Will Short-Term Financial Pressures Complicate the Transition to Sustainable Business Models?
Topics
MIT SMR Strategy Forum
Climate change poses the biggest existential risk of our time, and the actions businesses take inside and outside of their corporate fences have a critical impact on the environment. However, many companies are failing to keep up with their own climate commitments, and others are struggling to even articulate what changes they can and will pursue. BP, for example, recently backtracked on previously announced plans to reduce its oil and gas production over the next several years.
One might wonder when the business community will commit to more sustainable models. Are we looking to the wrong sector for meaningful change, or are short-term financial pressures the universal barrier to long-term sustainable models? To find out, we turned to our expert panelists for their responses to this statement: BP’s decision to dial back plans for cutting oil and gas production shows that short-term financial performance pressure will make it difficult for many firms to transition their strategies toward more sustainable business models.
Agree
More than half of our panelists (64.7%) agree at some level that BP’s decision reflects the difficulty in balancing long-term climate goals and short-term financial pressures. “In the short run, it is more profitable for firms such as BP to harvest the value of their existing investments in fossil fuels. … But in the long run, they switch or die,” writes Melissa Schilling of New York University. Other panelists also emphasized time pressure as a factor. “Most strategies toward more sustainable business models take time to produce visible effects on the bottom line, so the tension is inevitable,” says Andrea Fosfuri of Bocconi University. And London Business School’s Olenka Kacperczyk notes, “Sustainability is a long-term strategy. … It remains to be seen what kinds of solutions are most effective in helping firms navigate the well-known temporal trade-offs.”
Some panelists were more skeptical of businesses’ motivation to drive sustainability transitions. John Van Reenen of the London School of Economics and Political Science writes, “We cannot rely on the goodwill of large companies to deliver a transition to net zero.” Olav Sorenson of UCLA expressed a similar sentiment: “It seems like wishful thinking to expect that BP and other petroleum giants would lead the way to a more sustainable energy future.” And Joshua Gans of the University of Toronto says, “I am not sure what folks were expecting. … This isn’t about short-term financial performance pressure but about how such firms actually make money.”
Agree
John Van Reenen
London School of Economics and Political Science
Neither Agree nor Disagree
About a quarter (23.5%) of our panelists took a stance in the middle, pointing to pressures beyond the financial: regulations, geopolitics, and energy security. “It is not the market pressure per se that makes it difficult for firms to choose sustainable business models; it is the regulatory framework that affects market pressure,” writes Monika Schnitzer of Ludwig Maximilian University of Munich. Daniel Levinthal of the Wharton School asserts that “short-term pressures from financial markets … haven’t fundamentally driven changes, whereas the geopolitical situation has.” And Anita McGahan of the University of Toronto, notes, “I don’t think it’s the short-term financial pressure that’s driving BP’s announcement. Rather, I think it’s pressure for short-term energy security, which is central to value creation.”
Neither agree nor disagree
“As long as oil and gas are needed, it is better that BP extract them in an environmentally responsible manner.”
Ashish Arora
Duke University
Disagree
Only about 12% of our panelists disagree (with caveats) that short-term financial pressures complicate the move to more sustainable business models. Jennifer Brown of the University of Utah says, “A decision to … produce more oil today may actually allow a firm to transition to more sustainable energy production tomorrow.” And Timothy Simcoe of Boston University notes, “I think BP’s change does illustrate that oil and gas producers will be slow to transition toward greener strategies. But firms in other sectors … will face increasing pressure from shareholders and customers to make meaningful changes.”
Disagree
“A bankrupt firm can’t save the world. That is, without sufficient surplus in the short term, the firm cannot pursue long-term projects, and there is no trade-off between the short and long runs.”
“We cannot rely on the goodwill of large companies to deliver a transition to net zero. It must happen through tough policies — carbon taxes, regulation, and clean-innovation subsidies.”