In an editorial cartoon highlighted at a recent Cornell SC Johnson College of Business faculty panel, the sea level rises from knee to waist height as a businessman extols the beauty of free-market capitalism as a self-correcting force.
Asked how it self-corrects for climate change, the businessman, now shoulder-deep in water, replies: “By producing more lifeboats!”
Cathy Kling, Tisch University Professor in the Charles H. Dyson School of Applied Economics and Management, said the cartoon illustrates that while private markets may drive some adaptations to climate change, public policy intervention will be essential to addressing the global challenge.
“You cannot make the kinds of changes needed at the scale needed unless you have some form of policy intervention that really changes the incentive to private markets,” said Kling, citing a carbon tax and emissions trading as potential examples.
Kling kicked off the panel, March 6 in Warren Hall, of SC Johnson faculty discussing whether business practices are the cause of, or part of the solution to, environmental degradation and the climate crisis.
“What mechanisms do we have for a better alignment between business decision-makers, households, consumers and the public good?” asked Ravi Kanbur, a Dyson economics professor, and organizer and moderator of the panel. “What is the right balance between market and state in achieving this goal, and how quickly do we need to move to close the gap between private interest and public interest?”
Businesses already have strong incentives to address environmental issues, said Mark Milstein, professor of management and director of the Center for Sustainable Global Enterprise at the Samuel Curtis Johnson Graduate School of Management.
“It’s a question of competitiveness and value creation, plain and simple,” Milstein said. “When the science, the policy and cultural behaviors and attitudes are all heading in roughly the same direction, companies are going to pay attention to that.”
While policy may ultimately help hold laggards accountable, Milstein said, business leaders and local and regional governments are not waiting for federal action. Business students today, he said, “have got great opportunities to make this a central part of their careers and make change from the inside.”
Elena Belavina, associate professor in the School of Hotel Administration, said some food retailers are working proactively with supply chains to reduce food waste, which produces more global warming emissions each year than road transportation.
But individual households, not retailers, are the biggest contributors to the problem, she said. Belavina performed an analysis that found that more grocery stores in big cities would result in shoppers buying less food each visit and wasting less at home. In Chicago, for example, she found that adding three or four grocery stores within a roughly four-square-mile area could reduce food waste by 6% to 9%.
“Even very small increases in store density would have a huge impact,” Belavina said.
Markets have long punished companies responsible for polluting or environmental disasters, said Vicki Bogan, an associate professor in Dyson. But her recent research showed that markets reward firms with higher stock prices and valuations more for announcing environmentally friendly plans or policies than for actually delivering on them.
That, Bogan said, risks creating incentives for “greenwashing,” or creating a false perception of environmental concern and action. Like Kling, she believes policy interventions are needed to incentivize companies to look beyond short-term market gains.
“Beyond policies that focus on fines and penalties that are punishing firms and that are reflected in negative stock shocks,” Bogan said, “we need more proactive policies to push firms to make significant environmental improvements.”
Andrew Karolyi, a finance professor at Johnson and deputy dean of SC Johnson, said one promising development is a growing call for action by managers of large investment funds.
A recent example: BlackRock Inc., which manages more than $7 trillion in assets, announcing that sustainability would be a core consideration in its investment strategy moving forward.
“This is kind of new,” Karolyi said. “These are important players that haven’t been talking like this.”
Karolyi was an editor of a new special issue of The Review of Financial Studies, focused on climate finance, which selected nine research papers from more than 100 submissions. Summing up the findings, Karolyi said there is evidence that climate risks will have consequences for asset prices, but that evidence remains subtle and nuanced. Still, he is optimistic that influential change agents are beginning to demand action on climate solutions.
“Business has to be part of this equation, the asset management industry has to be part of the solution,” Karolyi said. “Just the sheer dimensionality of the problem is so big, it has to be there.”