Climate change makes hard hitting regulations on businesses inevitable -- even if the direct effects don’t harm business– every second of delay makes it worse.

The argument that ‘fighting climate change will hurt the economy’ seems to overlook the fact that so will do nothing. This is one of the core issues when it comes to action on climate change whether this is from government or businesses perspective. It is essentially choosing between accepting the costs now or deferring them to a later point where they could have an even greater negative effect. The business as usual argument Yossi Sheffi, Professor of Engineering Systems at MIT and author of Balancing Green, believes that the issue is simply that businesses perform a cost-benefit analysis surrounding investing in sustainability today and most conclude that meaningful actions do not justify the costs. He says that he actively advises business who want to increase their ESG appeal, to find something they are already doing that is aligned and “PR the hell out of it”. He gives the example of McDonald’s recent ban on straws, which received a large amount of media attention and praise in spite of its minimal real impact. Yossi argues that if McDonald’s really wanted to become sustainable they would stop serving beef, which has a significantly bigger effect on the environment than its plastic usage. If that were to happen McDonald’s customers would be up in arms and flock to the plethora of competitors who still served beef. This is his fundamental point; business’s first obligation is to its customers. The sad truth is that no matter how vocal they are about sustainability, customers are not willing to forgo cheap prices and convenience for a lower environmental impact. Until we see a significant change in this area, Yossi argues, business will not change. While I disagree with Yossi’s view on companies implementing superficial strategies that are no more than glorified PR campaigns, I do think that companies need to adopt impactful strategies that also promote shareholder returns. The benefits of a significant sustainability strategy can be looked at from a risk mitigation standpoint. If the company has a culture of long-term value and good governance, they minimize their risks to large tangle losses in value due to controversy related events. Should CEOs care about sustainability? Winston’s counterpoint to Yossi, in terms of consumer retention, is one which has a more long-term focus and is centered on the two things that businesses compete to acquire: future customers and future employees. While customers now don’t seem to be willing to pay a premium for sustainability, it is plausible that in the future they will be. By not investing in clean business models today, are companies at risk of being punished by future customers? There is increasing social momentum, especially in the younger demographics, behind social sustainable movements such as “meat-free Monday”. The number of young people who consider themselves vegetarian is more than double that of older generations (figure). While these have little tangle effects now, they are an indicator that consumer tastes are shifting. Business would be naive to overlook them. We are also witnessing a fundamental difference in what younger generations expect from an employer. Employees increasingly seek an employer that is aligned with their belief and values, and not just the level of compensation. This is important given the “talent war” which US businesses are engaged in. With unemployment at record lows, it is increasingly more difficult to hire the top talent. One way in which business can gain an advantage is by aligning their values with those of their future employees. CEOs should shift from seeing these as mere side notes and realize that they are likely to be key profit drivers in the future. It’s about getting ahead of the curve There are numerous aspects to this crucial decision but I would like to focus on two which I think are important. The first is the issue of business executive compensation and tenure structure. This will aid understanding what drives executive decision making and might help explain the relative lack of progress in any significant way on this issue. Executives are compensated highly for their role in a business’s strategy and decision-making process, often raking in millions of dollars in bonuses. However, their tenure in charge, and benefiting from this compensation, is usually short. According to Harvard’s school on Corporate Governance and Financial Regulation, the median CEO tenure in large-cap companies was 5 years in 2017. This short amount of time to personally capitalize on the position, combined with how bonuses are often judged against financial return levels, could explain why companies are not implementing widespread meaningful initiatives. The second aspect I would like to discuss is the likelihood of underestimating the cost of regulation down the road. The longer it takes before meaningful regulations are implemented, the harsher the terms of those regulations need to be in order to have the necessary impact. This affects both governments and businesses, politicians and CEOs. In terms of government, the further down the line they push implementing regulations, the stricter those regulations are going to need to be. The more time that passes, the further we move away from where we need to be and the larger the pull needed to bring us back. This is not a great prospect for future politicians who tend to incur larger public backlash the larger the inconvenience they impose. From a business perspective, the longer a company defers its sustainable transformation the more drastic it is likely to be when the harsh regulations are eventually implemented. It would make more sense to get out in front of the curve, implement a transformative policy now when there is less corporate inertia to overcome and the costs are comparatively lower. If companies are truly serious about maximising long-term shareholder value, they should consider reevaluating how their executives are compensated. A shift to prioritizing long term value, lowering the costs of transformation and minimizing the impacts of future regulation by taking the initiative today should be incentivized.