By Ian Edwards
The future is uncertain.
Stated one way in business, this simple declarative sentence can open an investor’s wallet for a future with unlimited possibilities. It’s about bravery, stewardship or prescience. Add in imagination and creative license, and the world is full of all kinds of possibilities – with outcomes manifesting in the future.
Delivered another way, the future is uncertain can have us paralyzed in doubt about which way to step next. Looking beyond the next horizon, or the long term, we imagine restraint, doubt and loss.
Sustainability, positioned in modern business as an obligation or sacrifice, sits squarely in this more dire uncertainty, which is compounded by immense scale and consequence. It means taking maverick action now, only to defer the benefit to a future far enough ahead that it might not include you – admittedly a tough sell.
If saving the planet is not, in itself, sufficient reward, in what ways does it make sense to defer a benefit to generations not yet born? What turns long-termism into a near-term benefit? This is where some creative work needs to be done, to engage the vast long horizon of sustainability into language that gets business to act in its interests today – sidestepping uncertainty and building in reward.
Managing uncertainty, it turns out, is something we’re good at. We do it all the time. Uncertainty, on its own, is not a good enough excuse for inaction in the sustainability challenge.
The future and its infinite complexity is a factor in all manner of near-term consequence. Valuations, risk and the expected return on investment – each of these metrics routinely teleported from the future for today’s decision-makers – are just a few factors rooted in uncertainty that weigh on present-day business performance.
Business acts on a hunch that a product or service will find or define a market. Investors capitalize potential, especially if there is a forecast for a return, say, five years out. We pay premiums, gambling now to insure against unknown threats. A resource company attaches a price to potential reserves yet to be extracted from nature, and trades that value, artificial or not, on a stock exchange.
Comprehensive scenario planning – “what if?” – is a mainstay of issues- and crisis-management. A company’s R&D budget might balloon in the current fiscal budget to fund the promise of a disruptive innovation that might be a boon to business many fiscal years from now.
We have made vast investments in other uncertain outcomes. The worldwide space-race engaged the imagination and demonstrated society’s ability to transcend even our planetary boundaries. Over its 40-year history, the U.S. Space Shuttle program alone cost $209 billion. Global spending on defense, managing against real or perceived present and future security threats, represents $1.8 trillion per year, or 2.5 percent of annual global GDP or $249 per person.
On the flip side, we can dismiss uncertain visions we prefer to avoid as lunacy, fear mongering, paranoia or simply anti-business.
In 1998, earthquake researchers identified increasing seismic pressures in the Caribbean region, and by 2008 had predicted a quake of 7.2 on the Richter scale. By March 2009, geologist Claude Prepetit presented a report to the Haitian government outlining the risk to Port-au-Prince specifically and the folly of shoddy construction that didn’t conform to seismic standards.
"If we don't stop these constructions," warned Prepetit, "we risk seeing Port-au-Prince transformed into a vast cemetery … Given the capital's current state of decay, we won't be able to bring necessary help to thousands of victims."
Nine months later, on Jan. 12, 2010, a 7.3 earthquake struck Haiti. According to Oxfam, 220,000 people were killed and more than 300,000 injured. More than 1.5 million people were made homeless. The non-human toll was $7.8 billion in economic losses related to the earthquake – a chunk of business that equates to almost 66 percent of the country’s total GDP in the prior year.
Imagine the Haitian government, confronted with evidence of potential disaster and recognizing the staggering efforts, cost and hassle of responding effectively to mitigate the threat. With such a monumental task, made worse by all the other current priorities and distractions, how could it respond based on a potential future bad outcome?
Maybe that’s a lesson for society’s response, such as it is, to the threats of climate change, biodiversity loss and resource scarcity.
Anthropogenic climate status is particularly rich with bellwethers. In 1957, researcher Roger Revelle told a Congressional committee that the greenhouse effect might someday turn Southern California and Texas into “real deserts.” By 2014, the Intergovernmental Panel on Climate Change warned the “worst is yet to come.”
“All we can do is speculate,” explains Robert Pindyck, a professor of economics and finance at MIT, explaining why even cost-benefit analysis so far fails to bridge the uncertainty about climate change. “We don’t really know the costs. We don’t really know the benefits.”
Leaders in business, as part of their job descriptions, must manage uncertainty, choosing from moment to moment whether to hedge or gamble or defer.
“Chances are, traditional strategic-planning processes won’t help much [in clarifying great uncertainty],” say the writers of Strategy Under Uncertainty, a dated Harvard Business Review article, still relevant when read through the lens of the sustainability challenge.
“The standard practice is to lay out a vision of future events precise enough to be captured in a discounted-cash-flow analysis. Of course, managers can discuss alternative scenarios and test how sensitive their forecasts are to changes in key variables, but the goal of such analysis is often to find the most likely outcome and create a strategy based on it. That approach serves companies well in relatively stable business environments. But, when there is greater uncertainty about the future, it is at best marginally helpful and at worst downright dangerous. Underestimating uncertainty can lead to strategies that neither defend against the threats nor take advantage of the opportunities that higher levels of uncertainty may provide.”
Focusing capital on the long term, a 2013 paper by McKinsey that includes a survey of 1,000 global executives, suggests that 86 percent of respondents “believed that using a longer time horizon to make business decisions would positively affect corporate performance in a number of ways, including strengthening financial returns and increasing innovation.” However, 63 percent “said the pressure to demonstrate short-term financial performance had increased over the previous five years.”
For discussion, then, how else might leaders leverage long-termism for now?
Some of the radical global warming remedies, perhaps more suited to movie scripts than business plans, involve orbiting mirrors that deflect a small percentage of the sun’s rays from the arctic, scattering particles like sulfur dioxide to thicken the upper atmosphere, or dispersing microscopic drops of seawater to whiten stratocumulus clouds. Columbia researchers, meanwhile, are developing artificial trees that scrub carbon like real trees.
Image credit: Pixabay
Ian Edwards is a sustainability consultant.