Sustainability –
a systemic approach!

Klaus Bergsmann [1]

The idea for this article originates in pre Corona times. It was the idea to write about the topic sustainability for the Austrian economy. For different reasons I started writing this article late, in the middle of the lockdown triggered by the new virus SARS-CoV-2. However, the economic consequences of this pandemic very vividly show what sustainability really means. These times are unprecedented: companies have been forced to shut down because of state regulations or have not been able to continue their work due to a lack of labor force, broken supply-chains or missing means of transport because the virus forced governments to close borders.

Sustainability is more than just “green”

In everyday life the use of the word sustainable is commonly used as a synonym for ecological. The idea of sustainability, however, goes beyond the mere concept of ecological. In Europe the concept of sustainability was first scientifically defined by Hans Carl von Carlowitz at the end of the 17th century and applied to forestry [2]. This explains why sustainability has been used mostly in context with ecology.

300 years later sustainability was redefined by the UN Brundtland Commission as follows: “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs!“[3]

It was as late as in 2018 that the “EU Action Plan on financing sustainable growth“ extended the term sustainability into a comprehensive political mission with the following goals: (1) reorient capital flows towards sustainable investments, in order to achieve sustainable and inclusive growth, (2) manage financial risks stemming from climate change, environmental degradation and social issues, (3) foster transparency and long-termism in financial and economic activity [4].

The plan was initiated by the obvious need to fight climate change and its clearly visible consequences for our economy. The Global Risk Report 2020 [5] defines the failure to tackle climate change to be the most likely and most severe risk for mankind. Those who still deny climate change and its consequences or even call them fake news jeopardize the future of mankind.

The fact that today everything is measured in economic terms causes certain problems. We need a systemic approach: we have forgotten that our economic dealings have to be seen in context with all areas of life and how they are interlinked.

Limits of our present economic system

The most prominent question for entrepreneurs usually is: How can a product or a service be produced at the lowest possible price? As there are hardly any political limits which cannot be overcome by economic arguments, the final question is: Where on this planet can a product be made at the lowest possible labor costs and lowest environmental standards. Transportation costs are of no avail in today's intricate economic system and can be disregarded in most cases.

Today’s industry produces whatever the client wants or needs. Negative impacts of low social or environmental standards at a production site are irrelevant. Many countries are even using such low standards as competitive advantages to attract investors.

The current Corona crisis has shown us once again how fragile and vulnerable our economy really is. The advantage of cheap labor is futile if certain regions cannot be reached due to closed borders and a collapsing international trade.

Even the smallest missing component produced in a far-away country can lead to a production stop and products cannot be assembled and delivered here in Europe/Austria. We had to learn that the production of medical products is no longer possible in Europe as necessary basic substances have to be imported from far-away countries. Even more surprising was the experience that medical gowns and protection equipment were no longer produced in Europe/Austria and that this production had to be re-started at a high expense.

A scenario in which travelling by aircraft would turn out to be impossible for some months had previously been unimaginable. The completely unforeseen breakdown of the supply chain due to an invisible virus and not due to political conflicts shows how limited and weak our current economic system really is. Hopefully this experience will bring about change for post Corona times.

How does sustainability come in here?

The dark side of the present economic system is the fact that external costs [6] are not or hardly reflected by the production costs and thus in the final price of goods. The fact that external costs are not reflected in the product price is mainly based on the concept of shareholder value, which focusses on maximizing profit in the interest of shareholders and management.

Companies causing air, water and soil pollution usually do not have to bear the costs for the damage done by them. Consequences of this lack of responsibility are greenhouse gas emissions leading to climate change; air, water and soil contamination leading to the destruction of the ecosystem or people’s health; inadequate and unfair pay leading to social inequality and often to poverty. This conduct of individual companies over the last 100 years has negatively affected economies worldwide. The costs to mitigate climate change and the increasing pollution of the oceans will have to be carried by the global community, also by those who have not at all contributed to the destruction of our planet.

Sustainability in business means that all social, ecological and economic aspects of a product or service (from production to delivery, to consumption and disposal) have to be taken into account.

There is a growing understanding that “the market“ is not self-regulatory and will not necessarily lead to the common good of all people. It is obvious that a totally de-regulated market does not always lead to fair ecological and social results. This is not about criticizing capitalism but rather about redefining the concept of sustainability in the context of economics. Social, economic and ecological aspects of any business have to be of equal importance.

What will this lead to?

A legal requirement to deliver more detailed information on a product’s origin and its components will force companies to pay closer attention to their supply chain and connected external costs. Consequently the lowest labor and production costs will no longer be the ultimate criteria.

This brings me to the “EU Action Plan on Sustainable Finance“. The cornerstone of this audacious initiative by the EU Commission is the “EU taxonomy for sustainable activities”. For the first time it is defined in detail, which economic activities are considered sustainable. The Taxonomy is based on six ecological aspects: climate change prevention, climate change adaption, circular economy, sustainable use of water and marine resources, pollution prevention and healthy ecosystems.

