Article
Reconciling capitalism and sustainability
Investors and business executives can find it difficult to reconcile capitalism with a more sustainable economy. The best solution may be to evolve capitalism’s aims and goals rather than repudiate them.
Being a capitalist who is committed to sustainability strikes many people as a form of cognitive dissonance. Stereotypes of rapacious industrialists and naive environmentalists still prevail in many quarters. How, then, can we reconcile what many see as such disparate and even contradictory world views?
It’s best to begin by exploring the role of capitalism in the modern world. At its core, capitalism is an economic system in which private actors—endowed with the freedom to choose—play the commanding role in determining how to best allocate resources. They do so by relying upon the open exchange of goods and services in (mostly) free and (tolerably) fair markets to balance supply and demand in a manner that best serves the self-interests of all those involved.
Under a capitalist system, mostly privately-owned capital assets, both tangible (factories, buildings, etc.) and intangible (intellectual property, equity, bonds, etc.) are leveraged to produce goods and services and to provide a rate of return to asset owners. It is therefore essential that this capital base is preserved and protected to generate both growth and future returns.
Like every other economic system, capitalism is fluid, imperfect and unfinished. It must continue to evolve as the needs and norms of society change. Much of what we now consider capital assets would have been unrecognizable to the founders of capitalism—as would the market mechanism for exchanging and valuing them. This adaptability is one of its great strengths.
Favored yet flawed
Favored yet flawed
While it possesses many strengths, capitalism also has its flaws. Natural and human resources have historically been undervalued, misused, and even abused due to a misalignment of incentives. Both have too often been viewed merely as an input into a productive process, rather than precious forms of a capital base that need to be preserved.
No successful capitalist would intentionally allow financial capital to be squandered frivolously on poorly planned projects, nor would they neglect to maintain and upgrade their industrial capacity. To do so would destroy franchise value and fatally compromise the long-term viability of their enterprise. That same standard of care must now be applied to natural and human capital.
In a recent study, McKinsey & Company estimated that financial capital (equity, debt, etc.) totals about USD 510 trillion globally, while real capital assets (buildings, machinery, etc.) amount to about USD 520 trillion.1,2 While it is notoriously difficult to value natural capital, the World Wildlife Federation estimates that it generates roughly USD 125 trillion in economic benefits every year.3 But this economic bounty is increasingly at risk. The World Bank cautions that the global economy could lose as much USD 2.7 trillion by 2030 if critical ecosystem services such as pollination, carbon storage and fish stocks continue to degrade.4
Trying to assign a monetary value to human capital is even more daunting, but it is huge—as are the consequences of allowing it to erode. In a study from 2017, Korn Ferry estimated that human capital represents a potential value of USD 1.2 quadrillion for the global economy—or about double the physical capital base.5 McKinsey projects that poor health reduces global GDP by about 15% each year, while the World Literacy Council pegs the cost of illiteracy to the global economy at roughly USD 1.2 trillion annually.6,7 No capitalist would be able to remain solvent for long were they to suffer such a sharp erosion in their capital base.
Conscious capitalism
Conscious capitalism
As we pointed out in our recently published whitepaper “The Rise of the Impact Economy,” capitalism cannot survive indefinitely if it focuses exclusively on the value of outputs while failing to fully account for the input costs required to generate those outputs.8
Yet for all its faults, capitalism has arguably been the greatest driver of rising living standards that the human race has ever seen. We don’t need to repudiate the capitalist economic system—we need to evolve it. In particular we should help participants better “internalize” the “externalities” of the economic decision-making process.
Capitalism has traditionally presumed that its participants are driven by the self-interested pursuits of accumulating material goods and wealth. To improve the system’s effectiveness, we need to broaden the concept of “self-interest” to include a sustainable environment, a diverse ecosystem, and a more equitable society. They are all integral to the smooth functioning of capitalism; without them, material goods would become worthless and wealth would rapidly dissipate.
Some within both the environmental and social justice communities believe the public sector must displace the private sector if any real progress is to be made. We disagree. Because while public policymakers will doubtlessly play an important role, any meaningful and sustainable progress will require the engagement of what Mackey and Sisodia refer to as “conscious capitalists”.9
What we need therefore is not “degrowth” and the repudiation of the capitalist economic system. But rather the foresight, patience, and willingness to promote the natural and necessary evolution of it.
Our future depends on it.
The author is grateful for feedback from: Paul Donovan, William Nicolle, Richard Mylles, Jackie Bauer, Richard Morrow
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