Into the red – out with the green?

Will recession force environmental issues down the agenda – or could it be an unlikely spur to more sustainable work, rest and play? Martin Wright investigates.

“Bye bye greens, see you in the next boom.”

That was the scathing sign-off to an editorial in The Economist in 1991, as the last recession began to bite.

It neatly sums up the conventional wisdom that environmental concerns wither in the face of the chill winds of a downturn. Like worrying about the finish to your new kitchen, fussing over green issues is a pleasant indulgence for the good times – but when the crunch comes, you pare everything back to the essentials.

So, now that the ‘nice decade’ is over, are we set to see a ruthless, exclusive focus on the ‘nasty’ stuff – the struggle to stay afloat at any cost, to keep your job, your home, your business intact, and damn the consequences? Will soaring oil prices combine with the credit crunch to choke off ethical investment, squeeze out demand for eco-products, and force the government to appease voters by watering down green regulations?

Or will a recession instead focus attention on the virtues of energy efficiency and renewables, encourage a culture of saving, not splurging, and bring home the inherent unsustainability – economically and environmentally – of a debt-fuelled consumer boom?

We’ve polled opinions from leading thinkers and doers in the sustainability and business worlds; and Ian Christie reports the results of his own investigation into the likely consequences of a downturn.

Danger signals

Some see clear signs of trouble ahead. John Elkington, founder of SustainAbility, who has weathered several economic peaks and troughs, believes “the current frenzy around sustainability is very much a late-boom phenomenon. That doesn't mean that critically important seeds aren’t being sown, but I suspect that they will face a fairly wintry season or three before they can really get into the process of germination.”

Rhian Kelly, head of climate change at the Confederation of British Industry, has “some concerns that the issue might be put to one side as the government focuses its attention on economic worries” and sees “a danger that it could also start to drop down the corporate agenda if the slowdown worsens”.

This may mean a tough few years for sustainability professionals.

Elkington compares the present crunch to the “troubled times of the early 80s [when] some companies in heavy-end sectors like oil and chemicals had built up substantial safety, health and environment departments. Recessionary pressures forced major cutbacks… I recall ICI losing 16-17 of these people in a single year. This time around, I think a fair few will be reassigned or, because they don't fit well elsewhere, will be ‘let go’.”

Jonathon Porritt, founder-director of Forum for the Future and chair of the Sustainable Development Commission, agrees that companies might “scale back on sustainability spending, [with] some of the larger capital expenditures being deferred”. But, he adds, “it’s important to point out that the spend within these companies is not that big anyway. I suspect what we’ll see is somewhat less manic recruitment, rather than a wave of redundancies.”

So who’s vulnerable?

Some of the frothier corporate positioning might be an early casualty, along with pricey consultancy exercises. Any company facing a squeeze on shareholder dividends, or the prospect of widespread redundancies, will baulk at spending money on ‘non-essentials’. “If you see [sustainability] as just a communications opportunity, then yes, you may lose out,” comments Seb Beloe, head of socially responsible investment research at Henderson Global Investors.

But be wary of being too Euro-centric, warns Brendan May, managing director of Planet 2050 at Weber Shandwick. The demand for sustainability communications may slow in the West, “but there will always be a marketplace which needs it – like India, or China. The demand in general is growing, not falling away.”

For Paul Monaghan, head of ethics and sustainable development at the Co-operative Bank, there’s a danger that ‘saying it could make it so’. “We’ve been through this before, when the dot com bubble burst, and when we had all the big accounting scandals. Both times people predicted it was the death knell for corporate social responsibility. It wasn’t then, and there’s no sign it will be so now. But what worries me is that, because business has such a herd mentality, if enough people say it often enough, we will end up killing it. So we need to be careful. [Sustainability and CSR] has been quite robust in the past, and we shouldn’t forget this – through all the turmoils, it has gone from strength to strength.”

