Climate Change is Heating Up the Global Business World

Things are heating up—and not in a good way. 

According to the United Nations, our planet is about 1.2°C (i.e., 2.7°F) warmer than in 1850 (before the Industrial Revolution). 2023 was the warmest year so far; every incremental uptick of the thermometer increases the threat of greater weather extremes. Experts believe an increase above 1.5°C will result in severe environmental impacts “larger than the world as a whole [is] willing to accept,” including more extreme weather events, rising sea levels, and increasing extinctions.

The climate crisis is a global emergency that affects every country and every citizen. In response, the international community enacted a legally binding treaty—the Paris Agreement—in December 2015. Members of the Agreement, which includes 194 states and the European Union, promise to cut greenhouse gas emissions, periodically assess progress, and help finance the climate efforts of developing countries. The goal is to restrict global warming to well below a 2°C increase, preferably capping the temperature change at 1.5°C above pre-industrial levels.

As governments worldwide rein in the use of fossil fuels, how can international business leaders address climate change requirements, meet shareholders’ profit demands, and satisfy the larger community’s sustainability expectations?

We sat down with Kenneth Pucker, sustainability, fashion, and ESG (Environment, Sustainability, and Governance) expert and professor of the practice in the online Master of Global Business Administration (GBA) at The Fletcher School at Tufts University. We discussed how sustainability, ESG, and businesses’ bottom lines collide with the expanding global warming crisis.

Pucker is an accomplished writer, with articles appearing in the Stanford Social Innovation Review, Institutional Investor and the Harvard Business Review. Prior to his professorship at Tufts, he worked at Timberland, serving as chief operating officer from 2000 to 2007.

You have written extensively on ESG (Environmental, Social, and Governance) investing, and how it doesn’t put us on the road to a sustainable planet. What is ESG and how does it miss the mark?

ESG is a term that first appeared in 2004 in a UN report called “Who Cares Wins” that emerged out of the Global Compact. It was a report authored by close to 20 investment firms that were asked by Kofi Annan, former secretary-general of the United Nations, to come together to try to develop ways to contribute to the sustainability effort and the challenges the globe was facing. 

The term remained dormant for about a decade, and it wasn’t until 2015-16 that several academic papers highlighted correlations between equity returns (stock prices going up) and companies that performed well on sustainability. Those papers were then publicized by the asset management industry, and a new product was created: ESG public equity funds. ESG funds became so popular that companies adopted the vernacular. So, instead of calling their report “sustainability reports” or “responsibility reports,” many companies began calling them “ESG reports” to match investor demand. 

That said, ESG is essentially an investing strategy. Firms (such as MSCI) started rating companies based on their “ESG-ness”. How do they rate companies? High-ESG companies are the ones that are well positioned to address risks from changes in the regulatory environment or natural disasters resulting from climate change. As a result, you could find that a company like JP Morgan would be highly rated (on ESG) because it is well positioned to deal with climate risks, but, at the same time, they are consequential financiers of fossil fuels. But most investors wouldn’t have known that because they assume that ESG ratings equate to corporate sustainability.

“ESG ratings in the United States are based on ‘single materiality,’ which means the impact of the planet on the company, not the impact of the company on the planet.”

Another painful detail is that ESG rankings are done vertically by industry. To get the highest score—AAA—you must be the best in your space. So, for example, Exxon can be a AAA-rated company because it’s being compared to Chevron and BP, not to battery manufacturers or solar panel companies.

As a result, if one were to review the prospectus of an ESG fund, you’ll see that the top stocks invested in are pretty much the same as a conventional fund: Google, Facebook, Apple, and JPMorgan Chase. An investor might rightly question, Wait a minute… Are these all highly responsible companies? The answer is no. They’re highly rated ESG companies and there’s a difference. 

One more detail. Most people investing in an ESG fund think they’re buying something responsible that’s going to help the planet and deliver returns, because of those academic reports I mentioned before. Two things. One, those academic reports have been debunked. A colleague of mine, Andy King, has done replication studies to demonstrate that they’re not valid. 

In addition, when you’re buying a fund that’s a collection of ESG highly rated stocks, you’re buying a stock that I’m selling, right? We’re transferring securities. Nothing changes in terms of the company; it doesn’t get any additional capital. 

