Hello from London, where I’ve just attended the launch of Fortune’s new Europe edition. More on that in a moment. But first, let’s talk about the pressing problem of emissions.
A 7% reduction in global CO2 emissions per year, starting right now: That should be the target if we want to save the world from runaway climate change and put it on track for the “net zero” climate goals for 2050. This is the conclusion of Boston Consulting Group in a new report prepared for the Alliance of CEO Climate Leaders, a group of sustainability-minded CEOs by the World Economic Forum.
But even before the COP28 UN climate summit kicks off in Dubai later this month, it should be obvious that this goal won’t be achieved. For starters, global emissions are still rising, reaching a record high last year. Moreover, just a fifth of global carbon emissions are currently covered under national climate plans that have a goal of net zero by 2050 consistent with the 7% annual emissions drop.
This leaves companies with what looks like a prisoner’s dilemma: Do your fair share no matter what and hope that the rest will follow, even if you will probably be betrayed. Or opt out and ignore the global goals, as they are unlikely to be achieved by the global community anyway.
Not to be cynical, but the first option will not be the outcome of the Dubai gathering. It will be another talk shop on the road to global boiling, as the UN secretary-general now describes our era. And it feels like a classic tragedy of the commons in which everyone loses.
Yet there is another way forward. In economic literature, the prisoner’s dilemma assumes individual players have no agency over the process, just over their own actions, and that the outcome they face depends only on other players’ independent decisions. But in real life, that’s not the case. Companies can lobby each other and the governments that regulate them.
This has been the approach of many climate-oriented CEOs. A prime example is Holcim, the global construction materials company. The Swiss firm has historically been responsible for up to 0.4% of global greenhouse gas emissions. Globally, the built environment is responsible for 39% of emissions, split between emissions from construction and those of heating and cooling.
Under a new strategy adopted in 2020, Holcim has chosen the collaboration stance in the prisoner’s dilemma regardless of what others do. It adopted a “net zero” target, verified by the Science Based Targets initiative. As a result, the company will likely achieve 2-6% average emissions reductions in the coming years, in line with the 1.5-degree Celsius pathway.
To avoid the worst-case outcome of the prisoner’s dilemma, though, the company has hedged its bets. It seeks out fellow corporate climate leaders and sells them on its new CO2-light products. It’s how Amazon became a customer of Holcim’s “Ecopact” concrete, for example, for its new warehouses in Virginia.
But Holcim goes a step further, lobbying regulators to come on board. It has active discussions with regulators in the European Union, its chief sustainability officer, Nollaig Forrest, told me, to get them to adopt regulations favorable to other climate-oriented companies. (Forrest also joined me on stage in London last night to celebrate the launch of the Fortune 500 Europe.) And in the U.S., Holcim targets progressive states such as California to set a precedent in America too.
It’s a sensible strategy. Without such lobbying and coalitions, a climate-friendly strategy would most likely be penalized by the market instead. But collaborating in the fight against climate change can be effective even if the classic prisoner’s dilemma suggests otherwise.
Here is my new feature on Holcim, which comes in at No. 121 on the new Fortune 500 Europe, the first-ever list of the 500 biggest companies in Europe by revenue.
On a related note, you can now sign up for our new CEO Weekly Europe newsletter, which kicks off Nov. 29. In it, I’ll cover Europe’s largest companies and their quest to remain relevant in the 21st century global economy. As in the Holcim case, sustainability will likely be a big part of the narrative. If you like how that sounds, subscribe here.
More news below.
Peter Vanham
Executive Editor, Fortune
peter.vanham@fortune.com
This edition of Impact Report was edited by Holly Ojalvo.
ON OUR RADAR
Reader feedback: “The most unsustainable and inhumane industry on the planet” (INBOX)
Some readers didn’t appreciate last week’s newsletter edition, on the “green” plans of Elanco, a leading animal health care company. “Shame on Fortune for publishing the greenwashing propaganda from Jeff Simmons, the CEO of animal drug company Elanco,” one reader wrote. The company “profits massively on animal agriculture, the most unsustainable and inhumane industries [sic] on the planet.” Another agreed: “Are you blind to the massive conflict of interest here? Of course the CEO of Elanco is going to say we can eat as much meat as we want—his whole business depends on it.”
Our response: at Fortune, our job is to “report and reveal the stories that matter today—and that will matter even more tomorrow.” The 1 trillion-dollar global meat industry is a reality today, and as we noted, meat consumption is rising. Elanco plays a big role, so their track record and future plans matter. Some may like Elanco’s idea of working with farmers to reduce greenhouse gas emissions. Others may find it disingenuous. We’re here to provide context and hope business leaders will find it useful in their quest to make business better.
The true cause of ESG's rise and fall (The New Republic)
ESG didn't fall out of favor because of politics, Timothy Noah writes in this New Republic piece: "The real culprit was the revival of Big Oil." Noah argues that the rise of ESG in the early 2020s "reflected the reality that oil and gas stocks had over the previous decade become a seriously bad investment." But then Vladimir Putin invaded Ukraine, and everything changed. Oil prices rose and oil stocks became more attractive, Noah argues, and ESG investing lost its luster. Can it make a comeback? Not "when doing good ceases to be profitable, or even as profitable," Noah says.
My take: It's true that capitalism is essentially a market system based on value, not values. as we've written before. But ESG principles have staying power because of an enduring belief that they create better long-term value. Still, the problem with ESG for investing is that it measures metrics, not business models. It has led to things like Big Tech companies like Nvidia and Microsoft being the largest ESG stocks, although their business model has little to do with caring for the environment. I'd argue that this is the root of the problem of ESG.