Sustainable Products Don’t Build Sustainable Companies
By: Morgan Zemaitis 6/22/2022
A Razor Revolution
In 2017, I bought a safety razor. The sweltering summer in Atlanta was ending, and I had gone through over $50 worth of disposable razors in a matter of months. My budget could not keep up with my shaving products. For me, the double-edged tool came with a triple-edged promise: a more quality shave, the chance to save money, and a reduction in my waste footprint.
Many of my retail purchases had been failed attempts at finding products that were high-quality, low-cost, and sustainable. Household cleaners made of safer chemicals required more elbow grease. Kitchen compost bins required accepting you would have a few fruit flies. I would be lucky to get through a takeout meal without bending my plant-based fork.
Yet somehow this old-fashioned razor jumped all three hurdles seamlessly. While there was an initial higher cost, I saved money overall, reduced my plastic waste, and found it much easier to shave once I got the technique down. It turns out I was not the only one noticing the benefits: safety razor sales jumped 1,000% for the Art of Shaving from 2009 to 2014.1
Safety razors were one item in a slew of products to hit their stride in the 2010s. Sales of all sustainable products grew 5 times faster than conventional products between 2013 and 2018, and over 50% of market growth in consumer-packaged goods came from sustainability-marketed items.2 Goods like the Beyond Burger and Oatley – now part of a $7.4B market of plant-based foods3 – did not exist on grocery shelves prior to 2013. EV adoption grew more in 2018 than the prior 4 years4, due in part to Tesla’s release of the Model 3. Consumers themselves demonstrated their heightened interest by increasing their internet searches for sustainable goods by 71% from 2016 to 2020.5
It seems now that sustainable products are ubiquitous in the marketplace. Excluding the challenges of greenwashing and lifecycle costs, there is a growing taxonomy of compostable, regenerative, plant-based, and fair trade products. The very existence of this taxonomy demonstrates the importance and impact the market has placed on sustainability.
However, even with these levels of success, we still experience a drastically inequitable society. A sustainable product is one line item, a single revenue-generating piece of a company – it cannot solve the deeply challenging world we live in. The safety razor cannot solve our plastic problem. But could entire businesses, instead of individual products, have the agency to make a positive impact?
Answering this question requires us to go backwards by a decade: from the 2010s to the 2000s. Investors that successfully rode the dot-com bubble were hungry for the next big wave of change. If the internet could revolutionize business, could climate change push companies toward solving big societal challenges? Silicon Valley VC John Doerr believed so: his firm dedicated $200M to cleantech in 2006, adding to what would become a 30-fold investment increase in the clean energy industry from 2004 to 2008.6
Then came a spiraling crash. Investors were hit by the financial crisis, fluctuating silicon prices, cheap natural gas, challenges in cleantech commercialization, and China’s market-moving rise in the solar industry.7 The belief that businesses can be a force for good was overshadowed by extreme market pressures.
In studying this mid-2000’s cleantech bubble, we are provided a hype cycle pattern that still holds true today. The pattern is: a new sustainable term or category becomes popularized on its ability to generate positive change, an influx of attention and cash follows, and a fast retreat occurs when issues arise. The cycling of these terms has spun out a confusing glossary of overlapping words with similar yet slightly different goals: think of how the Triple Bottom Line (TBL) morphed into Corporate Social Responsibility (CSR) and is now Environmental, Social, and Governance (ESG).
Take, as another example, the global French food company Danone. Its CEO Emmanuel Faber believed he could lead the company into a philosophy of “stakeholder capitalism” as CEO. Instead of being driven solely by short-term profits for shareholders, he deeply invested in regenerative agriculture.8 Under his leadership, Danone would achieve a AAA rating from the Carbon Disclosure Project three years in a row, crowning them as a global environmental business leader.9
Faber’s investments logically required additional costs, and during his tenure the company’s stock underperformed the market—a metric driven exclusively by a financial evaluation of free cash flows. Activist shareholder demands resulted in Faber stepping down from his role as CEO, ushering in leadership focused on better financial performance while still attempting to hold Danone’s original impact-driven mission. What was the benefit of Danone’s products becoming more sustainable if the underlying investor and market vision for the company did not follow suit? Companies are plagued by current market rules and limitations – even when they choose to be responsible, they can still fall on the sword of short-term financials.
