Nobuko Kobayashi is a partner with EY Strategy and Consulting Co., Ltd., Strategy and Transactions -- EY-Parthenon.
The war in Ukraine, which began on Feb. 24, has thrown the world into a tailspin. The threat of an escalating conflict has tripped the alarm of human sustainability.
Not only are the environmental consequences of our relative prosperity during times of peace a source of worry, but now the propensity of humans to inflict direct, wide-scale harm on each other is palpable.
In this geopolitical context, we must reassess the role of the state and, most notably, its active engagement with the market. This role is not to be confused with the resurgence of state capitalism, in which the private sector worked in concert with powerful bureaucracies such as Japan's Ministry of Economy, Trade and Industry, which produced the protectionist industrial policy that drove Japan's postwar economic boom.
While this model certainly worked wonders to resurrect Japan following its devastating World War II defeat, it would not be appropriate today when global problems are sprawling in nature and infinitely more complex.
If liberal democracies are to protect sustainability and stave off the threat of geopolitical rupture, we must partially rewrite the rules of capitalism, find audacious new ways for the market and the state to interact, and at the same time, be truly global in scope.
A concerted effort between market and state is not new, even without the context of state capitalism.
When I spoke recently to Otto Schulz, a board member for the German Sustainability Award, Europe's largest award for ecological and social commitment since 2008, he broke the relationship between state and market down into three phases of activities: setting the rules for the market economy, letting the game play out to maximize innovation through competition and limiting any remaining inconvenient consequences by providing a social security net.
Under the conventional capitalist model, the state calibrates the rules -- think old-school directive regulation -- and rebalances the results for the common good by redistributing wealth through taxes.
Our challenge today, explained Schulz, is that the damage done to society and the environment after decades of running this conventional capitalist system is so enormous that the negative consequences -- the ghastly wealth gap within and between nations as well as the global climate crisis -- are no longer fixable through government tinkering. We must reboot our entire model of operation.
Under this new model, the state would play a more important role. And although we are in the early days, we are not without progress.
For example, as of last month, 12 Group of 20 countries have a carbon pricing system that includes the external cost of greenhouse gas emissions that were previously unaccounted for under old-style capitalism. By resetting these rules, a greener form of capitalism can take root.
But just resetting some of the rules does not solve the entire sustainability problem. Over decades, the market's operations were optimized to allow the smooth operation of the old system.
This system is so deeply rooted and robust that a solid transition plan is needed. Here, the state must play a heavy hand in helping the private sector transition to a more sustainable future by fueling innovation.
For example, transitioning the energy mix from fossil fuel-dependent to renewables requires many government incentives, from subsidies to research grants.
If different states are to succeed in adopting these new roles, then global consistency and collaboration are of the utmost importance. Threats to sustainability are global in nature as, in our interconnected world, no country can survive in isolation. Rewired capitalism must clearly depart from state capitalism, which single-mindedly prioritizes the nation's economic prosperity.
Workers install a rotor blade on a wind turbine in the Almaty region, Kazakhstan, on April 7: Transitioning the energy mix from fossil fuel-dependent to renewables requires many government incentives. © Reuters States can look to the market for early case studies of global collaboration. Multinational corporations, for instance, already band together to self-regulate. The Consumer Goods Forum, an international industry body comprised of 400 global companies, formed eight CEO-led coalitions in 2020 to address sustainability-related agendas, from protecting forests to reducing food waste.
Another example is the Responsible Jewelry Council, an industry organization founded in 2005 that actively works to prevent the procurement of blood diamonds sold to fund violent insurrections in unstable mining regions. States can endorse and enhance such rules as well as hold businesses accountable.
There are green shoots for state-to-state alliances on green innovation too. German Chancellor Olaf Scholz, who visited Japan in April, emphasized Japanese-German collaboration on hydrogen as an "alternative to today's gas and coal."
One potential approach for collaboration includes the shipping of hydrogen fuel and developing a hydrogen supply chain. Because both countries are built on a heavy industry sector with a global footprint, they are naturally large-enough energy consumers to achieve economies of scale. Such state-to-state coalitions on hydrogen could accelerate sustainable technological development under joint leadership.
The quest for sustainability will redefine the role of the state's engagement with the market and will require rewriting the rules and energizing innovation. By doing so, states must come together, just as multinational companies do.
Could that be the unifying force for a world seemingly on a path toward decoupling? That is the ultimate question surrounding sustainability that we all must try to answer.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.