By Maude Lavanchy and Karl Schmedders
“The system” doesn’t necessarily reward companies for their initiatives towards sustainability. In fact, they may find themselves at a commercial disadvantage for their pains. The phrase “a level playing field” may be just a sporting metaphor, but could the world of sports actually yield valuable insights for sustainable commerce?
Society’s growing concern over climate change has led to a surge in corporate climate pledges. Thousands of companies have joined the United Nations Framework Convention on Climate Change’s Race to Zero campaign, committing to take rigorous actions to limit their environmental impact. IKEA has pledged to be climate-positive by 2030, the BMW Group to be carbon-neutral by 2050, and Unilever to reach net zero by 2030. The logic behind these pledges is straightforward:
- Long-term pledges lead to concrete investment in more sustainable practices.
- Investors and consumers reward companies that contribute to the green transition and penalise those that don’t.
Over time, pledges should create a virtuous cycle, firms with strong sustainability performance dominating the market. Yet recent analysis of 25 major companies’ pledges1 shows that they are falling well short of their promises, their ambitious-sounding commitments often lacking real substance.
Are Business-Led Environmental Initiatives Set Up to Fail?
Voluntary measures to reduce environmental impact can often be explained in terms of economic self-interest. Reducing compliance costs, mitigating adverse stakeholder reactions, or improving public image are among the reasons for going green. Unfortunately, these reasons are countered by two strong economic forces: the “tragedy of the commons” and the “tragedy of the horizon”.
Tragedy of the Commons
Earth’s atmosphere is a common-pool resource: no one owns it; everyone has access to it. If sustainably managed, it can provide for many; a lack of sustainable management can be very harmful to everyone. Put differently, when company A emits less greenhouse gases (GHGs), it contributes to the sustainable management of the “common” (i.e., Earth’s atmosphere), which benefits everyone. But because only company A is paying for this measure, it ends up competitively disadvantaged vis-à-vis its competitors that opt for less environmentally responsible (and thus cheaper) practices. As this trade-off between profitability and sustainability could put company A out of business, it has no incentive to bear the cost of reducing its emissions. Since the same argument applies to all firms, the “common” is no longer sustainably managed. Which is the tragedy.
Tragedy of the Horizon
Popularised by former governor of the Bank of England Mark Carney, the tragedy of the horizon describes the conflict between companies’ tendency to focus on the short term and the long-term vision required to follow through on climate targets. As the effects of climate change will be felt well beyond the typical investment cycle horizon or that of top-management team tenure (the average CEO serves for 7 years), current business and political leaders have little reason to deal with climate risk now. The temptation to pledge for the future but leave the tough decisions to one’s successor is high.
The forces underlying these two tragedies help explain why:
- Green initiatives are often a second-tier priority2, behind business imperatives such as financial performance and talent management. A 2022 IMD Executive Opinion Survey of 4,097 C-level and mid-level managers across 63 countries shows that inflationary pressures, geopolitical conflict, supply chain bottlenecks, COVID-19, hybrid work, and technology and customer interaction are all prioritised over environmental concerns. For instance, Cargill made important commitments on deforestation and supply chain GHG emissions. Yet Jill Kolling, Cargill’s vice president for global sustainability, warned that meeting them ultimately “depends on how our business grows”.3
- Greenwashing and the tendency to change environmental targets if they are not met are ubiquitous. A recent study using data from Japanese organisations shows that whenever a company fails to hit its GHG emissions target it tends to change how that target is defined (e.g., replacing a target regarding an absolute reduction in total GHG emissions with one regarding reducing GHG intensity)4. Likewise, when Cargill fell short of its objective to be “net-zero” vis-à-vis deforestation by 2020, it simply extended that target to 2030.
- Organisations struggle to align financial incentives with climate pledges. A 2022 analysis of environmental, social and governance-linked compensation at S&P 100 companies shows that these components tend to be vague, opaque, and easy to manipulate, and warns that such compensation could be “exploited by self-interested CEOs to inflate their payoffs, with little or no accountability for actual performance”.5
As the effects of climate change will be felt well beyond the typical investment cycle horizon or that of top-management team tenure (the average CEO serves for 7 years), current business and political leaders have little reason to deal with climate risk now.
