This article first appeared in Forum, The Edge Malaysia Weekly on August 12, 2024 - August 18, 2024

Here’s an iconic corporate story. In a bid to boost its green credentials, a corporate giant launched a “Go Green” initiative, complete with a grand ceremony. Employees were handed ­reusable water bottles and bamboo cutlery, all wrapped in layers of fancy plastic packaging. The highlight was the CEO’s speech, delivered via a video conference from his private jet, emphasising the importance of reducing carbon footprints. As the event concluded, the lights in the office were left on overnight, and the recycling bins were emptied into the general trash. One employee quipped: “Our sustainability efforts are like a diet soda with a double cheeseburger.”

If that sounds like circling around the truth, it is. But what it isn’t is the concept of the circular economy. That’s a model of production and consumption that aims to minimise the use of natural resources, cut waste and reduce carbon emissions.

It is based on three principles. One, design products and processes that do not generate harmful or polluting materials. Two, keep the products in use for as long as possible, by repairing, recycling and repurposing. Three, take steps to reinvigorate nature by restoring and enhancing natural systems and resources.

Why bother at all? Because the circular economy could generate US$4.5 trillion of additional economic output by 2030, according to a study by Accenture. “Current business practices will contribute to a global gap of eight billion tonnes between the supply and demand of natural resources by 2030,” Accenture estimated in a book, Waste to Wealth, published in 2015. “This is equal to the total resource usage in North America in 2014 and translates into US$4.5 trillion of lost economic growth by 2030 — and as much as US$25 trillion by 2050.”

Those are indeed staggering numbers. But then, a circular economy is an alternative to the traditional linear economy, where we grab resources, make products, consume them and discard them. This gobbles up finite raw materials and produces vast quantities of waste. There is now enormous pressure on companies to be environment-friendly. Those that don’t heed this call risk losing customers and reputation. No wonder circular economy-based products and services are top-of-mind on both regulators and enlightened consumers.

Gartner predicts that by 2026, some 60% of global enterprises will drive profitable growth through circular supply chain practices. However, the path to profitability won’t be easy and supply chain managers will need to adjust their strategies to succeed in the new ecosystem.

“As CEOs reset their long-term strategies, environmental sustainability remains one of the leading factors that will frame competition,” says Kristin Moyer, a distinguished Gartner vice-president. “Despite much corporate greenwash, recent economic conditions could have triggered a reversion to ESG (environmental, social and governance) cynicism and a refocus on profit at all costs. However, the commitment of CEOs is necessary.”

Gartner polled 400 CEOs and senior business executives across the world and found that sustainability consistently remains a top 10 business priority, surpassing even productivity and efficiency. “Leaders and investors know environmentally cavalier corporate behaviour is a mid- to long-term risk to business results, with a big price to be paid when environmental factors are ignored as externalities,” Moyer says. “However, smart CEOs realise big sustainability challenges can create new areas of business opportunity.”

Why bother? Because companies that are perceived to be greenwashing suffer about 1.34% drop in their customer satisfaction score. “This number is economically significant,” the Harvard Business Review reported in June 2022. “Prior studies have found that even small changes in a firm’s customer satisfaction score can have significant implications for corporate performance. A change of merely one unit in customer satisfaction could result in 0.032 units of change in net earnings per share and 0.40 units of change in return on investment (ROI).”

Why then do companies resort to greenwashing? Managers may be unable to implement the necessary changes, or are incompetent, or they may lack the resources, or they may be intentionally overstating their environmental credentials. Ambitious and unattainable goals may also serve corporate executives’ agendas, rather than the interests of the corporation.

The crux? Despite the bombardment of green messaging, customers can’t know or understand exactly why companies fail to implement their environmental goals. “That’s why they look at corporate environmental commitments with scepticism and have a hard time trusting companies to act in the best interests of society,” HBR reported. “Customers may be willing to forgive companies that tried and legitimately failed to implement their goals. But customers might also be less forgiving towards companies that attempted to cheat their way by exaggerating their credentials.”

The worry? Multiple climate tipping points could be triggered if global temperature rises beyond 1.5°C above pre-industrial levels, according to a new analysis published in the journal, Science. Even at current levels of global heating, the world is already at risk of triggering five dangerous climate tipping points. The risks increase with each tenth of a degree of further warming. An international research team synthesised evidence for tipping points, their temperature thresholds, timescales and impacts from a comprehensive review of over 200 papers published since 2008, when climate tipping points were first rigorously defined.

Is net zero the answer? Net zero is an ideal state where the amount of greenhouse gases released into earth’s atmosphere is balanced by the amount of GHGs removed. Decarbonisation efforts are needed to reach net zero. So how can investors leverage their capital and influence to reverse the impact of climate change? Bruce Usher, a professor of professional practice at Columbia Business School, and author of the book, Investing in the Era of Climate Change, says we have 30 years to rebuild the global economy that we spent the last 300 years creating.

“That’s going to require extraordinary amounts of investment capital — from US$100 trillion to US$150 trillion,” he was quoted in an interview by McKinsey & Company. “The actions that investors take over the next few decades are going to change the planet. They’re going to remake that global economy and reduce emissions to meet those science-based targets. How they go about doing that, how quickly that capital is invested and how effectively it’s invested is going to make all the difference in terms of allowing us to avoid catastrophic climate change. The reality is that mobilising and investing that capital is a significant challenge. In the context of many of the other great challenges that society faces, we have at hand the ability to solve this one.”

Could the rapid uptake of artificial intelligence (AI) move the needle on sustainability? As more businesses make sustainability a core part of their strategy, they learn that timely and trusted data is the lifeblood of sustainability efforts. This data provides could provide visibility into operations and indicate how well sustainability targets are being met. AI can help sustainability insights by helping leaders make informed decisions in real time.

“However, for maximum benefit to be derived from AI automation, sustainability data and metrics need to be embedded in operations, processes and workflows,” advises IBM IBV (Institute for Business Value). “Through these data-enabled actions, sustainability strategies can be brought to life. In fact, 46% of executives view AI as important for advancing their organisation’s reporting and performance efforts. And 77% of CEOs pursuing transformational sustainability expect workflows throughout their operations to be digitised and to leverage AI automation by 2025.”

The bottom line: companies with more mature sustainability data capabilities could outperform their peers in many key areas. “For example, these outperformers have a 5% better ROI on shareholder investment, and a 10% higher annual rate of revenue growth,” IBM IBV notes. “These leaders are also 43% more likely to outperform peers on profitability and are 52% more likely to attribute a very great impact of ESG efforts on profitability.”

Since we started with an iconic anecdote, let’s end with an ironic one. To showcase its commitment to the environment, a large corporation decided to host an “Eco-Friendly Week” and encouraged employees to bike to work, offering free parking for bicycles. However, the company also scheduled a mandatory team-building retreat at a luxury resort, requiring everyone to drive hundreds of miles. The irony peaked when the CEO arrived at the resort in a petrol-guzzling SUV, only to give a speech about reducing emissions. “Our eco-friendly efforts are like a salad at a fast-food joint,” an employee joked. “Nice in theory, but completely out of place.”

Raju Chellam is editor in chief of the AI Ethics & Governance Body of Knowledge and chair of Cloud & Data Standards, Singapore.

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