Can Business Alliances Move the Needle on Climate Change?

Even as major players retreat from climate change efforts and the US government weakens environmental rules, two factors can possibly help businesses stay focused and committed: alliances and owner-stewards.

Financial services firms that joined business alliances adopted 50% more environmental practices, without any evidence of antitrust, says a May working paper by Harvard Business School’s Peter Tufano. A separate study published in April showed how family-owned public companies embrace far fewer environmental, social, and governance (ESG) efforts than other firms, but those with next-generation family leadership don’t underperform along this dimension.

Taken together, the research illustrates the contours of climate adaptation and advocacy one decade after world leaders forged the Paris Agreement to address greenhouse gas emissions. Leadership matters as does collaboration.

“Survey after survey shows that the vast majority of people around the world want firms to represent the interests of multiple stakeholders, not just shareholders,” Tufano says. “And they view firms as falling far short.”

We spoke with the Baker Foundation Professor about his research in a conversation that has been edited for clarity and length. Here’s what we learned.

Change truly takes a village

“Governments may try to mandate systems change. But even if they do, often it's collaborative activities that allow regulations or rules to be implemented in ways that make sense.

One of the first tenets of systems change is that ‘It takes a village.’ I have a particular interest in this topic because a lot of my career has been about collaboration in service of positive systems change through business. I cofounded the Innovation Lab at Harvard, and joined with seven other deans to found Business Schools for Climate Leadership. These days, I lead a consortium of 150 schools and regulatory bodies to advance climate finance.

These have all given me a window into the importance of collaboration … and that's certainly what the climate alliance paper is about. And the ownership paper is fundamentally about the power of committed leadership by owners and executives. Collaboration and leadership are essential to effect systems change.”

Later generations of family owners embrace ESG

“The fundamental question we were trying to understand is, how does ownership influence the decisions of firms? My coauthors and I examined more than 3,000 firms over 18 years, studying how the exact form of ownership—and a host of other factors—related to how firms implemented various ‘ESG’ practices— looking in detail at the different elements.

Our conclusion was that there was an ownership type, among public firms, that seemed to have less appetite for what we call ESG: Family firms, or firms with vestigial family ownership. The way that a family becomes an owner in a publicly traded firm is by selling stakes to non-family members. Public firms with remaining family ownership show far lower adoption of ‘ESG’ practices than firms with institutional, employee, managerial, or government ownership.

Given that families usually claim that they have longer-term horizons and greater social sensibilities, we tried to understand this finding in more detail. While perhaps family owners might tend to treat firms as piggy banks, it's not just about ownership, but also about control. Where families are in the second or third generation, the firms are much more prone to adopt ESG practices, and when they are in charge, even more so.”

Alliances are about ‘joint ambition, not joint action’

“Alliances intend to coordinate joint ambition, not joint action. In a study of over 400 financial institutions, some of whom joined one of 11 climate alliances, we try to understand the implications of alliance membership for firm practices and behaviors.

Not surprisingly, alliance members are more likely to set emissions targets than non-member peers, as well as to adopt more pro-environmental practices, to disclose their exposures, and even to reduce their own quite small emissions from their offices and travel.

Perhaps more substantively, alliances generally ask their members to lend their voice in public forums to advance climate regulation and laws. In the US we see this, with alliance members spending more resources on pro-climate lobbying than non-members.”

Joining many alliances reduces their marginal impact

“If I join three alliances, will I do three times as much as other firms? We find the diminishing marginal returns of alliance membership for practices and targets adopted. If you're studying the third or fourth alliance, you're not going to see very much additional activity.”

Alliances keep companies from going it alone, but with limits

“Alliances can be helpful in sharing best practices, for example about how you create a transition plan as part of the strategic planning process. Alliances can … remind firms they're not acting alone. I think those are all positive impacts.

But it may be helpful to think of alliance as akin to groups like Weight Watchers and Alcoholics Anonymous. The idea that you're not alone in this process probably is useful … But much like members of these self-help groups, the choices that firms make in the privacy of their own organizations is an individual one.

While alliance members tend to reduce their own emissions relative to non-members, they don’t seem to reduce their much more substantial financed emissions—a finding that corroborates other recent papers.

Perhaps as a result, we don’t find any evidence of antitrust markers, whether in the form of enhanced profitability or market share, not in the form of a collective boycott of fossil fuel firms."

Nevertheless, voluntary action matters

"If you believe that we need to collectively address the harms of greenhouse gas emissions and global warming, which I do, in a way that protects future generations, a combination of government action and private sector action will both be important. Government action could take the form of taxes or regulations; private sector action could take the form of innovations or adoption of practices that, at a minimum, do less harm.

In the US, we are seeing a wholesale denial of climate change at the federal level and a substantial rollback of environmental regulation. While the federal government may try to suppress the science of climate change, they can’t deny its manifestations in the form of wildfires, hurricanes, heat waves, and rising sea levels.

For now in the US, we need even more leadership in the private sector supported by mutual support. Both are in short supply. And therefore the question is not, should we have more alliances or fewer alliances, but how can alliances become more effective? And will business leaders act to recognize the harmful impacts of some of their decisions—or take the regulatory holiday to pollute more and harm future generations?”

Image: HBSWK Photo credit: Evgenia Eliseeva