In a first step only the technical definitions of a sustainable activity for climate change prevention and climate change adaption - as the pending threats for our planet - have been approved by the EU-parliament. But there is also a clear timeframe to discuss and finally to approve technical criteria for the other four aspects of sustainable activities mentioned above. This concept of the EU-taxonomy also demands a systemic approach because an activity can only be considered sustainable if it supports at least one of the six ecological aspects and at the same time does not harm any of the five other aspects.

In addition to these six ecological aspects defined for the “EU Action Plan on Sustainable Finance” also a Taxonomie for social criteria will be developed within the next years to define if a financing can be seen as sustainable.

The final goal of this “EU Action Plan on financing sustainable growth” is to nudge businesses and the finance industry towards sustainable conduct.

What will make Austria’s economy more sustainable?

Austria’s economy will suffer serious consequences caused by climate change/global warming. According to calculations by the Österreichische Bundesumweltamt (Austria’s environmental agency) the damage caused by climate change already amounts to one billion euros per year [7]. By 2050 it might amount up to five to nine billion euros per year. But these figures do not include further ecological threats such as the loss of biodiversity (e.g. the imminent extinction of bees).

To make Austria’s economy more sustainable, measures will have to be taken to improve the energy efficiency, followed by an increased use of renewable energy, attractivity of public transport and individual e-mobility. Furthermore, the change of eating habits of Austrians should be of utmost importance as it would consequently lead to an increase of organic farming as well as to more sustainable production processes by the food industry.

Based on figures published by the EU Commission, 200 billion euros per year are needed until 2030 to have a chance to avoid climate change. Surprisingly, 50 percent of this amount will have to be invested to improve energy efficiency and to facilitate the change to renewable energy for the private and public housing sector (heating and warm water).

This can also be applied to Austria, where investments in energy efficiency and the use of renewable energy will result in the achievement of Austria’s climate targets and at the same time will reduce Austria’s dependency on imports of fossil fuels.

To achieve Austria‘s climate targets another areas is to reduce meat consumption which should go hand in hand with raised awareness for the origin of food. People have to understand the impact of transportation on the ecological footprint of food. Therefore regional products should have preference over organic products harvested in far-away countries.

To be able to compete with world markets, Austrian agricultural products are often subsidized. This is understandable but not at all sustainable. Not only does it force increased costs on the Austrian taxpayer but it furthermore devastates local traditional farming in the export countries, because local farmers there are unable to produce at such low costs, thus contributing indirectly to migration from rural areas in these countries and thus fostering worldwide influx of migrants to Europe. These subsidies of export will not contribute to greening farming industries and food production.

This is one example for the lack of understanding of systemic correlations.

But to subsidize Austrian mountain farmers is usefull from a sustainability oriented point of view. These (small and medium sized) farms contribute substantially to the landscaping of remote areas such as alpine meadows, which are important for the biodiversity and lead to superior quality of agricultural goods such as meat and dairy products compared to factory farming.

Lowest possible prices for food must not be the highest political priority but to make sure that incomes are high enough to enable as many people as possible (or even all) to afford sustainably produced food. This does not mean that all products have to be organic. It means to foster farming and food industries which do not cause additional external costs. Examples of the negative effects on the environment are the reduction of biodiversity of farming soil or the contamination of groundwater by fertilizers. Inadequate farming of water intensive crops lead to a depletion of groundwater reserves while in addition there is diminishing rainfall due to the climate change.

Subsidies towards new technologies in farming are to be recommended if they help to change the production of agricultural goods to be more sustainable. Also, the use of less pesticides and fertilizers and the improvement of the quality of livestock breeding may be subsidized, thus raising the ecological quality of food.

Such actions can be called sustainable from a wide-ranging systemic point of view.

The good news is that the necessary technologies which are meant to change the economy towards more sustainability are already known. Austria is even technology leader in areas like energy efficiency, water management and organic farming.

Now it is time to create awareness for a systemic and sustainable economy by Austria’s consumers as well as companies. This process will require support from state because at the beginning sustainability seems to be in contradiction to profit. However, such investments in a systemic and sustainable economy will create the possibility of a positive economic development for future generations and to make Austria and our world a better place to live in.

[1] Klaus Bergsmann – Expert in Sustainable Solutions, until his retirement in  April 2020  Head of Group Sustainability Office of Erste Group Bank AG, Vienna.

[2] http://www.environmentandsociety.org/tools/keywords/hans-carl-von-carlowitz-and-sustainability

“Sylvicultura Oeconomica or the instruction for Wild Tree Cultivation”. In the view of Carlowitz (1645 -1714) only so much wood should be cut as could be regrown through planned reforestation projects.

[3] 1987, Report of the Brundtland Commission “Our Common Future”

[4] https://ec.europa.eu/info/publications/180308-action-plan-sustainable-growth_en ,  8 March 2018

[5] http://www3.weforum.org/docs/WEF_Global_Risk_Report_2020.pdf - World Economic Forum

[6] External costs are costs are costs imposed upon a third party when goods and services are produces and consumed (econation.co.nz)

[7] Industriemagazin of January 9th, 2020