"Anything frothy is vulnerable"

More fundamentally, though, a downturn will put to the acid test those much-vaunted claims that there’s a happy symbiosis between planet and profit. As John Quelch, associate dean of Harvard Business School, famously remarked: “Only when you get into a recession will you know whether your values will hold up.”

So watch Marks and Spencer’s ambitious ‘Plan A’; watch HSBC’s massive investments in renewables and climate research; watch the (already faltering) commitment to renewables on the part of Shell and BP.

For Stephanie Draper, deputy director of Forum for the Future’s Business Programme, a recession could show up very starkly which companies have truly taken sustainable development on board – and which were just flirting with it at the margins. “Those that have really got it don't leave it to the CSR department: they take it right into the heart of the business. It’s a way to manage risk and control costs, to create new products, to penetrate new markets, and so on. That means there is less immediate risk to this activity when there’s a downturn, as it’s clearly seen as a cost saver or a revenue generator.”  Forum’s new report, Leader Business Strategies ©, makes a persuasive case that such an approach really does create value – and so should weather the downturn intact.

At the CBI, Rhian Kelly agrees. “It’s clear now, more than ever, that CEOs do ‘get it’ – and many are taking action to embed climate change into core strategy, recognising that [it’s core to] the long-term health of their business.”

And that’s one of the key differences between previous recessions and now, says Seb Beloe. “Most companies are much more sophisticated in the way they tackle sustainability… It’s much more embedded in the way they think about the future, and the business case associated with it is much more robust, [whether it’s related to] risk management processes or innovation and product development.”

For Geoff Lane, a partner at PriceWaterhouseCoopers, addressing such issues often “involves management time but not huge cash investment. So in a downturn, when you’re striving to keep people motivated and making sure your stakeholders are still respecting your business, [sticking with sustainability strategies] can actually add value for relatively little cash cost.”

Paul Monaghan is adamant that “if anything I’m seeing increased levels of competition in terms of ethics. I’m not seeing any loss of interest in the sectors in which we trade. In fact we’re expanding here, in terms of budget and people.”
 
Regulation plays a role, too, says Lane. It “underpins the whole agenda, particularly on climate change, but elsewhere, too. So whether companies like it or not, they can’t get around their basic obligations on environment, health and safety.” And that alone, he says, makes a nonsense of claims that “this is all a fad prone to be swept away in tough times… My analogy is: the froth on the cappuccino may disappear, but the coffee underneath is getting stronger!”

Will government keep its nerve?

Talking of regulation, will governments seeking popularity water down environmental rules and targets? After all, green charges, in Britain at least, are routinely derided as ‘stealth taxes’. “There could be a backlash which would make it tougher for the government to introduce or even maintain fiscal measures,” says Tim Jackson, professor of sustainable development at the University of Surrey and economics commissioner at the Sustainable Development Commission. Similarly, “business will lobby harder against regulations imposing fresh costs, and government may listen more if the economy is top of the agenda”.

Porritt, too, sees “real danger” here. “Our government is absolutely obsessed with competitiveness – and Gordon Brown is extremely anxious to avoid any additional burdens on industry… So we’ll definitely be more vulnerable to that kind of argument. For instance, I have heard one or two ministers arguing lately that a substantial part of the increased energy prices at the moment can be attributed to things like the Renewables Obligation and energy efficiency commitments – which is largely garbage, but when did they ever worry about the facts!”

But he takes comfort from the fact that “much of the regulatory process is now driven by the EU, which is less likely to be vulnerable to short term economic pressures of this kind”.

Industry, though, says Kelly, would welcome a more robust approach from the government. “Business more than ever needs policy certainty over the long term. It needs to know that there will be a long term price for carbon and, where carbon prices may not support the demonstration and deployment of key low carbon technologies, that the government will provide that support.”

