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Environmental and social risks are economic risks.

If your business is not working to eliminate them, you’re at risk.

This is the second of a series of 10 insights from co:collective on how your business can join the sustainable economy.

In the face of urgent, intersecting environmental and social crises, it seems obvious that the risk of inaction outweighs the risk of action.

Why, then, does businesses’ response feel slow, stalled, or downright absent? Why are leaders struggling to prove the value of sustainability initiatives to their boards and shareholders? Why is ‘sustainability’ an ‘initiative’ versus the core operating system of business today? Why do companies keep damaging people and the planet?

One of the biggest problems is relatively obvious yet hidden in plain sight.

This is the problem of negative externalities, let me explain. In economics, there’s a concept called ‘externalities.’ This refers to any impact that a business has that affects stakeholders outside the business, e.g., local communities or the natural environment. And ‘negative externalities’, refers to any impact that a company has that’s, well, negative (or harmful) e.g., lowering access to employment for the community in which they do business or polluting the environment.

Negative externalities are the economic equivalent of sweeping dirt under the rug – you might not be able to see it, but it’s still there.

For many generations, businesses have operated without any care for the reverberations of their actions beyond their immediate operations. But now, these negative externalities are boomeranging and exposing the interdependencies of business to the world around them.

Most global crises, including the depletion and pollution of natural resources, climate change, natural disasters, mass migrations (of humans and animals), and humanitarian crises have roots in economic activity, created and exacerbated by the activities of individual businesses who’ve never considered the harm they’re causing to entities other than themselves.

But today, business leaders must face the simple truth: the lines between internal and external are not real.

Businesses operate in the world, which means they are connected to people and the planet – whether they like it or not. They depend on environmental and human stakeholders to resource their operations, to buy their products, to generate their value, to give them purpose. And, critically, the health of these stakeholders determines the health of the business.

So, how can business leaders stop sweeping negative externalities under the proverbial rug? It starts with three steps:

Realize: that your business operates in a system, the health of this system determines the health of your business.

Reevaluate: how you define your stakeholder set, and how you view your business’ role in the world, your impact is wider than you think.

Remedy: how you quantify the impact of your actions, how you measure risk and how you view success, the wider the positive impact you have, the better it is for your business, now and the future.

By Sarah Elsmore

Senior Strategy Director, Business & Brand

Sarah is a Strategy Lead at co:, where she partners with clients on their brand and business transformation projects. She’s driven by the urgent need to create a more sustainable and equitable future for all through better businesses, organisations, cultures and leadership practices. She’s a humble student of systems thinking, which she weaves into her strategic practice to create more possibilities for clients, teams and strategic outcomes.