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:
1 Long-term pledges lead to concrete investment in more sustainable practices.
2 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