“The whole exercise is pretty much a charade.“

With ESG funds, investors are not getting what they think they are getting and, when one transfers shares with someone a counterparty, there’s no planetary impact. And yet the notion that ESG investing delivers positive impact is perpetuated by academics who stand to gain from consulting with asset management firms, and asset management firms win because fees on ESG funds are typically 40 percent higher than on conventional funds. 

“But investors don’t win, because ESG funds don’t generate higher returns (in fact, they generate lower returns because of the higher fees) and the planet doesn’t benefit. So, it’s a sad dance.”

What are the alternatives to ESG? How can businesses commit to fulfilling their obligations to environmental, social and governance responsibilities and their bottom line? 

I wrote a paper with professor Andy King that tried to answer this question published in the Stanford Social Innovation Review; it focused on the perils of win-win solutions. For years, a group of academics has been pedaling different win-win solutions, including: creating shared value, fortune at the base of the pyramid, eco-efficiency, circularity, ESG. They typically come and go in five-year cycles. 

These win-win strategies are based in truth. Meaning, you can find examples of companies that create shared value or that create circular business models, but they’re not extensible. These strategies provide hope that we can solve for a sustainable future without regulation because they posit that investors care about the environment, or consumers care about carbon emissions, or companies that are responsible make more money. These things can manifest in specific episodes, but that does not make them empirically accurate.

An excellent Wall Street Journal editorial from 2010 that I refer to regularly by a professor from Michigan named Aneel Karnani called “The Case Against Corporate Social Responsibility” summarized this well:

“Very simply, in cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant. Companies that simply do everything they can to boost profits will end up increasing social welfare. In circumstances where profits and social welfare are in direct opposition, an appeal to corporate social responsibility will almost always be ineffective because executives are unlikely to act voluntarily in the public interest against shareholder interest.” 

I think there are circumstances where sustainable practice can lead to win-win outcomes, as Karnani says—when there’s alignment. Right now, for example, solar and wind primary energy are cheaper than fossil fuels. And so renewable energy will continue to grow. 

But one of your articles said it’s just not moving quick enough to close the gap, right?

As but one example, the United States is committed in the Paris Climate Accords to reduce its carbon footprint by 42 percent from a 2005 base. The U.S. is going to come close. 

China is, however, more complicated. They’re installing more solar than the rest of the world combined and are committed to a massive increase in nuclear energy. The problem is that China is growing quickly. As they’re growing non-fossil-fuel energy, they’re also adding coal plants. And that’s why it’s hard to affect this change at the rate that’s required.

“The world has to decarbonize at a rate of probably 7 or 8 percent a year.“

The only times in that last 200 years that carbon emissions have gone down year-on-year were during the pandemic and during the 2008-2009 global recession. And yet, humanity must decarbonize by approximately 8 percent a year.

Decarbonization will happen. It’s just that it’s happening too slowly, and, as a result, temperatures are going up. Companies have a role to play, and there are win-wins. There are great illustrations of companies that go above and beyond what Karnani was saying.

But, in general, the rules of the system are such that if you’re an executive of a publicly traded company, every 90 days you report to your investors and they’re more concerned about What are your gross margins? What’s your cash flow growth? than they are about water intensity and your carbon emissions. That’s the system we live in.

And so, if you expect behavior to change within that system because a survey tells you that Gen Z cares about sustainability… well, you know, buyer beware.

What are the downsides of regulation?

There are unintended side effects of regulation. A good example of that is public housing. In San Francisco, they tried to provide housing and stipends to the homeless—and it didn’t work.

They spent $100 million and homelessness went up. Why? One of the reasons was other homeless people found out these stipends were available and they moved to San Francisco. So, regulation or policy or legislation doesn’t always have its intended impact.

If you look at the options which we have to decarbonize, the biggest actors that can drive change are consumers, companies, investors, and policy. There are others, there are NGOs, there’s media, there’s lots of others. I don’t believe, after years of trying to figure this out, that investors, consumers, or companies, on their own, have either enough information or incentive to make this happen. Therefore, we need policy and new rules to address market failure and externalities.

You’ve written a scathing review of the fashion industry’s failed attempt to become more sustainable. What other industries are heavy emitters of carbon?

The big ones are transportation, agriculture, buildings and industry. By industry, I mean heavy industry: steel, chemicals, aluminum, those kinds of products. And the rate of progress against each of these different four buckets is different by continent.

In the US, for example, we are making real progress on electrification, which will help with home heating, transportation. It’ll make a big difference. Agriculture and heavy industry will be harder to decarbonize. 