"This is creative destruction at work"

Most commentators think a recession is unlikely to derail the slow crawl of international climate change diplomacy, partly because it’s not exactly setting stretch targets, but also because it’s focused on relatively long-term goals – ones that will only really start to bite once a downturn is over.

But will cash-strapped consumers still be willing to dig deeper for greener, more ethical products – sales of which were worth £32 billion in the UK alone last year? Draper is sceptical. “Contracting consumer spending is going to hit the high street – which is where there’s been the major flurry of sustainability activity of late.”

Others aren’t so sure. “As long as people have money coming in,” says Porritt, “there will only be a marginal impact on green spending.” Consumers will still want to ease their consciences, predicts Elkington, so “fair trade and organic products could surprise us by their staying power”. Brendan May agrees: “People’s whole value systems don’t change because of an economic downturn. Look at the brands founded on ethics – Ben and Jerry’s, Green and Black’s. Businesses have been desperate to buy them.” And, he adds, they can give competitive distinctiveness, too. “Kenco won’t abandon shade-grown coffee, because it maintains a key point of difference with Nestle.”

"Ethical investors are stickier than the rest"

Ethical investments too can hold up surprisingly well in tough times, fluctuating less than their mainstream rivals, observes Mark Robertson of the Ethical Research and Information Service (EIRIS). The Co-op’s Sustainable Leaders Trust, as Monaghan points out, outdid “every single other unit trust in the UK market” in 2007. At Hendersons, says Beloe, “the volume of money coming in [to our ethical funds] is more than the volume of money going out, which isn’t true for all equity funds by any stretch of the imagination”. He says ethical investors tend to be “stickier” than the conventional sort – both because of their personal commitment, and the fact they tend to view the investment as a long-term one. So for the moment at least, customers don’t seem to be fleeing sustainability in favour of cheap n’ dirty.

Swings and roundabouts

If spending gets squeezed, major capital investments with long payback periods – such as solar panels or new waste recovery plants – could be among the first casualties. But while some green actions cost money; many save it – particularly at the level of the individual consumer (and voter). Thrift may never be the height of fashion, but it looks increasingly cool when times are hard. Hence the surge of articles lately on second-hand chic. For everyone baulking at the cost of buying organic or hiring CSR specialists, there will be someone else deciding to holiday at home, or carry out a ruthless war on wasted energy.

Rising oil prices might have helped trigger the downturn – but they also make investment in energy efficiency, in particular, look increasingly attractive. This in turn could set off something of a positive feedback loop for renewables: the more energy we save, the greater share of our demand we’re able to meet from ‘home-grown’ sources, such as wind, tidal, wave, biomass and solar. High fuel costs also strengthen the case for a whole slew of green policies, from locally-sourced organic food to green transport initiatives encouraging walking, cycling, homeworking or car-clubbing.

For the moment, investment in renewables and other clean technologies is holding up well, says Mark Campanale, associate director of London Bridge Capital. “Whilst the broader economy is facing difficulties, the cleantech markets are remarkably resilient.” Campanale quotes some impressive growth figures, such as, solar investment in the City markets rising at an average annual rate of 254% during 2004-07. “We feel 2008 will be better than 2007… Society has decided to invest in, effectively, new energy infrastructure on an enormous scale. This is getting done – and so capital is getting deployed.”

At a national level, says Paul Ekins, professor of energy and environment policy at King’s College, the single most effective intervention the government could make – especially during a recession – would be to “invest heavily in the energy efficiency of the housing stock. It’s good for the economy, and it’s good for the quality of life of the people that live in the houses.”

For maximum effect, though “we need to couple it with an environmental tax reform. There is absolutely no reason to think that this would be bad for the macro economy – it’s simply getting your taxes from one place [pollution] instead of another [income and jobs].”

Silver linings?