Although not all voluntary green initiatives are doomed to fail, it helps to understand why these two economic forces are hard to overcome. Our interactions with hundreds of corporate leaders reveal that many companies still struggle to compensate for the additional cost often associated with green production6 (compared to “browner” production). They tell us they are ready to “get greener”, but that everyone has to play by the same rules. More and more executives believe that regulation is needed to ensure that level playing field. Lucas Joppa, Microsoft’s chief environmental officer, agrees: “If we are going to achieve a net-zero carbon economy for real, we will need everyone to act … and that means action can’t be voluntary. We need requirements and standards that everyone is expected to meet7. The question is how. Forces similar to those described above are at play elsewhere, and while climate change is arguably more complex,7 the case of doping in sport offers an interesting lens with which to explore the problem.
The Anti-Doping Movement as an Inspirational Case
Consider the case of figure skater Kamila Valieva in 2022 at Beijing. The first female skater to complete a quadruple jump at the Olympics, she helped her team to gold in the women’s event. But clouds gathered when it emerged she had tested positive for a banned substance just days before the games. Although reducing doping is socially desirable, the case raises key questions. Will fans and sponsors favour fair (and clean) competition over spectacular (but “unclean”) performances? If I, as an athlete, do not dope, am I at a competitive disadvantage? Performance-enhancing drugs can significantly tip the odds of winning, and can “create a market” where the only options are to lose or to dope – just like in the tragedy of the commons.8
From Threat to Business to Threat to Survival
Although using substances to improve performance has a long history (stimulants were used to combat fatigue in China 5,000 years ago), doping became controversial only in the 19th century. The first modern doping regulation was introduced in 1928. When controls came to the world’s most famous cycling race, the Tour de France, in 1966, riders interpreted them as an “attack on their right to self-determination”. Organisers also initially feared that anti-doping controls would lead to less “superhuman” performances, making the Tour less spectacular and less economically viable.
The turning point for the business case for anti-doping was the public backlash that followed the “Festina affair”. In 1998, French authorities decided to crack down on the Tour and found hundreds of doses of doping products, revealing large-scale, systematic, organised doping in professional cycling. The result: a media furore and public outrage. Anti-doping measures were no longer a threat to the business of the Tour, but a prerequisite for its survival.
Performance-enhancing drugs can significantly tip the odds of winning, and can “create a market” where the only options are to lose or to dope – just like in the tragedy of the commons.
While other doping scandals had comparatively less impact on the business of some sports (e.g., track and field), the risk of stakeholder withdrawal and its potential financial impact, as well as the risk to athletes’ health, were now taken seriously by organisers. The Festina affair, along with other highly publicised doping scandals, led to the creation of the World Anti-Doping Agency (WADA) in 1999. This sudden acceleration of the anti-doping movement provides interesting insights into the fight against climate change. In particular, the following three lessons on how to “level the playing field” appear crucial:
Lesson 1: Harmonise the Rules of the Game
The development and adoption of the World Anti-Doping Code (WADC)9 is one of the greatest-ever examples of successful international cooperation. Before 1999, anti-doping policy was fragmented and ineffective. Every sport and country had its rules, and athletes could be banned from one country or sport but able to compete in others. Rapidly, WADA created the Code, harmonising and coordinating anti-doping policy across all sports and countries. The Code and its list of banned substances and methods have a “universal status”. More than 180 countries have ratified a UNESCO Convention against doping in sport10, enabling national governments to align their domestic policies with the WADC. WADA quickly became a global standard-setter, developing “soft law”, including recommendations and best practice.
The speed at which sporting authorities harmonised and coordinated anti-doping policies worldwide is remarkable and suggests key lessons. Like an athlete who, pre-WADA, was banned in one country but could compete in another, companies nowadays can relocate their activities to countries whose environmental policies are less strict. For instance, the introduction of carbon pricing in some countries has led certain firms to transfer production to countries with laxer emission constraints, thereby increasing carbon emissions in the latter and creating “carbon leakages” (i.e., additional carbon emissions associated with transporting goods back to the home market, or with the use of less efficient production plants).
The current proliferation of environmental, social and governance (ESG) ratings and reporting standards adds a further complication. There is little consensus between them, and research has shown that agencies rate different items, use different scales, apply different weights, and have their own “rater-specific” bias.11 Firms trying to improve their ranking on one rating may thus not necessarily see similar improvements in another. This diversity of ratings has also led to “selective reporting” and cherry-picking.12
Like an athlete who, pre-WADA, was banned in one country but could compete in another, companies nowadays can relocate their activities to countries whose environmental policies are less strict.
