I recently read a paper by McKinsey & Company which discusses the sustainable and inclusive growth against the challenges that await us. Surely this sustainable and inclusive growth will require the support of business leaders. Let me share my highlights from this paper.
Realizing a better global future requires achieving three interlocking goals: sustainability, inclusion, and growth. In a sustainable world, climate change would be contained through net- zero emissions of greenhouse gases, and natural capital and biodiversity would be preserved. In an inclusive world, economic empowerment, opportunity, and progress would be shared by everyone. And in a growing world, economic activity would expand through greater productivity and innovation, providing the financial resources and new forms of growth needed to realize sustainability and inclusion.
As populations age in many parts of the world, labor forces are shrinking, requiring new ways to encourage labor participation and productivity growth. Meanwhile, the expanding knowledge economy is driving demand for workers with more technological and cognitive skills, while automation and artificial intelligence are increasingly displacing routine work.
Economic growth is necessary for the world to start closing the empowerment and sustainability gaps. The reason is simple: growing economies produce financial resources, services, and technologies that can be brought to bear on global challenges. Every percentage point of growth creates income that is consumed, saved, or invested; some of that income will raise households to empowered levels of spending, and some will contribute savings that help build the infrastructure needed for the net-zero transition. Growth does lead to some counteracting forces; two major examples are income inequality and energy consumption, both of which tend to increase in tandem with growth. Nevertheless, the baseline growth that we expect this decade will be critical in order to partly fill the empowerment and sustainability gaps by 2030.
But growth alone will not provide enough financial resources to close the gaps. Business-led innovation, can make growth more inclusion- and sustainability-oriented in several critical ways under the right conditions. For starters, as innovation boosts overall growth, more income flows to households and can be spent by those below the empowerment line or saved and invested for sustainability. Furthermore, innovation can help close the empowerment gap when it is paired with policies that help boost workers’ wages and labor force participation in sectors with rising productivity, making growth more inclusive. Innovation can also make inclusion and sustainability more “affordable”—for example, as companies invent ways to bring less costly healthcare or internet access to low-income people, or as they figure out how to produce low- emissions technology more cheaply. And when innovation provides low-emissions technology more cheaply, it helps close the sustainability gap further by shifting consumers’ preferences toward that technology; electric vehicles are a good recent example.
Because growth is necessary for the world to achieve greater sustainability and inclusion, companies will necessarily play a vital role simply by driving baseline growth during the challenging global circumstances ahead. After all, companies are the most powerful growth engines in the world economy: in OECD countries, businesses account for about 70 percent of GDP, and companies with more than $1 billion in revenue account for about 30 percent. They drive productivity growth in various ways, including R&D and digital transformation, and they build human capital. They are particularly important in drawing workers into more formal, productive, and skill-enhancing jobs in lower-income economies. In short, they have the reach and innovative capabilities required for transforming and shaping how the economy grows.
But delivering baseline growth will not be enough. Closing the gaps entirely will require companies to pursue new strategies of innovation and collaboration with government stakeholders. Opportunities for them to innovate, supporting more growth and helping make inclusion and sustainability more affordable, are legion. Companies can shift the ways they create and share benefits with their immediate stakeholders— workers, customers, suppliers, communities, and shareholders—in order to be more inclusive. They can create products and services that support inclusion: healthcare, affordable housing, critical infrastructure, bank accounts, and so forth. And they can work to adjust their impact on the environment.
At the same time, companies do not always have incentives to tackle the world’s inclusion and sustainability challenges, even when their capabilities and innovation are needed. For example, a company may be reluctant to invest in training programs for its workers if the business case is not obvious—if those workers are likely to then move elsewhere, say, or if the company fears losing ground to competitors that do not bear the same costs. A company that can create new products to reduce the cost of public goods, such as broadband networks to expand digital inclusion or advanced power plants to reduce emissions, may not have reason to anticipate eventual returns on its investment absent government support.
The world’s goals for sustainable, inclusive growth are thus not always aligned with companies’ financial incentives—but the calls to do more are loud. One reason for those calls is that companies are tightly linked to existing challenges to inclusion and sustainability. The share of their income that goes to their workers has fallen, for instance. And among large companies headquartered in the G20 countries, Scope 1 emissions, which are defined as emissions from a company’s owned or controlled sources, account for about 15 percent of total emissions worldwide each year. Such connections suggest that companies will necessarily be partners in the new growth imperative.
The world’s sustainability and inclusion deficits cannot be filled immediately, but that should be a rallying cry for companies, not a reason for inaction. The scope of the challenge makes it that much more critical for them to determine which problems make sense to tackle while realizing the financial returns they need, particularly when inaction could bring financial risks. Two main approaches are possible: acting through market opportunities that are already available and helping shape new ones where incentives are not yet aligned.
It is paramount for companies and the public sector to work together to understand how incentives may come into place and help businesses that want to implement a robust agenda for ESG and sustainable, inclusive growth.
If you are interested in the full report, here it is: toward-a-sustainable-inclusive-growing-future-the-role-of-business.pdf (mckinsey.com)
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