We now find ourselves at the height of ESG investing – another, and perhaps the largest, hype cycle by sheer scale. The market is in the billions: $649B at the end of 2021 and growing. Sitting at a grand total of 10% of global assets10, these investors believe that contributing dollars aligned with investor values can better incentivize companies with the potential for positive change.
To better place this market in context, we currently need $3T of annual investment in radical decarbonization until 2050 to limit temperature rise to 1.5 degrees.11 Unfortunately, the investment flowing into “ESG Companies” is $2.4T shy of number. In addition, its primary ability is to allocate capital towards popular companies with an ESG label in public markets like FAANG rather than deep technological investment such as carbon sequestration technology. The ESG ranking itself is inconsistent at best, and some argue that ESG investing shows no material positive change. Market analysts are already hinting this is a bubble,12 13 14 which comes at a time when we are seeing more market uncertainty and predictions of a coming recession.15 Will the market retreat yet again during a time where investment is crucial, if not necessary?
David Vogel, Professor Emeritus of Business Ethics at Berkeley Haas, has outwardly criticized the role that so-called Conscious Capitalists have played in overpromising what businesses can deliver for positive social change. “For the vast majority of socially responsible companies, a change in leadership, in technology, or in competitive pressures and, almost always, a takeover will undermine the kinds of behaviors promoted by Conscious Capitalists.”16 Put another way, when a business opportunity to be responsible becomes difficult, it will almost always be undermined by the simpler and more cash-efficient option.
To determine whether a company is truly focused on responsibility, we must ask not whether they are simply choosing the sustainable option when profitable, but whether they will continue to do so at the expense of near-term cash flows. This is unlikely if not impossible. Vogel continues in his 2011 paper, “By promising more than it can deliver, the Conscious Capitalism movement is in danger of impeding rather than promoting the kinds of social and environmental goals it seeks to achieve.” Empty promises on corporate responsibility are getting in the way of true structural change.
These hype cycles demonstrate failings not in individual businesses, but in the rules that govern markets and society. Just as a single razor cannot solve our plastic problem, a single razor company cannot solve our plastic problem either.
Calls for Permanent Change
We will continue to see hype cycles, greenwashing, and failings in corporate responsibility. The root of this problem is with our current version of capitalism itself, and the rules businesses can play by, rather than the responsibility of a particular business.
Taking steps to change the system, rather than try to operate within the constraints of the system, is one of the greatest challenges for today’s sustainability leaders. A house that lacks a firm foundation will warp, no matter how many superficial repairs address the symptoms of the root issue. A business can’t make long term pivots toward sustainability by only improving its goods and services, it needs to rethink and advocate for better market environments and structures that can buttress a more permanently sustainable enterprise.
Support for responsible business and improved capitalism can come in many forms. Mandatory disclosure of ESG metrics from the SEC, although imperfect, is a start. Financial analysts should consider reforming the capital asset pricing model (CAPM), a fundamental tool used to value the risk versus reward of a holding, to internalize climate risk and carbon impact of companies.17 Even the GDP has the potential to change by demonstrating an economy’s entire portfolio of assets that include depreciation and degradation rather than a yearly rate of output.18 Business schools can ensure MBAs understand public policy with cross-functional content that balances accountability and profitability.
Public companies can consider how loyalty shares might positively shift the restrictive shareholder primacy dynamic.19 Private companies should explore how they can tie executive compensation to positive social impact and whether alternative ownership models can help them grow and scale their businesses. These are just a few examples of leverage points to start shifting the impact of our current capitalist system in a more positive direction.
Safety razors won’t save us. Razor companies won’t save us. To ensure a future without climate change and growing inequality, we need systemic change. We need new thinking, and we need a fairer version of capitalism.
 David Vogel and James O’Toole. Two and One-Half Cheers for Conscious Capitalism. California Management Review. 2011