Harmonising the rules of the game is crucial to ensuring a “level playing field” for organisations. The news that the International Sustainability Standards Board (ISSB)13 was developing a “global baseline” standard for ESG reporting raised hopes that it could unify these fragmented standards and combat greenwashing. Although it remains unclear whether that baseline will be universally adopted and enable a “just transition”, organisations should take an active role in its development and implementation.14 Forward-looking organisations could review the current draft of ISSB’s climate-related disclosures and evaluate how they currently fare. Managers could then use this information to mobilise resources proactively, and to align, incentivise, and promote change.
A further demonstration of organisations’ willingness to take meaningful climate action would be the setting of local (e.g., industry-level) standards. Conceptual work by the Nobel laureate Elinor Ostrom provides a useful, cross-contextual template. Her eight “design principles”15 offer guidance on the successful, long-term management of a common. See sidebar 1 for how these principles were implemented by WADA for the Code.
Lesson 2: Join Forces with Public Authorities
WADA’s hybrid public-private structure is both unusual and interesting. To ensure autonomy and impartiality, WADA is structured like a typical foundation, but with equal decision-making power for sporting organisations and national governments. This has ensured the engagement of both, which has helped restore the credibility of international sporting competition with global audiences. This hybrid structure leads to “greater internal and external pressures to be impartial, transparent and accountable than [for] private international sports organisations”16. It also limits the geopolitical and sector-specific conflicts of interest that could undermine the agency’s impartiality and independence, and thus its role as a “referee”.
National governments have notoriously struggled to rally together to collectively fight climate change. If the dial is to be moved significantly in the right direction, the public and private sectors must join forces. Public-private collaboration can mean the coming together of private capital and expertise with public resources (e.g., for infrastructure investments). It can also ensure regulatory frameworks and incentives that spur innovation. Organisations such as the International Finance Corporation, the World Bank, the UN, the World Economic Forum, and the World Business Council for Sustainable Development are already attempting to do this at the global level. Yet local public-private partnerships also offer fruitful opportunities. Swiss Re, for instance, teamed up with the Nature Conservancy and Mexican regional governments, developing a “nature-based insurance solution”17 to protect Mesoamerican coral reefs. In the Melbourne Metro Tunnel project18 a private consortium worked with the State of Victoria to minimise the environmental impacts of the new tunnel and help build the city’s climate change resilience.A 2020 review of more than 70 empirical studies on how environmental regulations affect organisations highlights the importance of combining mandatory and voluntary rules.19 Voluntary programmes give firms flexibility, but are often unlikely to drive significantly improved environmental outcomes because short-term profits tend to trump environmental targets. Compulsory regulations, meanwhile, provide structure and have a strong and positive influence on firms’ environmental performance. When, in 1975, the US Congress debated raising automobile fuel-economy standards20, many predicted it would lead to disaster. Yet when those standards were raised, all car manufacturers fell into line. None had wanted to move first, but the change spurred technological innovation, leading to them producing powerful, comfortable, efficient cars at a reasonable cost. Firms that actively support environmental regulation can make a real, positive difference.
Lesson 3: Embrace Transparency
WADA has been extremely quick and successful in developing a coordinated approach to doping, but that approach isn’t foolproof. In 2016, WADA’s then president, Sir Craig Reedie, declared that revelations of Russia’s state-sponsored doping programme implied the “worst case of system failure … in the entire history of the anti-doping movement”. That failure revealed the scale of the challenge. But it also offers additional insights into potential stumbling blocks on our road to sustainability. Although the threat of severe punishment disincentivises athletes from doping, it is less clear whether competition organisers and national associations have much incentive to test them. One research study shows that the risk of customers and sponsors withdrawing their support in response to a doping scandal encourages organisers to avoid testing athletes, as this reduces the risk of uncovering doping cases in the first place.21 The study does, however, show that a “doping-free equilibrium” is achievable if testing is publicly observed (even if those tests turn out negative).
As companies transition to sustainable business models, systematic checks and balances are needed. We have financial audits, and there is a case and a demand for sustainability audits, which would ensure transparency and thus boost credibility.
Could such increased transparency in turn increase accountability regarding corporate climate pledges? As companies transition to sustainable business models, systematic checks and balances are needed. We have financial audits, and there is a case and a demand for sustainability audits, which would ensure transparency and thus boost credibility. Data and technology can be leveraged to improve regulatory oversight and monitoring. For instance, Amazon Conservation is using drones to monitor, almost in real time, deforestation and illegal logging.22 Data from satellites and sensors could be combined to detect air pollution, and smart contracts could be used to enforce sanctions in cases of environmental damage.
