What’s really causing the “sustainability recession”?

Why "win-win" solutions are a dangerous distraction

Sustainability is having a rough ride these days. 

With layoffs happening right, left, and centre, companies are reducing ambition and scaling back their green commitments. Major banks are backpedalling on climate, with JP Morgan and StateStreet leaving the Climate Action 100+ alliance. Unilever, once the poster child for socially responsible business, has scaled back its environmental and social pledges. After calling sustainability a “powerful engine for growth,” Nike has laid off 30% of its employees who work primarily on sustainability initiatives. Not to be outdone, major oil companies are walking away from their previous public commitments. They’re not even attempting to greenwash anymore. 

The recession has even generated its own memes, such as this one about the risk of burnout among sustainability teams:

Source

This comes in a broader context of global retrenchment and stalled progress. Most countries are falling way too short on their climate commitments. There’s been a general souring on ESG (environmental, social, and governance) and sustainable investing. Some have called this a “greenlash,” reflecting a wider cultural backlash against environmental target-setting in general. The growing disenchantment with Canada’s carbon tax is no exception to this trend. 

Many reasons have been identified to explain this sudden reversal of fortunes: rising regulatory scrutiny, higher costs, the growth of AI, pressure from activist investors, and particularly the Republican war on “woke capitalism” pushed by the American Legislative Exchange Council and other groups backed by the Koch brothers. 

On the surface, these seem like negative developments. And in many ways they are; it would have been wonderful if companies followed through on their commitments. But in reality, something much deeper is going on, highlighting the potential for more fundamental change. 

What we’re really witnessing in the sustainability recession is the death of the “business case for sustainability” - the idea that profitability and sustainability necessarily go hand-in-hand, and that win-win solutions will save the day. For too many years, we’ve been enamoured with a false narrative: that what’s good for the planet is good for the income statement, and that we can have our cake and eat it too. This simplistic idea is tantalizing but hollow. 

What the sustainability recession really demonstrates is that the private sector is not going to lead climate action on its own, and that it was foolish to believe this in the first place. We’ve seen the breakneck speed at which companies abandon their commitments as soon as it’s no longer advantageous to their PR strategies, which raises questions about the authenticity of these claims in the first place. The veil is lifting, and companies are showing their true colours. We’re entering a new phase. 

Ultimately what we need is not more voluntary, market-led initiatives, but policy, regulation, and constraints on the ability of polluters to continue wrecking the planet with impunity. We know how to transition, and we have many of the technologies we need to get there. The core questions are political, social, and cultural. We have to transform our corporate governance codes, incentive structures, fiscal and monetary regimes, and even the very relationship between the public and private sectors in order to actually meet global climate goals. 

And why aren’t we having these conversations? Because there are vested interests standing in the way, particularly the fossil fuel industry and its enablers in law, consulting, and PR. And, in many cases, these same enablers are the ones pushing the “win-win solution” narratives which serve as a convenient distraction from the real issues. 

So how did we get here? 

The rise of the “business case for sustainability” 

Things weren’t always this way. There was a time - *gasp* - when voluntary action from corporations was seen as insufficient, and when regulation was viewed as the main pathway to cleaner air, water, and ecosystems. 

The contemporary environmental movement was largely born after the publication of Rachel Carson’s path-breaking book Silent Spring, which raised alarm about the toxic effects of chemical pollution. The movement she helped spark led to the enactment of the Clean Air Act in 1963, the National Environmental Policy Act in 1969, and the Clean Water Act in 1972. It was a Republican president, Richard Nixon, who established the Environmental Protection Agency in 1970. In fact, there was even a time when pollution pricing through cap and trade was considered a conservative solution to environmental issues, favoured by Republicans like Ronald Reagan and George H. W. Bush. Progressives were more likely to favour non-market solutions (i.e. direct regulation). 

So what changed? 

In the simplest terms, from the 1980s onwards there was a coordinated effort across the industrialized world by corporations and trade associations to promote the idea that all government intervention in the economy is inherently inefficient, and therefore that markets should be left to regulate themselves. Following the social movements of the 1960s, with significant gains made for labour, civil rights, feminism, and the environment, corporate leaders began to feel like they were “under attack” by progressive forces that were out to undermine business as usual. 

The response was a multi-decade attempt to deregulate, privatize, liberalize, and de-unionize the economy, cutting taxes while imposing austerity on social programs, and generally enforcing the norm that corporations only existed to maximize short-term shareholder value. This counter-revolution was overseen by an army of libertarian think tanks working alongside astroturf groups to convince the public that the state needed to be rolled back in order to revive economic growth. In Canada, the Business Council of Canada played a pioneering role, as recounted in detail by Tom d’Aquino in his candid memoir Private Power, Public Purpose.¹

The reason why this is so important to understand is because it puts the “business case for sustainability” in a wider historical context. In a tragic irony, the growth of free market ideology in the 1980s coincided perfectly with the period in which scientists began raising public alarm about the climate crisis. In an environment where corporate power was rising, and public appetite for regulation was at an all-time low, making sustainability seem like a win for business appeared like the only viable strategy. The problem is, we are still trapped in that way of thinking over 50 years later. 

