because the burning of these substances results in the emission of an enormous amount of carbon dioxide. Today we are faced with the challenge of having to shift, within a few decades, towards a sustainable mode of production. This mode must be based on efficient energy use, renewable energies, and closed production cycles.
Politics will have to set targets; we will need legal standards to guide market forces so that they move in a more ecological direction. However, such policy cannot replace entirely the creativity of a market economy with its millions of manufacturers and consumers acting independently. Businesses and consumers themselves must become actors for ecological innovation. How realistic is this?
Eco-capitalism - a contradiction in terms?
Karl Marx famously said: "Capitalism ruins the sources of the wealth on which it is based: labour and nature". This was an acute observation of a trend. Today, after one and a half centuries of capitalism, we have to add: Capitalism is a system with an enormous ability to learn and evolve. To date, it has managed to turn every crisis and opposition into an impetus for innovation.
In the 19th century, the labour movement emerged as a first historic response to the destructive trends of capitalism. Social democracy is its political expression. The project was the social civilisation of capitalism, the result of the struggle a wide network of institutions: trade unions, co-operatives, social insurances, vocational training, labour legislation, collective agreements, co-determination, etc. This led to a higher life expectancy and a better standard of living for the working classes. The increase of mass purchasing power was the basis for modern consumer society. To be sure, social containment of capitalism is a process which is subject to struggles that flare up and its results come under pressure again and again. Nevertheless, in defiance of all prophecies of doom, it still goes on even in the age of globalisation. In particular, in the newly industrialised countries, we see that levels of education and mass purchasing power are improving. Simultaneously, the demand for qualified labour and the significance of human capital for the economy are growing in line with the development of modern technologies and services.
We will have to wait and see if the result will be something similar to the social market economy. Yet, on a closer look, one will find many signs which indicate that the ecological modernisation of capitalism has already begun. If it is true that the race against the climate catastrophe leaves us with little time, we have no alternative.
The new system within the old
We are not speculating but taking a closer look at recent developments and actors that contribute to the ecological transformation of the economy. During the past two decades the number and political influence of organisations of civil society has grown significantly. In 1992 the number of non-governmental organisations registered with the UN was 1,400. By the time of the 2002 Johannesburg summit, the number had grown to 3,000. Today, NGOs are embedded in international networks and, in many countries, they have access to the media and political decision makers. With their ability to "scandalise," they act as sentinels vis-à-vis transnational companies.
Frequently, civil society organisations underestimate their influence on business. Reputation, which is at stake whenever companies become the target of an international campaign, is an important business factor - especially for businesses primarily active in the consumer field and with a brand name to lose. Sales and shareholder value are very sensitive to damages to the reputation. International campaigns like "Nestle kills babies", the Brent Spar campaign by Greenpeace, or the campaign against Nike sweat shops have forced companies to change their policies.
More and more, environmental risks - in particular the dependence upon fossil fuels - turn into economic risks. Simultaneously, the fact that prices for raw materials and energy will continue to rise in the long term forces us to manage resources ever more efficiently. A growing scarcity of and growing prices for CO2 emission rights will accelerate this process. This development undermines the business model of CO2 intensive businesses. An energy intensive business without a strategy for reducing its energy consumption and emissions risks a loss of goodwill.
A chain reaction may follow, if production fails at one point within the worldwide supply network - and such a chain reaction will have a major impact on sales and profit. For this reason, risk management systems for hazardous substances and production processes have become a standard in order to keep liability risks under control.
The rise of the green movement worldwide has led to the internationalisation of environmental protection. Ministries for the environment, emission limits, eco taxes, programmes like the law on renewable energies, environmental impact studies, and certification processes have contributed to a situation in which environmental technologies, alternative energies, and ecological services are a growing market which attracts capital and creates jobs.
Ecological services - a growing market
The current discussion about climate change demonstrates to even the most stubborn companies that they cannot continue ignoring global environmental issues. Those who do not move with the trend towards greater ecology will be punished by the market. The current crisis of the US automotive industry shows this quite clearly. This development causes a race of innovation towards a more efficient use of resources and towards products with better environmental compatibility. By an by all sectors of industry are beginning to participate in this race.
The actors are changing, too. A new generation of managers are trained to understand that "corporate social responsibility" and eco-management are integral components of their job. People such as current US Secretary of the Treasury Henry Paulson, who was simultaneously chairman of Goldman Sachs and president of The Nature Conservancy, one of the biggest US environmental organisations, need not remain an exception.
Especially in the USA - the home of private venture capital - we do see a green wave in businesses and finance. Last year alone, approximately 30 billion dollars were invested into alternative energies. "Green" investment funds are booming. This, too, shows that the next great wave of innovation will occur in the ecological sector.
A most interesting development is taking place in the finance markets. For over a decade now leading re-insurers have been allies in the struggle against global warming because the damage caused by hurricanes has reached astronomic levels. Others follow suit: Investors who need medium- and long-term stability for their capital, e.g. the big US pension funds, more and more take into account climate, ecological, and social criteria when making their decisions. Thus, they exercise growing pressure on companies and force them to deal with these issues.