Standing on the Shoulders of Giants
Despite the successes of the anti-doping movement, some critical voices ask whether the cure is worse than the disease, and question whether the Code goes too far.23 In a similar vein, a 2022 report by The Economist on the rise of ESG investing24 reveals that dropping dirty equity shares is not the best way of influencing polluters, because of the abundance of private cash willing to buy those shares.
Yet harmonising the rules of the game, joining forces with public authorities, and embracing transparency have unquestionably been shown to counter the tragedies of the commons and of the horizon in the world of sport. And organisations can draw on these lessons. BP’s Lord Browne played an influential role in mobilising support for the European Emissions Trading Scheme25, and all organisations have a role to play in supporting and encouraging governments to act. According to a 2022 report from the Intergovernmental Panel on Climate Change26, carbon emissions need to shrink by 43 per cent by the end of 2030 if the threshold of the most dangerous levels of warming is not to be breached. The lesson from the development of anti-doping policy is that improvements can happen fast if there is the will.
About the Authors
Maude Lavanchy is a project manager in corporate strategy at Transports publics de la région lausannoise SA. She was previously a Research Fellow at IMD Business School in Lausanne, Switzerland, and a semi-professional volleyball player. Passionate about sports, economics, and new technologies, her research is part of the field of economics and organisational behaviour. [email protected]
Karl Schmedders is a Professor of Finance at IMD Business School in Lausanne, Switzerland. His research and teaching focus on sustainability and the economics of climate change. He has published a range of research articles in international academic journals and received numerous teaching awards throughout his career. [email protected]
- J. Malen, “Moving the Goalposts: Aspiration Reoperationalisation in Response to Failure to Achieve Environmental Performance Targets”, Academy of Management Discoveries 8, no. 3 (2022): 357-83.
- L. A. Bebchuk and R. Tallarito, “The Perils and Questionable Promise of ESG-Based Compensation”, Journal of Corporation Law, forthcoming.
- For instance, the impact of doping on athletes’ health has been demonstrated in a number of studies, while certain impacts of climate change (e.g., on the economy or the planet) are still filled with uncertainty.
- Likewise, the relatively short career of athletes (e.g., 73 per cent of Olympians participate in only one games), the lag between doping and its adverse health consequences can, combined, enhance the temptation to dope, echoing the tragedy of the horizon.
- F. Berg, J. F. Kölbel, and R. Rigobon, “Aggregate Confusion: The Divergence of ESG Ratings”, Review of Finance, forthcoming.
- R. Slager and J.-P. Gond, “The Politics of Reactivity: Ambivalence in corporate responses to corporate social responsibility ratings”, Organizational Studies 43, no. 1 (January 2022): 59-80.
- According to the International Labour Organisation, a just transition means “greening the economy in a way that is as fair and inclusive as possible to everyone concerned, creating decent work opportunities and leaving no one behind.”
- E. Ostrom, “Beyond Markets and States: Polycentric Governance of Complex Economic Systems”, American Economic Review 100, no. 3 (June 2010): 641-72.
- “Guardians of Public Value. How Public Organisations Become and Remain Institutions”, eds. A. Boin, L. Fahy and P. Hart (Palgrave Macmillan, 2020).
- J. Alberto Aragòn-Correa, A. A. Marcus, and D. Vogel, “The Effects of Mandatory and Voluntary Regulatory Pressures on Firms’ Environmental Strategies: A Review and Recommendations for Future Research”, Academy of Management Annals 14, no. 1 (2020): 339-65.
- B. Buechel, E. Emrich, and S. Pohlkamp, “Nobody’s Innocent: The Role of Customers in the Doping Dilemma”, Journal of Sports Economics 17, no.8 (2016): 767-89.
- B. Kayser, “Ethical Aspects of Doping and Anti-Doping In Search of an Alternative Policy”, PDF file (dissertation, KU Leuven Faculty of Movement and Rehabilitation Sciences, 2018), https://www.grea.ch/sites/default/files/print.pdf.
- See J. Meckling, “Oppose, Support, or Hedge? Distributional Effects, Regulatory Pressure, and Business Strategy in Environmental Politics”, Global Environmental Politics 15, 2 (May 2015): 19-37, https://doi.org/10.1162/GLEP_a_00296.