With more and more of the world’s economy in the service sector and 80% of the U.S. Gross Domestic Product (GDP) in services, we have firmly entered a brain-based economy where corporations compete for talent to compete for customers. While the boss is still in charge, autocratic management styles are evaporating, replaced by a culture of consultation and participation. When this combines with pressure to diversify corporate boards, we are seeing an evolution away from good old boy organizational governance into a governance style more in tune with external political, social, and cultural influences. In the case of decarbonization, we are seeing a determined push by many companies to reduce their carbon footprint. According to Yusuf Khan of the Wall Street Journal:
“The pressure on companies to cut their carbon footprint is coming more from within the organizations themselves than from customers and regulators, according to a new report. Three-quarters of business leaders from across the Group of 20 nations said the push to invest in renewable energy is being driven mainly by their own corporate boards, with 77% of U.S. business leaders saying the pressure was extreme or significant, according to a new survey conducted by law firm Ashurst…The shift in sentiment comes as companies ramp up investment in renewable spending to meet their net-zero goals. Ashurst found that 71% of the more than 2,000 respondents to its survey had committed to a net-zero target, while 26% of respondents said their targets were under development. Ashurst also found that solar was the most popular method to decarbonize, with 72% of respondents currently investing in or committed to investing in the clean energy technology…Meanwhile, 81% of energy-sector respondents to the survey said they see investment in renewables as essential to the organization’s strategic growth.”
This reflects a paradigm shift dominated by the increased influence of talented young people who have always lived in the shadow of a planet stressed by environmental damage and focused on the threat of climate change. Unlike more complex environmental problems such as biodiversity loss and the spread of toxic chemicals, the causes and effects of climate change are well understood, and while its solution requires massive change, we understand what is required. Moreover, the technological fix to climate change not only reduces greenhouse gas pollution but also promises a lower cost and more reliable energy system.
Even as conservative politicos attack “woke” management, young professionals reject jobs from organizations that do not align with ESG (environmental, social, and governance) values. While not every worker is in high demand, it appears that those in the highest demand, with choice in the employment marketplace, assign a high value to organizational purpose. It is not that they reject the pursuit of profit but that they want more out of the organizations they work for. Many want the organizations they work for to make money while making the world a better place.
Moreover, technology enables organizations to pursue precision in a way that was not possible in the early and mid-twentieth century. Inexpensive communications coupled with inexpensive information and computation enable organizations to collect, analyze, and act on detailed indicators of organizational performance. Organizations can achieve their goals without destroying the planet or their neighbors. Ignoring waste, pollution, community impacts, and stakeholder perceptions is sloppy and evidence of an absence of organizational capacity. The practice of midnight dumping of toxic waste is made difficult in a world of drones, security cameras, and billions of video-enabled smartphones. Ignoring the views and needs of the local community is a bad neighbor policy that rarely ends well. Muscular macho management is being replaced by artificial intelligence-developed algorithms that enable organizations to precisely reach their goals instead of reaching objectives via the application of overwhelming and wasteful force. Management and organizational culture are changing and reflect the impact of new technologies and changes, such as greater gender equality, in the broader culture. Organizations that ignore ESG tend to be poorly managed.
Decarbonization is a very ambitious goal that will take a generation to accomplish, but resistance due to ingrained habit, laziness, or an unimaginative drive to recover sunk costs at any price is rejected by many young people. Here in New York City, new regulations are requiring large buildings to gradually decarbonize. Many buildings have begun this work, and others are simply punting and deciding to pay non-compliance penalties. In an interesting recent piece in the Wall Street Journal, Shane Shifflett reports on a renovation designed to retrofit an old building for energy efficiency. According to Shifflett:
“A nearly 100-year-old office building in New York City is undergoing a massive retrofitting to slash its emissions. The $35 million project could serve as a blueprint—or warning—for property owners around the country. The boiler in the basement of the 17-story building will be ripped out, along with the cast-iron radiators that wrap around each floor. In their place, heat pumps as big as oversize refrigerators will warm or cool water that is circulated in the building’s pipes to control temperatures through new radiators…Its owners are betting that the work will pay off. In addition to sharply reducing energy costs, they expect greener spaces will command higher rents. “We see the tenant demand, and there’s a tidal wave coming,” said Mike Izzo, an executive at Hines, a global real-estate investment manager and one of the building’s owners… [T]he firm expects the building’s revamped spaces to be in demand as companies look to shrink their carbon footprints. Average rents are 31% higher for buildings certified to conserve energy and meet other environmental standards than those without, according to a 2022 study by CBRE a commercial real estate services firm.”
This case is interesting for two reasons: First is the fact that this company is investing so much money to retrofit a building to enhance its sustainability because they expect the investment to pay off. Second is the 31% premium that green buildings command in the marketplace. While regulation is certainly a force driving this change, the need for energy efficiency and decarbonization is accepted as a fundamental fact of real estate’s future.
What we are seeing is the integration of ESG principles into standard business practice. It is driven by forces both external and internal to the organization, but it is the internal forces that provide transformational staying power to these changes. Instead of looking for ways to resist change, there is internal pressure on management to see ESG as an opportunity and take risks that enable the organization to profit from change. At the center of the opportunity are new technologies or the improvement of existing technologies. Heat pumps, solar cells, enhanced battery technologies, and a wide variety of new software and hardware are facilitating energy efficiency and decarbonization. Management is being pushed by their boards and by young staffers, and organizations are busy taking risks, changing practices, and enhancing ESG performance.
In addition to enhancing environmental performance, there is also a push to benefit the communities surrounding the organization and to promote diversity, equity, and inclusion. The key is to connect these efforts and those designed to improve environmental performance to the achievement of the organization’s financial goals. To the extent that these connections are not made, ESG becomes a symbolic organizational add-on: PR and greenwashing. ESG principles must be approached strategically and integrated into other elements of organizational performance, such as strategy, finance, marketing, talent acquisition, and performance measurement. They cannot be seen as self-justifying but must serve the organization’s overall objectives. This requires trade-off decisions that can be uncomfortable to those who see ESG as an end itself rather than as a means to an end.
The elected officials opposing ESG management tend to have little management experience and, when they do, are more interested in political gamesmanship than effective organizational management. It is ironic that the same folks who oppose regulation because it interferes with private sector decision-making believe they know enough to oppose basic business management and investment practices. Fortunately, the main response to the attack on ESG practices is not to end them but to conduct them out of the spotlight rather than call attention to them. Blackrock is investing in the “renewable energy transition,” not ESG. A little silly, but far from fatal.
Views and opinions expressed here are those of the authors, and do not necessarily reflect the official position of the Columbia Climate School, Earth Institute or Columbia University.