From very early on, corporations sought to shape the discourse around sustainability to promote an over-reliance on voluntary, market-led initiatives. Maurice Strong, a Canadian oil executive and CEO of Petro-Canada, was one of the key forces behind the convening of the Rio Earth Summit in 1992, and served as an architect of the creation of the World Business Council for Sustainable Development (WBCSD) through the International Chamber of Commerce (ICC). In a statement from 1997, the ICC was very explicit about why businesses needed to promote the idea of voluntary corporate action: “failure by industry to carry out its voluntary initiatives might prompt governments to resort to other instruments, among them regulation and taxes” (ICC Commitment to Sustainable Development, 1997).

They even explicitly stated a desire that voluntary initiatives come to be seen as “viable alternatives” to regulation. From its inception, voluntary corporate action has always been about avoiding or pre-empting regulation. 

These words had real world consequences. As this graph created by Duncan Austin shows, from 1997 onwards there was a marked decline in references to “environmental policy,” coinciding with the rise of the concept of the “business case”: 

Duncan Austin, 2024

1997 was also the year of the introduction of the Kyoto Protocol, which was one of the first global agreements to create international carbon markets and carbon trading systems. A recurring character in this story, Maurice Strong played an influential role in the creation of the International Emissions Trading Association in 1999, a trade association with a stated mission “to address climate challenges with market solutions.” BP helped set up the IETA, and other oil companies with representation include Koch Industries, Shell, Total, and Statoil. This is no coincidence, given carbon markets and carbon credits are a climate solution that the oil industry has a vested interest in promoting. 

Fast forward to today, and it is clear that the same actors most responsible for pushing “win-win” solution narratives are also the same people most ardently promoting the use of carbon markets. The ESG consulting industry is built on the idea of win-win, market-based solutions, but the unspoken truth is that many large consulting firms are deeply tied to fossil fuel interests. 

Let’s talk about why this is a problem. 

Exhibit A: McKinsey’s climate hypocrisy

If you look at this cluster of headlines scraped from McKinsey’s website, you’ll notice something strange. There is one statement in particular which appears to contradict all the rest. 

For years now, McKinsey has been pushing this notion of “win green and grow,” where growth, profit, and sustainability go hand-in-hand. Simultaneously, however, they have also made headlines lately for offering a reality check on the energy transition, saying that it will be expensive and slow, and that we need to temper our expectations. 

Hang on a second. How can sustainability be both a quick win for business, and also a costly, time-consuming endeavour? 

A McKinsey report from 2022 claimed that the global energy transition would cost $275 trillion, particularly given losses to fossil fuel-dependent industries and governments. However, the flawed assumptions underlying McKinsey’s analysis have been disputed by energy system researchers. 

For one thing, their report doesn’t compare the costs of climate action to the costs of climate inaction, which automatically makes it a skewed representation. (One study by the Tyndall Centre for Climate Research finds that runaway climate change could cost us $551 trillion). But more importantly, McKinsey’s study includes barely any role for the rapid scaling of clean energy, which is unrealistic given that renewable energy learning curves have enabled solar and wind to outperform all predictions. A study by the Oxford Institute for New Economic Thinking finds that rapid renewable energy adoption could actually save us $12 trillion by 2070, given decreases in electricity costs. 

The real barrier to a more rapid energy transition is not costs - it’s profitability. As recent research by economic geographer Brett Christopher shows, the real reason why the private sector is not scaling renewables faster is because they simply aren’t lucrative enough. It’s not that they aren’t cheap; solar energy is now the cheapest form of electricity in history. But banks and financial institutions are unwilling to part with the incredible profits that the fossil fuel industry yields, spurred in large part by an energy supply shock caused by the invasion of Ukraine. 

The elephant in the room is that the global energy transition is not going to happen without massive government intervention. This means that governments must go beyond just pricing or trading carbon, and actually work to shape markets through industrial policy, green central banking, and regulation. 

As Danny Cullenward and David G. Victor show in their recent book Making Climate Policy Work, the potential for carbon markets to drive the transition has been greatly exaggerated. Economists spent decades pushing market-based climate solutions based on a belief that they are the most cost-efficient. But as Cullenward and Victor show, carbon markets are plagued with problems, not the least of which is that they lock us into incremental, least-cost emissions reductions within the existing fossil fuel-based infrastructural system, which then makes it much more costly to replace later. This exacerbates stranded asset risk, and makes it more difficult to achieve the inevitable phase-out of fossil fuels that we need in order to meet global climate goals. 

With this being understood, the contradiction between McKinsey’s “win-win” versus “reality check” rhetoric becomes much easier to explain. The “win-win” narrative aims to imply that markets are working fine on their own - that we can expect companies to pursue voluntary incentives to do the right thing - and therefore that deeper social transformations are unnecessary. Meanwhile, the “reality check” narrative aims to convince us that a larger social transformation is actually not possible in the first place, given the deeply embedded nature of the existing energy system, and therefore that the most we can hope for is incremental change. 

