Al Gore and David Blood discuss capitalism and sustainability and argue that sustainable economic development requires mechanisms to ensure that businesses fully internalize the social and economic costs they bring about. One mechanism to force businesses to internalize costs is government policy, but an emerging factor is consumer preferences for sustainable business practices:
For People and Planet, by Al Gore and David Blood, Commentary, WSJ: Capitalism and sustainability are deeply and increasingly interrelated. After all, our economic activity is based on the use of natural and human resources. Not until we more broadly "price in" the external costs of investment decisions across all sectors will we have a sustainable economy and society. ... Our current system for accounting was principally established in the 1930s by Lord Keynes and the creation of "national accounts" ...
While this system was precise in its ability to account for capital goods, it was imprecise in its ability to account for natural and human resources because it assumed them to be limitless. This, in part, explains why our current model of economic development is hard-wired to externalize ... costs...
Externalities are costs created by industry but paid for by society. For example, pollution is an externality which is sometimes taxed by government in order to make the entity responsible "internalize" the full costs of production. Over the past century, companies have been rewarded financially for maximizing externalities in order to minimize costs.
Today, the global context for business is clearly changing. ... and we think ... financial markets have a significant opportunity to chart the way forward. ... The interests of shareholders, over time, will be best served by companies that maximize their financial performance by strategically managing their economic, social, environmental and ethical performance. This is increasingly true as we confront the limits of our ecological system ... The "polluter pays" principle is just one example of how companies can be held accountable for the full costs of doing business. Now, more than ever, factors beyond the scope of Keynes's national accounts are directly affecting a company's ability to generate revenues, manage risks, and sustain competitive advantage. There are many examples of the growing acceptance of this view.
In the corporate sector, companies like General Electric are designing products to enable their clients to compete in a carbon-constrained world. ... Whole Foods and others are addressing the demand for quality food by sourcing local and organic produce. Importantly, the business response is about making money for shareholders, not altruism.
In the nongovernmental sector, organizations such as World Resources Institute, Transparency International, the Coalition for Environmentally Responsible Economies (Ceres) and AccountAbility are helping companies explore how best to align corporate responsibility with business strategy.
Over the past five years we have seen markets begin to incorporate the external cost of carbon dioxide emissions. This is happening through pricing mechanisms (price per ton of carbon dioxide) and government-supported trading platforms such as the European Union Emissions Trading Scheme in Europe. Even without a regulatory framework in the U.S., voluntary markets are emerging, such as the Chicago Climate Exchange and state-level initiatives such as the Regional Greenhouse Gas Initiative...
The investment community has also started to respond. For example, the Enhanced Analytics Initiative, an international collaboration between asset owners and managers, encourages investment research that considers the impact of extra-financial issues on long-term company performance. The Equator Principles, designed to help financial institutions manage environmental and social risk in project financing, have now been adopted by 40 banks which arrange over 75% of the world's project loans. In addition, the rise in shareholder activism and the growing debate on fiduciary responsibility, governance legislation and reporting requirements ... indicate the mainstream incorporation of sustainability concerns.
While we are seeing evidence of leading public companies adopting sustainable business practices in developed markets, there is still a long way to go to make sustainability fully integrated and therefore truly mainstream. A short-term focus still pervades both corporate and investment communities, which hinders long-term value creation.
As some have said, "We are operating the Earth like it's a business in liquidation." More mechanisms to incorporate environmental and social externalities will be needed to enable capital markets to achieve their intended purpose -- to consistently allocate capital to its highest and best use for the good of the people and the planet.
Mr. Gore, a former vice president of the United States, is chairman of Generation Investment Management. Mr. Blood, formerly head of Goldman Sachs Asset Management, is managing partner of Generation Investment Management, which he co-founded with Mr. Gore.
One note. I would have mentioned Simon Kuznets when discussing development of national income accounts, and noted that economists weren't always the obstacle in developing better measures of well-being:
EconLib: Simon Kuznets: In the late forties, however, [Kuznets] broke with the Commerce Department over its refusal to use GNP as a measure of economic well-being. He had wanted the department to measure the value of unpaid housework because this was an important component of production. The department refused, and still does.
