By François Candelon, Managing Director and Senior Partner at BCG Paris, and the Global Director of the BCG Henderson Institute, Rodolphe Charme di Carlo, Principal at BCG Paris, and Ambassador at the BCG Henderson Institute, and Yves Morieux, Managing Director and Senior Partner at BCG Middle East, BCG Fellow, and head of BCG Institute for Organization
This blog is part of a series on tackling COVID-19 in developing countries. Visit the OECD dedicated page to access the OECD’s data, analysis and recommendations on the health, economic, financial and societal impacts of COVID-19 worldwide.
“COVID-19 is climate on warp speed” said Gernot Wagner, climate economist at NYU. Both trends show exponential growth – in infected people and CO2 emissions respectively – while capacity to fight them remains limited. Still, while governments enforce emergency measures around the globe, little action on climate has happened to date. Therefore, the actual question to solve is not “what can we do?” but rather “why not now?”
Bringing an alternative and rigorously structured approach can help to find practical, impactful solutions. The concept of Smart Simplicity, applying principles of sociology to solving complex organisational problems in business and beyond, can play this role by analysing inaction from two angles. First, the systemic lens – stemming from Thomas Schelling’s work – assesses how individual behaviours combine to produce collective outcomes that cannot directly be traced back to individual motives. Second, the strategic lens, legacy of Herbert Simon’s “bounded rationality”, analyses individual behaviours within the context of problems they try to solve, with resources to mobilise and constraints to cope with.
Today, we are stuck in a systemic vicious circle: current behaviours are negatively influencing each other while driving negative overall impact on climate change. Aggregate demand for fossil energy is high (although temporarily down under the current crisis and likely to go up as the recovery begins) while prices are low, tempering companies’ rationale to adopt sustainable behaviours.
As a direct consequence, consumers face higher prices for climate-friendly items, moderating their willingness and ability to buy. Also worrying is that growth in renewable energy capacity has declined by 13% in 2020 due to the COVID-19 crisis. Hence, for now, non-sustainable business models allow firms to maintain investor returns. Governments could have a central role in addressing this inertia, thanks to their regulatory power. However, their influence is constrained by political dynamics – notably the influence exerted by vested interests via lobbying and campaign finance; as well as voters’ opposition driven by purchasing power’s “world end vs. month end” dilemma. Even France, in spite of significantly contributing to treaty design, didn’t achieve its COP 21 target, partially due to Yellow Vests advocacy against rise on fossil fuel tax.
Still, there is hope: individuals drive these organisations, within their fiduciary duties. The first step to unlock action is to understand these individual behaviours, using the strategic view.
Step 1: understand rationale for current individual actions
“Rational” does not mean “selfish” or even “utilitarian” behaviours, and this diagram helps understand the absence of individual action until now.
Ultimately, mass adoption of climate-friendly behaviours can happen only when most customers have wide access to sustainable purchase options for an equivalent price per quality. This typically takes time, even with government incentives, as EVs in Norway. Immediate action is therefore critical to start this process, and integrators are necessary keys to unlock it.
Step 2: Identify integrators to switch towards a virtuous circle
In addition, young talents, expecting to bear the cost of climate inaction in their lifespan, also have significant influence on companies as employees, especially considering current talent shortage. This trend is already visible: in 2019, 40% of American millennial survey respondents had already chosen a job based on employers’ sustainability and the energy industry is especially vulnerable.
Finally, environmentally conscious customers (governments, companies or individuals) have an amplifying influence: they push companies to develop sustainable offering, finance the experience curve and set example for other customers. As soon as this group reaches significant scale, they can become preponderating ‘determinators’ of market value. And such a shift can happen rapidly, as the US coal industry drop in multiples in 2009 showed.
One may ask about governments and multilateral institutions. They unfortunately cannot play this role, either lacking influence, like Central Banks without regulatory power beyond fiscal policy, or interest for change, as the WTO for which climate regulations may harm its core mandate.
Now, to understand how action from integrators can provoke a dramatic change on climate action, we need to link back to the systemic view. Indeed, as sociology shows, the tighter the vicious circle a system is trapped in, the more dramatic the effect of unlocking it, in speed and scale. All forces that kept the ecosystem in its previous equilibrium are instantly reverted, making today’s situation both a significant issue and an incredible opportunity.
While young talent is already concretely influencing companies to act on climate change, the immediate priority is to catalyse investors’ intervention, by increasing their knowledge and influence. The objective is to make climate vulnerability a primary consideration in portfolio management, for example adopting science-based targets, with full investment managers’ commitment. Leading investors have started moving, as Larry Fink wrote “Climate Risk Is Investment Risk” in Blackrock’s latest CEO Letter. Still, this is insufficient. But hope is there. As social science tells us: immediate dramatic change can happen. And the cost of failing would be paramount for humanity. Unlike COVID-19, the Climate “pandemic” will not peak (no “herd immunity”)… but, luckily, we know the “offset CO2 emissions” vaccine already.