Why pandemic state aid should drive sustainable business
By Frank Wijen
There is no doubt that the spread of the coronavirus that quickly became known as COVID-19 has caused distress and chaos globally. In addition to the immediate impact on human health, the future continuity of millions of firms is on the line, threatening massive unemployment. However, COVID-19 presents a once in a lifetime opportunity for sustainability improvement.
While the pandemic continues causing havoc, amplified by constraining government measures, the fallout from COVID-19 has also created an exceptional opportunity to change the world for the good. What do I mean by that? Many governments have provided massive support to affected firms and their workers to stave off a tsunami of bankruptcies and job losses. This is laudable, since we have learned from the crisis of the 1930s that non-intervention will entail a vicious circle of further economic sliding. Halting economic decline is an important, yet insufficient, public policy objective. Because the upcoming economic crisis is likely to be followed by an even larger environmental crisis, whose deleterious effects may dwarf those of the one triggered by COVID-19. While many environmental issues threaten continued economic prosperity, the costs from insufficient efforts to curb climate change will be huge and undermine future economic activities, as detailed in the Stern Review on the economics of climate change, amongst other credible assessments.
is Associate Professor of Strategic Management at Rotterdam School of Management, Erasmus University.
His research interests include institutional processes, globalization, power and influence, organizational learning, and corporate and national environmental management.
“Firms with sizeable carbon footprints should be required to vastly reduce their emissions in return for state support. In other words, government should demand a quid pro quo in that recipients of state aid promise to literally clean up their act.”
Therefore, governments need to kill at least two birds with the huge stone they are about to throw into the economy. In essence, they should provide financial support to boost the economy while also significantly improving the environmental (in particular, climate-related) impact of the beneficiaries. Firms with sizeable carbon footprints should be required to vastly reduce their emissions in return for state support. In other words, government should demand a quid pro quo in that recipients of state aid promise to literally clean up their act.
Rethinking and reinventing
Energy company Shell, for example, should be told that it will receive help for hydro, solar, and offshore wind projects, but not for traditional oil exploration, production, refining and distribution. In a similar vein, airlines should only be rescued if they cease short-haul flights for which public transport alternatives are feasible, invest in highly energy-efficient aircraft, and accept carbon taxes on all flights.
Farming is another sector that needs to rethink its environmental attitude. We
need food, of course, but not at any cost. European farmers have been generously subsidized for decades, but continue burdening society with the environmental costs from intensive farming practices, such as huge freshwater withdrawal and nitrogen oxide emissions. Construction is also a highly conservative sector in need of reinventing itself. We surely need homes, but wooden-framed houses can be just as solid and robust as those erected from brick and concrete while involving much lower levels of carbon emissions. Interestingly, some governments have understood the necessity to render their financial support to distressed firms contingent on environmental measures, while others keep on fiddling as the ice melts. Two months after France decided to grant €7 billion to airline Air France, the Netherlands came to the rescue of KLM with €3.4 billion in state aid. The French government attached green strings to its support of Air France, but the Dutch government still considered the sky the limit and asked for mere symbolic environmental measures.
Lack of leadership
The importance of attaching sustainability criteria to financial support needs to be interpreted against the lack of business leadership in making sustainability transitions that adversely affect their vested interests. While businesses are great at implementing practices that engender both environmental and financial gains (the ‘win-win’ opportunities, such as serving environmental consumers), they shy away from those that adversely affect their ongoing business. For instance, companies owning huge unexploited oil-and-gas fields will not voluntarily abandon these ‘stranded assets’. Shell beats the sustainability drum, and its investments in renewables have recently taken off, but the amounts involved still dwarf those in new fossil-fuel projects. History teaches us that huge reductions in greenhouse gas emissions have never resulted from climate-change policies alone. They have often been a by-product of public policy decisions or political events, including the British closure of unprofitable coal mines and privatisation of the electricity sector (with the related transition to less-carbon-intensive gas, known as the ‘dash for gas’), the German reunification solidarity (and the related investments in more energy efficient factories in Eastern Germany), and – indirectly – the German safety driven phasing out of nuclear energy after the Fukushima disaster (and the ensuing scaling up of renewable energy, whose plummeting production costs in solar and wind power fuelled a global demand for renewables).
Since business is unlikely to adopt game-changing environmental improvements of its own accord, this implies that governments must take the lead and impose the sustainability agenda as they rescue firms. Necessity is the mother of invention and change, and business will only walk its sustainability talk when forced to by ineluctable government requirements. The sustainability transition will, thus, only materialize through targeted government support, in which economic and environmental recovery operate in lockstep.
Since governments virtually always prioritize economic stakes over environmental interests, the sustainability agenda will need to piggyback on economic interventions. The exceptionally large amounts of public funding that are about to be poured into the economy provide a unique opportunity to make great environmental strides while also propping up the economy. In this context, the European Union is showing some leadership, in that it has publicly pledged that 30 per cent of its €750 billion post-coronavirus restructuring emergency fund will be financed by the issuance of sustainable bonds.
Governments can save work, without necessarily saving existing jobs. A significant number of positions will almost certainly cease to exist over the next few years and others that we cannot yet even imagine will emerge. One of the key challenges for sustainable growth is to help people and firms adjust to this series of dramatic changes. A major threat is that governments will take short-term measures as they give in to powerful business lobbies and eschew measures that might displease their electorates.
“The exceptionally large amounts of public funding that are about to be poured into the economy provide a unique opportunity to make great environmental strides while also propping up the economy.”
The Dutch government, rubbing shoulders with big business and facing elections in March 2021, is likely to head for measures that are least painful for incumbent firms and voters in the immediate future. Unfortunately, unconditional business support is a short-term remedy that fills one hole by deepening another one. The failure to address major environmental problems head-on could well drive the next global disruption, such as a climate crisis of an even larger magnitude. The actions of governments in the next few months will clearly have important implications for the longer run. As the French dictum goes, to govern is to anticipate. Governments with foresight will thus ensure they attach solid environmental strings when pouring public money into distressed businesses.
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