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Putting “Long-term Goggles” on Business

The last few decades have blurred the lines of decision-making power between national governments and private companies, particularly multinational ones—often to the advantage of the latter. This, in turn, has raised civil society's expectations regarding the sometimes questionable behavior of large corporations; consider, for instance, the fact that just 90 companies have contributed a staggering 63 percent of human-caused greenhouse gas emissions since the beginning of the Industrial Revolution. Because economic actors are chiefly responsible for pushing future generations toward the brink of ecological catastrophe, the contribution of the business community will be crucial in keeping the young and unborn safe.

Yet companies seem even more geared toward short-termism than political institutions. The average tenure of a chief executive officer is under four years; most CEOs rely on hedge funds and stock options for a significant part of their salary, and are required to submit quarterly earnings expectations to shareholders. In the face of such powerful incentives working against the interests of future generations, it is difficult to see where the solutions could arise.

According to a Business for Social Responsibility report, because corporate social responsibility policies are too vulnerable to short-term financial stresses, corporations need permanent structures embedded within them to represent long-term interests. So-called “Futures Councils” would be composed of company employees and executives, alongside independent experts. They would issue yearly reports on whether their corporation is “operating in a manner compatible with sustainable development,” offer timelines and targets, and even make policy recommendations. While the idea is worth considering, it is difficult to see how it would avoid the shortcomings identified in similar experiments, such as a lack of weight in the decision-making balance, dependence on the good will of power holders, and so on. A closer look at economic decision making tends to suggest that the roots of short-termism run deeper.

The Devil in the Details of Economic Thinking

Mainstream economic theory began taking seriously the notion of “natural capital” only in the 1990s; even then, it was perceived as one form of capital among others, such as technology or knowledge. The fundamental hypothesis made by economic thought leaders such as Robert Solow was that the different forms of societal capital could be substituted for one another. In terms of intergenerational justice, it meant that a generation could use up ecosystem services and natural resources, as long as it made new and equivalent means of production available to the next generation.

In terms of “real life,” this perspective implied two things: first, that a technical fix would be available for all major instances of resource exhaustion and environmental destruction; and second, that future generations would consent to this substitution. A look at ecological trends worldwide makes it clear how influential these ideas remain today. However, initiatives such as the creation of sovereign wealth funds dedicated to generating wealth for future generations point to a slow change in mentality. (See Box 8–2.)

Another key factor of economic short-termism is the discount rate. Economic analysis uses discount rates to express a preference for the present: future costs or benefits are discounted to show that they mean less in present terms. This rate will, for instance, determine whether long-term infrastructure projects get the go-ahead, or help put an “appropriate” price tag on carbon emissions. In short, the discount rate will determine what is cost effective and what is not. Yet this apparently neutral tool contains moral judgments: the higher the discount rate, the less importance we give to the economic prosperity of future generations—and the more we tilt toward instant gratification.

British economist Nicholas Stern drew considerable criticism when he chose a very low discount rate in his famous 2006 review of climate change, which concluded that climate-friendly investment was very profitable in the long run. Opponents argued that this ethical stance—weighing present and future needs equally—was out of place and led to spending too much, too early on climate action and restraining economic growth. Why sacrifice present economic prospects, critics asked, when future generations will presumably be more prosperous and blessed with better and cheaper technologies to fight climate change? Such debates remind us that the pillars of business-as-usual thinking remain firmly in place: “growth equals well-being” and “environmental action equals economic loss.” We are finding out, at great cost, that treating nature like any other form of capital—as a discountable factor in the equation—is immoral and misguided, but this truth has yet to find its way into mainstream economics.

Is the current development model the only one that works? Is it still

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