To build back better, we must reinvent capitalism. Here’s how

Thanks to the ongoing pandemic, the world is off-balance – and it will remain so for years to come. Far from settling into a ‘new normal’, we should expect a COVID-19 domino effect, triggering further disruptions – positive as well as negative ­– over the decade ahead.

The wave of civil unrest that spread across America and beyond recently may be one example; it seems likely that the pandemic contributed to the context in which anger and despair boiled over into outrage and unrest following the death of George Floyd. Other possible COVID-induced discontinuities ahead range from a full-blown financial crisis to a step change in the rate of the global energy transition: some analysts now reckon that fossil fuel demand may have peaked in 2019 – for good.

The virus has highlighted many vulnerabilities – within businesses, supply chains, economies, health systems and political institutions – that will need to be addressed in the post-crisis world. It has underscored the interconnectedness of our natural, social and economic systems, and provided a stark reminder of the scale of systemic risks that can build up when we allow weaknesses and negative impacts to accumulate over time.

An inclusive and green recovery is vital if we are to create more resilient economies and a world in which business can thrive, not just now but long into the future. There are positive signs that, in some countries, bailouts and stimulus packages have been designed with these criteria in mind, but this is by no means universal. It seems inevitable that some governments will repeat the mistakes made in the aftermath of the 2007-8 financial crisis when, in many cases, the policies adopted post-crisis exacerbated inequality and locked in unsustainable outcomes.

A true recovery from COVID-19 will not be about putting things back together the way they were: we need to ‘build back better’, to ‘reset’, if we are to address the deep systemic vulnerabilities the pandemic has exposed. For businesses, building back better is about much more than corporate social responsibility: it is about truly aligning markets with the natural, social and economic systems on which they depend. It is about building real resilience, driving equitable and sustainable growth, and reinventing capitalism itself.

To ensure they are better prepared for the next shock when it comes, companies will need to establish a better balance between efficiency and resilience in everything from financial management to supply chain configuration. Complex supply chains may give way to simpler ones. “Just-in-time” may be superseded by “just-in-case” as the mantra of procurement and production teams.

Business will need to work with a wide range of partners to ensure that all risks – financial, environmental and social – are properly understood, priced and – wherever possible – mitigated. Increasingly, comprehensive and integrated risk assessments will be essential for companies to fulfil their fiduciary obligations and maintain their social license to operate.

Ultimately though, we are only as resilient as the systems on which we depend. Businesses must face up to their need for – and impact upon – systemic resilience. Post-COVID-19, this will require investment in regeneration (of weakened economies, shaken communities and over-exploited natural ecosystems) and adaptation (to increase our capacity to cope with future disruptions).

The case for ‘green’ stimulus measures is clear: they are likely to deliver more jobs and higher (equitable) growth in the short-term, while reducing longer-term risks linked to climate change and biodiversity loss – crises that, if unaddressed, will cause a level of disruption to our economies and societies orders of magnitude greater than COVID-19.

After the Second World War, the need to physically rebuild Europe’s cities and industry meant there was ample demand for the capital provided through the Marshall Plan and it was put to productive use. COVID-19 has not wrought physical destruction, so a vital question for the economic recovery is where demand will come from – especially since it is likely to take years for consumer confidence and spending to recover to pre-crisis levels.

The challenge of decarbonizing entire economies can be the source of demand needed to kickstart economic recovery and create good jobs. Now, more than ever, integrating climate goals into business strategy can be a vital driver of long-term success.

COVID-19 has exposed the fragility and societally negative outcomes of contemporary capitalist economies. It has strengthened the case for shifting to a more sustainable and inclusive model. The pandemic has temporarily weakened what Milton Friedman called ‘the tyranny of the status quo’ and created a context in which transformative change is at least possible. It is vital that we seize this opportunity to correct the broken incentives and information flows at the heart of our current model of capitalism.

Governments and regulators must intervene to ensure the costs of environmental and social damage are internalized by the companies responsible: profits cannot come at the expense of long-term societal resilience. Businesses must improve the quality and consistency of the information they disclose about risks, impacts and strategies – and integrate these factors into remuneration, management and governance structures.

Investors must, in turn, better integrate comprehensive environmental, social and governance (ESG) information into financial analysis and valuation models. The fact that many ESG funds have outperformed traditional funds since the start of 2020 should give investors and businesses the impetus to accelerate work in this area. For capitalism to deliver a sustainable and inclusive recovery, it is critical that companies’ cost of capital reflects the quality of their governance and their impact on society and the environment.

If we don’t seize this opportunity to build back better – to reset and reinvent rather than ‘return to normal’ – systemic risks and vulnerabilities will continue to accumulate, making future shocks both more likely and more dangerous. Despite the tragedy, we must leverage the COVID-19 pandemic, and make sure that it becomes the catalyst for a profoundly positive transformation of the global economy, taking us closer to a world in which everyone can live well, within planetary boundaries.

For more, see The consequences of COVID-19 for the decade ahead, a briefing developed by Volans and the World Business Council for Sustainable Development (WBCSD) as part of a refresh of WBCSD’s Vision 2050.