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Black Swans and Sustainability

CBEY faculty advisor writes for Environmental Leader

This piece was originally published on Environmental Leader.

The terrorist attacks of 2001, the economic crisis of 2008 — these sudden shocks neatly represent the three hallmarks of a “Black Swan event.” They:

  • Took place outside of regular expectations;
  • Carried an extreme impact; and
  • Made us concoct explanations for their occurrence after the fact, making them explainable and predictable.

When we consider Black Swan events, we tend to see them in the global socio-economic headlines of the past 20 years. But such events increasingly bleed into concerns over issues of environmental protection and social benefits; in fact, Black Swan events, by definition, provide a useful lens for the analysis of environmental and social sustainability impacts.

The Black Swans of Sustainability

The last 50 years, since the publication of Rachel Carson’s Silent Spring, have seen the rise of environmentalism and the subsequent evolution of corporate social responsibility. A quick scan of sustainability events over this period reveals a series of news stories, beginning with Silent Spring, that have become household names — the crash of the Exxon Valdez, chemicals released at Union Carbide’s Bhopal plant, poor labor conditions in Nike’s supply chain, and Superstorm Sandy hitting the US Eastern seaboard, to name just a few.

Though a disparate list, all of these events have two common characteristics. First, they had significant impacts. Rachel Carson’s Silent Spring had enormous positive impact by raising awareness of the environmental challenges that we face as a society. The Bhopal tragedy carried enormous negative consequences in terms of death and destruction. While few of these events had immediate international impacts, their final repercussions were invariably global in nature. For example, in a number of countries (including the United States), the Bhopal tragedy inspired a government commitment to disclose toxic chemicals stored and emitted by companies.

Second, each of these events was difficult, if not impossible to predict at the time, but in hindsight the risks or contributing factors are clear. So, to some degree, all of these events qualify as Black Swans.

One might ask whether it is a coincidence that the driving events of sustainability carry the hallmarks of Black Swans, or whether there is an inherent link between Black Swans and sustainability challenges? A coincidence seems unlikely, and there are several strands of logic to suggest why today’s sustainability challenges take the form of Black Swan-type events.

The Black Swan-Sustainability Nexus

1) Externality — Sustainability challenges typically fall “outside of regular expectations” in two of an organization’s most important decision-making areas: accounting and risk assessment.

An externality is defined in economics as the cost or benefit that affects a party who did not choose to incur that cost or benefit. Sustainability challenges are the modern day poster children of the economic externality. The fundamental sustainability challenges (e.g., environmental pollution, below-living wage salaries, human rights infringements, consumption of constrained resources) all represent costs to society that are not factored into the price of an operation or a product.

Even when sustainability impacts are quantified, risk assessment tools built on concepts of financial risk are ill-fitting tools of evaluation. Because risk assessment tools tend to bias toward demonstrable, quantifiable and immediate effects, they regularly — and significantly — under value the potential impact of long-term and slow-developing sustainability challenges.

The result is that sustainability challenges are not pinging in two of the most fundamental decision-making processes used by organizations today. Intuitively, we understand these challenges are out there, but because they don’t fit into any of our tools they tend to be ignored — a classic recipe for generating a Black Swan.

2) Extremity — Sustainability challenges, by their very nature, carry extreme potential consequences.

The second link between sustainability challenges and Black Swan events is in the potential magnitude of impacts. Black Swan events carry, by definition, extreme impacts.

We typically think of resource system or ecosystem collapse when discussing the potential impacts of sustainability. This fear is not unfounded. (Consider the North Atlantic cod fisheries, which collapsed from overfishing between 1950 and 1990.) The effects of a resource system or ecosystem collapse could reverberate across the globe, just as exploitation of constrained natural resources like rare earth metals could profoundly impact the development and availability of technology, and just as climate change will impact weather, coastlines and water scarcity around the world.

Sustainability challenges also carry the potential for extreme social impacts. Krueger and Malečková wrote on the causal connection between poverty and terrorism. Generally, poverty is thought to be a significant driver of regional conflict and extreme violence.

These sustainability impacts tend to be grounded in science. Natural resource economics, sociology, biology, geography and psychology all speak directly to these impacts. This means that sustainability challenges are, by and large, predictable in hindsight. It might also suggest that we should be able to see these impacts coming; they are, after all, obeying scientific principles. But we don’t see them coming because of…

3) Complexity — The complexity of sustainability challenges often places them outside traditional tools of rationalization.

To take one example, the feedback loops characteristic of many sustainability challenges baffle classical economic thinking. Markets don’t deal with feedback loops very well, particularly when the agents of feedback are disparate.

Carbon dioxide in the atmosphere (and therefore climate change) presents a clear example. Potential feedback loops in the natural system include anthropogenic emissions, arctic tundra methane, albedo from (melting) ice and cloud cover, massive carbon sinks in oceans and forests, etc. Add in the socio-economic feedback loops from climate-induced poverty and migration, agricultural intensity, conflict and land use patterns, and we have a mix of potential feedback loops that will make any economist throw up her hands and say “nope.”

Because markets cannot foresee the impacts — primary, secondary, tertiary — of feedback loops, the price of a product or service cannot accurately reflect the inherent costs in terms of sustainability. Our current capitalist systems, based on incentives determined by markets, cannot properly value sustainability impacts. This, too, is a recipe for a Black Swan event.

Good News, Bad News

Sustainability challenges and Black Swan events go hand in hand. This suggests that sustainability challenges will continue to arise in those places least expected.

The bad news is that these events will be disruptive, costly and sometimes tragic. Lives, well-being, ecosystems and money will all be lost as sustainability Black Swans continue to rampage. By and large, we will not see them coming (they are Black Swans after all), although we will be able to rationalize them after the fact.

The good news is that these sustainability Black Swans might be what save us all. As with the example of Silent Spring, some Black Swan events have positive repercussions, driving progress and innovation. Severe weather events are instigating city planning and financial infrastructure projects to better prevent and mitigate damage. The Exxon Valdez resulted in requirements on double-hulled tankers around the world. BP Macondo has forced the oil and gas industry to take a hard look at safety practices and invest heavily in best-practice safety procedures. Bhopal drove revolutionary regulations on chemical disclosure that not only protects lives, but also creates huge incentives for industry to cut waste. Nike’s revelation on labor issues has led to vast improvement in supply chain management practices, auditing and partnering along the value chain of major corporations. Today we look to events such as the Pope’s treatise on the dangers of climate change and the moral imperative of humans to address the challenge as potential change drivers in sustainability.

While Black Swan events pose significant threats, they also force change and innovation — two elements critical to sustainability.