#27: Investing in Green Companies Will Not Produce a Green Economy

This week’s post builds on a concept from last week’s – the idea that a green economy cannot be achieved by investing in green companies. New investment strategies are needed for driving system change. SCI fills this gap.

Why Investing in Green Companies Is Not Enough

For over 30 years, investments in green companies (e.g. sustainable energy, agriculture, materials, transport, etc.) have been an important type of responsible investing. More recently, as awareness of the need for system change rose, a growing number of asset managers are using this type of investment to drive system change.

Investing in green companies often benefits investors and society. Shifting the capital markets from investments in brown (i.e. harmful) to green (i.e. sustainable) companies is a form of system change. But this investment strategy does not adequately address root causes, and therefore cannot produce a green economy.

A key question is, why does a brown economy exist? Investing in brown companies contributes to it. But this is not the root cause. Reductionistic economic and political systems often make brown investments appear to be more profitable, and thereby create a brown economy.

These systems compel companies to harm the environment and society. They are the root causes of climate change and other SDG problems. Very generally speaking, under current systems, companies only can profitably mitigate about 20 percent of total negative impacts (i.e. short-term, long-term, tangible, intangible, environmental, social). Mitigation beyond this point usually increases costs and ultimately puts companies out of business.

Many specific system flaws compel companies to harm the environment and society (e.g. externalities, limited liability, time value of money, overemphasizing economic growth). These could be rolled up into one overarching system flaw – the failure to hold companies fully responsible for harm.

Current systems are based on voluntary corporate responsibility. As shown over the past hundred plus years, this approach cannot work. Beyond a certain point, voluntary corporate responsibility equals voluntary corporate suicide.

Failing to hold companies fully responsible allows them to externalize negative impacts onto society. This inhibits green products and processes by creating the illusion that brown ones are cheaper and more profitable. This is an illusion because customers actually are paying more for brown products.

For example, burning fossil fuels imposes extensive negative impacts on society, including climate change, respiratory illness, and mercury poisoning. Citizens pay for these costs through higher taxes, health insurance rates and other fees, as well as through reduced quality of life. Investing in green companies cannot create a green economy because it does not adequately drive necessary systemic changes. As long as system flaws make investing in brown companies more profitable, many investors will invest in them and perpetuate the brown economy.

To illustrate how failing to hold companies responsible creates a brown economy, the US electric power energy mix includes 60% fossil fuels and 15% non-hydro renewables (mainly wind and solar). If fossil fuel companies were held responsible for the negative impacts they impose on society, renewables would be a much higher percentage.

The Meta System Change Solution

The meta system flaw is the failure to hold companies fully responsible. Therefore, the meta solution is to hold them fully responsible (i.e. mandatory corporate responsibility). This framing boils system change down to one simple, easily understood, compelling concept. Companies cannot logically argue that they should be allowed to profit by harming the environment and society.

While this meta system change solution is easy to understand, it could be difficult to implement. Traditionally, vested interests fought strongly to protect systems that allow them to profit by harming the environment and society. Business and political leaders often prospered for their entire careers under current systems. It frequently is difficult to see how flawed systems could be changed, as it was difficult for slave-owners 200 years ago in the southern US to imagine how slavery could end.

Yet times are changing. Economic and political systems that continuously harm the environment and society obvious will not last. This might not have been relevant for companies and investors 20 or more years ago. But it is today. Rapidly growing environmental, social, economic and political problems severely threaten business and society. Cumulative negative impacts inevitably will drive system change.

If we do not voluntarily change flawed systems, they will involuntarily change (i.e. collapse). This change has begun. Unprecedented political, social and other turmoil show that we are in the midst of rapid system change.

Voluntarily changing systems in a timely manner (i.e. before they collapse further) is perhaps the most complex challenge facing humanity. No one has all the answers. No segment of society has the power to drive voluntary system change on its own. However, the corporate and financial sectors have the power and resources needed to initiate and drive collaborative system change.

How SCI Drives System Change

System change overall is immensely complex. But SCI is relatively simple. It does not seek to drive system change directly. Instead, it assesses and rates corporate efforts to drive it. The goal is to powerfully incentivize the corporate and financial sectors to drive collaborative system change. In this sense, SCI is a form of indirect system change.

SCI uses investing to address the system flaws that create a brown economy. Sustainable systems will internalize costs and provide accurate prices. This often will make green companies and products the low-cost, highest-profit options. This in turn will greatly accelerate capital market investments in green companies. By addressing root causes, SCI bridges the system change investment gap to a green economy.

For more information, visit our website SystemChangeInvesting.com or contact us directly.