Many of these changes are still in their initial phases. They alone will not bring on an ecological turnaround swiftly enough. Yet, they hint at new potentials, new alliances of actors which in the past were opponents rather than partners. In the US the Bush administration is currently subject to pressure from coalitions of environmental organisations and climate-conscious companies that demand binding targets and measures for reducing CO2 emissions. There, business leads politics and not vice versa. This explains, by the way, why CO2 emissions in the US went down in 2006 despite an economic growth of 3 % and despite the lack of action in Washington.
New alliances: "multi-stakeholder" initiatives
For the Harvard Business Review the growing co-operation between international companies and civil society organisations is one of "liberalization's unexpected consequences". Ninety companies with a total annual turnover of 400 billion dollars participate in Transparency International’s anti-corruption initiative PACI. The International Union for the Conservation of Nature advises major companies on investment projects and trains their staff. Dutch bank ABN Amro together with Accion International is developing micro-finance programmes for Latin America. BP co-operates with NGOs in India on a highly efficient small oven for private consumers in rural areas. The aim is to provide a substitute for the use of biomass as fuel, a practice that causes respiratory diseases. – All of the above are just a few examples.
The initiatives which aim at a co-operative regulation of markets are even more significant than co-operation agreements between individual companies and NGOs. The number of such initiatives is growing. They play a role wherever state regulation is not or not yet possible due to the lack of international agreements. They also exemplify a new quality in the co-operation between companies, civil society, and governments.
Under the Extractive Industry Transparency Initiative, for instance, market leaders in oil and gas, as well as governments, are co-operating with civil society organisations, investors, and development banks. The aim is to make transparent the flow of capital from oil and gas extraction. Companies, NGOs, and trade unions co-operate in the Ethical Trading Initiative and the Fair Labour Association in order to assure adherence to workplace standards set out by the International Labour Organisation (ILO). In the diamond industry, in recent years, the Kimberley Process has become known to a wider public through the term "blood diamonds". The introduction of a certification system for raw diamonds has led to significant improvements in this sector. The Forest Stewardship Council certifies wood and wood products from sustainable forestry; it now covers nearly 10 % of all commercial forests. Bulk buyers like the US DIY chain Home Depot and the publishing company Random House are among those using the label.
The finance market as seismograph
The attitude of institutional investors is critical for all internationally active companies. Since approximately the year 2000, sustainability indicators have been gaining greater significance in the rating of companies. Pension funds now hold that it is part of their "fiduciary duty" to consider sustainability criteria in order to reduce the risks of their clients. Last year, TIAA-CREF, the world’s largest pension fund, acted on this: It sold its Coca Cola shares (market value 52.4 million dollars) after it had transpired that the company had violated child protection, labour, and environmental standards.
Currently, the most successful co-operation of institutional investors is the Carbon Disclosure Project (CDP) which focuses on risk and climate. Since its founding in 2000, the CDP has grown from 25 to 211 investors and to date the volume of their assets is a remarkable 31 trillion dollars. The CDP regularly asks the world's 500 biggest listed companies to disclose their greenhouse gas emissions and their programmes to reduce them. Generally, the CDP has increased the pressure on stock market supervisors, management, and auditors to develop transparent reporting standards on climate risks.
What can, what must policy achieve?
New developments in business, new actors and alliances do not make state regulation obsolete. Policy has to provide the markets with ecological targets and an ecological framework. Companies need certainty as to what the targets of environmental policy are; they need guidelines as to how to invest; and they need truth about costs incurred by ecological investment. "The prices must tell the ecological truth" has to be the bottom line in an ecological market economy. Therefore, the most important levers of governmental policy for accelerating this transformation are:
- a shift in the tax and levy system from taxation of labour to taxation of resources
- further development and improved efficiency of the emission trading system, first on a European, then on a global level;
- binding targets for energy efficiency and renewable energies plus promotion of research and development
- more rights for consumers (information on the eco-balance of products and materials has to become compulsory, extended liability for health risks)
- international minimum standards for transparency, social rights, and environmental protection have to be codified in free trade and investment agreements
- more environmentally friendly technologies have to be transferred to developing countries in order to facilitate ecological economic growth.
Let us have no illusions: The projected growth of the world’s population to approximately 9.2 billion will of itself accelerate global economic growth. The decisive challenge will be to combine a growing volume of goods and services with a drastic reduction in the consumption of natural resources. In this we will not succeed without state and global policy frameworks. Yet, the ecological transformation of the market economy can not be achieved with a solely top-down approach. To deliver it has to be counter-balanced by a bottom-up ecological dynamic, one that includes eco-farmers and high-tech companies, inventors and investors, environmental organisations and enlightened consumers. It is the task of ecological policy to speed up this development.
Ralf Fücks is a member of the executive board of the Heinrich Böll Foundation since 1996. He is a regular contributor to numerous newspapers and political periodicals and co-author to numerous books.