Back in 1991, few people this side of George Monbiot welcomed a recession. Today, there are some more mainstream voices spotting a silver lining to the economic clouds. For Paul Monaghan, the downturn “almost makes you believe there’s a god – as it may buy us the time we desperately need to turn climate change around, because economic activity will be constrained. There’s very little ‘hot’ money in the economy right now, and that’s a good thing, because hot money is usually highly speculative and short term, and I don’t think anyone would argue that it has a tendency to produce sustainability.”

Tim Jackson also sees an opportunity. “The virtues of frugality are incredibly difficult to nourish in our existing consumer culture. Politicians are obsessed with growth – so much so that it makes it hard to question whether it really is a sustainable business model. As people realise an economy as strong as ours is still vulnerable, it might prompt a change in the way we think about consumerism – we might even develop a sense of shared vulnerability. Recession could help force those questions right to the fore.”

Paul Ekins isn’t so sure. He sees a parallel with the government’s failure to act to prevent the “completely unsustainable” house price spiral. “If after many, many years of concern [with issues like growth and stability] we still have not got the regulatory structures in place to limit and if possible, prevent, the kinds of wholly unsustainable activity that have lead to the credit crunch, how much less likely is it that we’re going to get the regulatory structures in place that will allow us to live with the environmental limits?”

“Every commentator of any substance knew that we were on an unsustainable economic boom; I suspect the government must have known so too, because all the figures on credit and mortgages were well known and well publicised, and yet nobody did anything about it because it served the political purpose of the time. And that is really profoundly depressing, given that they also know we’re on an unsustainable environmental course. But because doing something about it – taking the carbon out of the economy – is perceived as being difficult, and likely to be politically unpopular, we simply don’t do it.”

At this level, John Elkington is more optimistic, believing that history will view all this as “the processes of creative destruction at work. It’s a natural part of the economic cycle. Painful, even devastating to some, but creating the conditions for innovation and change in the same way that fires do in forests.”

And, he adds, “as the Japanese used to know, the best time to invest in new things is when the economy is going into recession – and all your competitors are cutting back. So invest now – and be ready to emerge from the recession with a bang!”

A carbon price in disguise?

Some see the surge in oil costs as being a de facto carbon price, so helping push the economy along a low-carbon path. It’s true up to a point, says Martin Brough, director of economics consultancy Oxera. “If the oil price stays above £100 a barrel, there is a huge impetus from that alone for people to become much more energy efficient. The oil price itself is acting as a surrogate global carbon price to some extent.”

But, he adds, “the danger is that if we move into recession and then the oil price comes down, it will be very difficult in that environment, where we still feel as though we’re being hit in our pockets, for the government to say: ‘Right, we’re using the opportunity to fill the gap by significantly increasing [carbon taxes].’”

Ekins agrees. “With every hike in the oil price, the entire lexicon of low carbon demand and supply side measures becomes less expensive, in relative terms. [But] that’s what environmental tax reform is expected to achieve. And it [would be] a much better way of doing it, because you keep the revenues in your own economy."

Meanwhile, high oil prices alone are a blunt weapon. “Were there to be a carbon price as well,” says Ekins, “we wouldn’t see this rush by oil companies into developing tar sands, and we would see a more sustained interest in renewables.”

He’s frustrated at the failure to join the dots. “I’m not sure that I have ever heard any mainstream commentator link the increases in the oil price with its effect on climate change. I’ve heard it being discussed in terms of the economic problems to which it’s likely to lead – the inflation that then passes through to the petrol pumps, [but not] in terms of making alternative forms of travel relatively cheaper, or perhaps fostering a slightly more ‘stay at home’ kind of climate whereby people get stuck into their local communities rather than driving 200 miles to the nearest beach!”

Here, politics comes into play. “We hear the worst effects that [rising fuel costs] could have, so you’re always thinking about the little old lady and her heating bills or the isolated rural motorist and his needs to get about. So if you’re looking for silver linings [and there are plenty], you risk being seen as monumentally insensitive – and so being shafted politically.”

Martin Wright is Editor (at large) of Green Futures.

20 June 2008

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