Have you ever noticed how often things break down as soon as the warranty expires? In a recent post, I mentioned my attendance at the RI-ESG Europe Conference. Prof. Noreena Hertz’ fantastic keynote on Sustainability and Finance triggered an “AHA” moment about sustainability that warrants further thought and discussion.
The term “sustainable consumption” has recently started popping up on the radar. My gut response is to cheer loudly! I had an electric mixer that my folks purchased in the 1970s – in that horrid color of avocado green that was so popular then. After more than 30 years of perfect functioning, I was finally forced to give it away so that I could buy one in a more pleasing color. That operational track record epitomizes sustainable consumption for me and contrasts to the fact that no matter what brand I buy, I seem to end up needing to replace my blender every two – three years.
Advocates of sustainable consumption often sigh over consumer fondness for the latest gadgets and suggest that people need to moderate their behavior, consume less and do without more. While there is an element of truth in this statement, something I learned at Wharton makes me believe that this is only a small part of the story. WHY are we buying new gadgets so often? Did any of us NEED to replace our VCRs with DVD players and then Blu-Ray players? Is a company like IKEA “good” because it works hard to be green and sustainable, or is it “bad” because (design elements aside) its low cost, low quality products are replaced regularly due to wear-and-tear or consumers’ desire/ability to upgrade their household goods?
The dark force lurking below the surface of these questions is Planned Obsolescence. How do you encourage continual sales growth? Planned Obsolescence is one of the answers. First, don’t build things to last forever. Second, introduce new versions of your product that are at least slightly better than the old version and encourage people to upgrade. You can plan your innovation cycle so that periodic offerings will entice existing customers to purchase new products. In its most sinister form, you can engineer your product quality to be just good enough to last through warranty so that customers are forced to acquire replacements periodically.
Why is planned obsolescence such a huge problem for sustainable consumption? I’d like things to last longer (like the freaking iPod battery that can’t be changed except by Apple, at a high cost) and for upgrades to be more affordable and useful (this means you Microsoft!) or share resources at an industry level (universal cell phone chargers, anyone?). I suspect many of you feel the same way.
Here’s the rub: if everything we buy lasts longer and/or shares universal standards and platforms, what happens to the growth paradigm? How fast can we reasonably expect businesses – and therefore the economy – to grow if sustainability reduces repeat revenue streams and prospects? How will markets respond and perform if sustainability turns out to require a steady 3-5% growth rate rather than a continual push for double digit growth? In other words, for corporations, sustainable consumption presents serious challenges to “best practice” business models and, depending on market reaction, may threaten higher financing costs as well.
Alexander Stille’s recent @NYT article The Paradox of the New Elite (http://www.nytimes.com/2011/10/23/opinion/sunday/social-inequality-and-the-new-elite.html?pagewanted=all) notes that US society has become more heterogeneous and much more inclusive in recent decades, while at the same time, income distribution has become more unequal at every level. The top 1% is earning close to $370,000 a year – but the top 0.1% earns more than $ 9 million a year. Now add in the fact that the bottom 50% is getting by on around $31,000 a year and the problem is evident. The top 1% is earning 10 times more than bottom 50% – and the top 0.1% earns close to 300 times as much. I have nothing against high income, nor even against unequal distribution of income, as long as what that bottom 50% earns is covering a reasonable and humane lifestyle, and I doubt that’s happening on $31k. My health insurance alone costs more than a third of that amount and no doubt I’m lucky to have it.
Getting back to the question of whether how and why we consume is a driver or a response (maybe both), the flip side of my sustainability is that we all need to consume certain things – like food, clothing, household goods – despite a shrinking resource base. I would argue that most of the world’s population needs to consume more than they already do! Moving the majority out of poverty and into a stable and reasonably pleasant state of socio-economic well-being means that a lot more basic goods, services and productivity enhancing tools need to be made available for consumption. The Ecologist’s insights into Ikea’s sustainability report (http://www.theecologist.org/green_green_living/behind_the_label/1098324/behind_the_brand_ikea.html) highlights this tension between good (social justice) and green. For the record, I think Ikea has got it right. Companies need to put as much effort into making their operations socially and environmentally aware as they do into greening what they sell. In fact, there are three different levels of social and environmental impact that I look for when screening investments – and the brief integrated term sheet (ITS) presentation (https://www.ideaencore.com/item/integrated-term-sheets-tool-impact-investing) on IdeaEncore offers insights in this context.
As long as we need to consume – and presuming some reasonable standard of “equality of condition”, why shouldn’t we figure out ways to consume “better” – durable, high quality, aesthetically pleasing, socially and environmentally responsible goods and services? Why can’t we – and our capital markets – learn to accept a slower, more sustainable growth pattern? The midst of this global recession is the perfect time to talk about slower, sustainable growth – especially since we may be stuck with slower growth in the foreseeable future regardless of sustainability concerns. Understanding the connections between sustainability and growth is a critical aspect of long-term thinking. We only have the one planet. If we don’t find better ways to share and sustain its resources, our future – or at least, our childrens’ futures – will be pretty grim.