Both logics work to achieve the same fundamental goal: to distract us from the fact that the private sector is itself the greatest barrier to change. 

This is convenient, given the vast array of fossil fuel clients that McKinsey represents - including 43 of the world’s 100 largest polluters, according to the New York Times. Over 1,110 Mckinsey employees released an open letter calling on their employer to drop relationships with major fossil fuel companies, concerns which the firm dismissed by claiming that they “have been carbon neutral since 2018.”

What this claim conveniently ignores is the substantial work McKinsey has done to enable or facilitate fossil fuel expansion worldwide. We know that they have been working to advance fossil fuel interests globally, particularly through UN-level processes. Their energy transition scenarios developed for the UAE government, which hosted the global climate conference last year, called for trillions in new oil and gas investment per year between now and 2050. McKinsey has also been helping fossil fuel companies brand methane gas as “green.” These recommendations are misaligned with the net-zero scenario developed by the International Energy Agency, which states that no new fossil fuel projects can be built after 2021. 

In Canada, new reporting by The Narwhal shows that McKinsey had potential conflicts of interest in advising the Canadian government on cleantech spending while simultaneously working for many oil and gas industry clients, including CNRL, Suncor Energy, Cenovus, ConocoPhillips, and Shell. McKinsey was tasked with recommending policies to help Canada compete with subsidies introduced in the 2023 US Inflation Reduction Act. Although it has not been made public, McKinsey’s advice likely included a significant role for carbon capture and storage (CCUS) in the energy supply sector. McKinsey’s fossil fuel clients are members of the Pathways Alliance, a lobbying organization which advocates for public subsidies to cover the cost of their proposed $16.5 billion carbon capture and storage pipeline network. Unsurprisingly, Canada’s 2023 federal budget included a large CCUS tax credit, despite the fact that Canadian CCUS subsidies are already much more generous than those granted in the US. 

As US Congressional hearings revealed last year, the oil and gas industry internally views CCUS as a means to extend the lifeline of fossil fuel projects - by almost a century, in some cases. According to the Energy Transitions Commission, CCUS does not “justify business as usual for fossil fuel production.” Carbon capture cannot reduce Scope 3 emissions, which represent 90% of the emissions of oil and gas companies. Most captured carbon today is used for enhanced oil recovery, which worsens fossil fuel dependence. 

McKinsey is also a major proponent of the use of carbon markets and carbon offsets/credits globally. The final report of the Taskforce on Scaling Voluntary Carbon Markets, a private sector-led initiative chaired by Mark Carney, was informed by McKinsey’s research and analysis. Leaks last year revealed how McKinsey is pushing the role of carbon markets in Africa, particularly through the African Carbon Market Initiative and the Africa Climate Summit, where McKinsey enjoyed “almost unrestricted access to the highest levels of the UN and national governments.” Internal documents from 2022 name Chevron and BP as among the clients of the firm’s carbon market business line. 

However, scientific research demonstrates that carbon markets are not likely to play a major role in emissions mitigation. Research on carbon offsets shows that “the large majority are not real or are over-credited or both,” according to Dr. Barbara Haya, Director of The Berkeley Carbon Trading Project. The Science-Based Targets Initiative, in a recent report, found that “various types of carbon credits are ineffective in delivering their intended mitigation outcomes,” and that over relying on credits poses the risk of “hindering the net-zero transformation.” (For further data, see this whitepaper by Dr. Joseph Romm.) 

The limits of market-based climate policies

As Cullenward and Victor write, “two profound problems – the failure of efforts to create effective market-based climate policies, and the failure to make significant progress in reducing global emissions – are inexorably linked.” Markets work best in situations where technologies are commercially mature and risks are low. However, according to the Energy Transitions Commission, for most technologies that are needed to achieve deep decarbonization at a global level, technological progress is at quite an early stage. Market signals do not work well in these conditions, in which technologies are unproven, risks are high, and there is danger for first movers. 

In these contexts, active policy support is required to actually create new markets, and bring technologies to maturity. This means that governments must go beyond simply fixing market failures, as influential economist Mariana Mazzucato writes, and take on a more active role in shaping the adoption curves of new technologies on the path from innovation to commercialization to widespread diffusion. The policy mix most appropriate to achieve this is not carbon pricing or carbon trading, but rather a combination of industrial policy (i.e. subsidies, R&D funding, green procurement rules) and smart, flexible regulations. 

Private sector thought leaders over-emphasize the role of carbon capture and carbon markets because these solutions require the least change to the existing energy system and thus serve the interests of incumbent industries, while also forestalling more ambitious state intervention. The biggest unspoken scandal of corporate sustainability is that the same people who have been pushing the “win-win” solution narrative are those that represent clients who have a vested interest in the status quo. 

So we should not believe those who tell us that the energy transition faces insurmountable technological and financial barriers. In reality, it's our political and economic systems that are the true barriers. 

And no consulting firm is going to publish a whitepaper on how to reform those.

1. For more information about the global rise of market fundamentalism, see the excellent work of Angus Burgin, Philip Mirowski, Naomi Oreskes, Kurt Andersen, Christopher Leonard, Jane Mayer, and many others.