And you think, Wait a minute, what is agriculture? Why are there emissions associated with agriculture? Well, cows’ burping methane is one—that’s not small. Therefore, beef consumption is a big problem. It’s also enormously land-consumptive. Oftentimes you have to cut down trees to allow for grazing, which gets rid of an emission sink. And then, in agriculture, you’re using machinery that’s often diesel-powered. There are lots of emissions associated with just regular agriculture. 

And then heavy industry, that’s probably 10 percent of emissions— steel, cement, aluminum. There are now promising technologies at hand, but not as demonstrably cost-effective as solar and wind are compared to traditional. But it’s going to happen. There are promising innovations to reduce emissions in these spaces, but it’s expensive and it will take time.

Before becoming a college professor, you were COO at Timberland. How do companies like Timberland and Patagonia successfully conduct business in a way that serves not only their shareholders but also other stakeholders (such as employees and local communities)? Do companies need to sacrifice profit to be good environmental stewards?

Patagonia is a different case. They’ve set up the company in a special non-profit trust. It’s not a traditional, private company that’s owned by a family. It’s now its own unique case where it’s set up as a trust and all the profits are donated into environmental causes. It is a wonderful outlier.

There are very few companies that have actually earned a brand that’s based on environmental stewardship and responsibility like Patagonia, so people will pay a premium for the brand. It’s very hard for a company that didn’t start out that way to engender environmental trust. For example, if you ask people about Timberland now, consumers will say, Oh, outdoor durable rugged quality boots, but they likely would not call the company an environmental leader. Even if the company does great sustainability work, consumers wouldn’t say it because that’s not what the brand is known for.

I would just say the magic of sustainability in Timberland’s case (and I can’t speak to Patagonia) wasn’t its ability to convince consumers that it was a responsible enterprise, because I don’t think most consumers were aware of our sustainability work. It wasn’t convincing investors to believe in the value of our sustainable progress. It was to create a values-rich purposeful environment that attracted and retained a higher caliber of employee than a company of our size should have been able to recruit. So when I was there we were a billion-a-half-dollar company and the team that we were able to assemble was extraordinary. And if you ask me to prove it, I couldn’t. That’s how I feel, but I can’t demonstrate it. 

“A lot of sustainability benefits are intangible and hard to pin down.”

How does your course, Sustainable Business Dynamics, prepare students for the future of business and sustainability?

I teach a discipline that emerged at MIT called Systems Dynamics. Donella Meadows and Jay Forrester are the principal architects of this way of thinking. I think it’s a challenging concept for students. It takes years to perfect and understand, but invariably, students’ evaluations say, Wow, this has helped me think about how to think—not just professionally, but also personally, and to problem-solve. So that’s one thing they get out of it.

Another thing they get is an understanding about the difference between oversold hype and what’s practically possible, and how to deliver progress.

Why should a prospective student choose Tufts’ GBA program?

One, it is a great blend of theory and practice. There are people teaching who are not just PhDs, but people who have succeeded in the business world.

Two, it’s rigorous.

And three, the other students—the cohort consists of people from different backgrounds, nationalities, professional experiences, military vs. civilians. Very interesting people who you can build relationships with over time and learn with.

What advice do you have for today’s emerging business professionals?

Make sure that you build a skill set that’s transferable. So, get deep in a functional area that’s conventional: sales, marketing, operations, accounting, etc.

Build your network. School’s a good place to do that—work on that.

And, finally, invest in learning ahead of income generation at the early stages of your career. It’s more valuable to work for a great company, with people from whom you can learn and whom you respect, than it is to make an extra $10,000. 

“And you may not think it at the time, but I think over time it pays more.“

A Global Degree with a 360 Degree Perspective

The online Master of Global Business Administration (GBA) at The Fletcher School, the graduate school of global affairs at Tufts University, goes beyond the typical global MBA degree. A high-caliber faculty ranks high among the program’s distinguishing features; renowned leaders like Kenneth Pucker present the challenges facing the international business world from a nuanced multidisciplinary perspective.

To become the best global business leader possible, learn from trailblazers who have paved the way. Explore the faculty experts and the robust curriculum that deliver the contextual knowledge business professionals need today to succeed internationally.

To find out more about the program, contact an enrollment advisor or attend a virtual admissions event. You’ll learn about the degree requirements, tuition and financial aid, and what to expect as a student in the program. If you’re ready to get started, begin your application today.