Lindsey Hall: Hi. I'm Lindsey Hall, Head of Thought Leadership at S&P Global Sustainable1.

Esther Whieldon: And I'm Esther Whieldon, a Senior Writer on the Sustainable1 Thought Leadership Team.

Lindsey Hall: Welcome to ESG Insider, a podcast hosted by S&P Global where we explore environmental, social and governance issues that are shaping investor activity and company strategy.

Esther Whieldon: We're only a couple of weeks away from Davos, the annual meeting hosted by the World Economic Forum that brings together global leaders from government, business and academia in Switzerland. The meeting normally takes place in winter, but thanks to COVID this year in 2022 it was bumped to the end of May.

If you paid attention to the last iteration of Davos, which by the way was all virtual, you know that stakeholder capitalism was a big focus at the meeting. In brief, stakeholder capitalism is the idea that companies are not just responsible to their shareholders but rather to a broader range of stakeholders, including their customers, employees, suppliers and communities as well as shareholders.

The idea really picked up steam in the U.S. in 2019 when the U.S. Business Roundtable issued a statement suggesting that companies should focus on benefits to all stakeholders rather than primarily on deriving profits for shareholders.

Lindsey Hall: Well, today, we're talking to an economist who says the business world needs to do a total rethink of its approach to accounting and corporate performance measurement.

Our guest today is Bruno Roche. Bruno spent many years as Chief Economist at Mars, Inc., the multinational manufacturer of confectionery, pet food and other food products like Mars bars, for example. And in 2020, he left Mars to found the Economics of Mutuality platform. In this new organization, as we'll hear today, what Bruno is proposing is a new approach to accounting that in some ways has a lot in common with the concept of stakeholder capitalism, basically a real rethink of a company's purpose.

Bruno Roche: The Economics of Mutuality work started actually about 15 years ago in 2006. And at that time, I was just – it had been at my job for a few months. And I was involved in a conversation that took place between the management of Mars and also one of the shareholders who happened to be also the Chairman of the Board of the company at that time.

And the question that came from the board was quite unusual question. And the question was what should be the right level of profit for a company like Mars. And the question wasn't asked in the context of should we do more or should we do less profit, but is there a kind of optimum profit level that, that would help the company thrive and survive and prosper? And to what extent this level of profit would eventually be impacted by the stakeholders that are actually operating in the ecosystem in which we operate. And to my surprise, this question has never been studied in economics and management. It was almost a blind spot in the academic literature in the practice.

But we took this question quite seriously, and we decided that, that question needed more sophisticated answer than just benchmarking exercise. And so we embarked on a series of hypothesis to help answer that question. And eventually, this journeynwhich started very modestly in 2006n ended up in a relatively complex program which involved academic research, teaching of MBA modules, testing in a different environment.

And we called it actually the Economics of Mutuality in reference to the point that economics is essentially a science that is all about the management of scarcities and mutuality is the description of the type of relationship that stakeholders can have in a given ecosystem.

And when I shared this story, I tried to be very simple to say economics is all about management of scarcities, right? And 50 years ago, financial capital was scarce, but natural resources were overly abundant. Today, it's just the opposite. Financial capital is overly abundant and natural resources are scarce. Yet our economic model has not changed. So there is something wrong.

So our argument is that the economic model will over time adjust to address the new form of scarcity that we are dealing with. And that's what economics is all about. And mutuality is to say, well, at the moment, financial capitalism relies primarily on a power relationship. That's why size matters so much in modern capitalism; the bigger you are, the more value you can extract from the value chain which you are operating.

But our hypothesis is to say, well, if we adopt not a power relationship but a mutual relationship with our stakeholders, what type of economic performance would we achieve. And we tested this simple concept that's business needs money, of course, to operate but money needs also natural capital and people capital.

And instead of just applying a power relationship, what if we just try to implement a mutual relationship with key stakeholders. And after 15 years of in-depth research, primarily with Oxford University but also in-depth practice, starting with Mars business units but also other large companies, we came up to the conclusion that this model is actually superior in terms of value creation, not only for the environment, society but also for the business and the shareholders.

And that's what Economics of Mutuality is all about. And a couple of years ago -- or 3 years ago now, together with Mars, we decided to turn this Economics of Mutuality ID from just think tank program within the company into a public interest foundation that we incorporated here in Geneva that's Economics of Mutuality.

And the mutual value initiative, the mutual value framework is a byproduct of the Economics of Mutuality and it is a methodology that helps companies not only to comply with the upcoming regulation, accounting regulation that's coming very soon, actually. In Europe, it's going to be 2024 and the rest of the world will follow quickly. So it's a methodology that can help any business, not only to comply with upcoming regulation but to thrive or to even prosper to revisit their value-creation model to adjust to these new norms, but also to take this opportunity of the new norms to create a more sustainable and more responsible and also more effective value creation model.

Lindsey Hall: So what you're describing, as you noted, marks sort of departure or a change from the historical, traditional approach to financial capitalism. And I wonder what kind of feedback did you get when you raised this idea? And has the response to this idea of the Economics of Mutuality or the mutual value framework, has that changed and evolved over time with the rise of sustainability focused investing?

Bruno Roche: There is a quote which I like to say. It's a quote written by a German philosopher called Arthur Schopenhauer. And he said that every truth goes through four stages. The first one is that it is ignored. Second one, it is ridiculed. The third one is that it is violently opposed. And the fourth one is that it is accepted as self-evident.

In a sense, over the last 15 years, we went through a similar journey from being ignored, being ridiculed, being opposed, and gradually being accepted as self-evident. But to go back to your question, the concept of mutual value creation is not limited to sustainability.

Sustainability is the realization from the business that there are some -- they are creating negative externalities that actually is detrimental to their reputation and to their capacity also to attract talent, et cetera. And that's good, but it's not about changing the core of the way business is being done.

What we are proposing with Economics of Mutuality and mutual value creation is to say that the sharing of benefits, when it is embedded into the value creation yields a superior outcome. So the traditional way is that I do business one way and eventually, I share the benefit another way.

So I create value first and I share the value in a second time. What we are proposing with Economics of Mutuality is to say that no, no, the sharing of benefit has to be embedded into the value creation equation. And when we do this, when we embed this sharing of benefit in the business model itself, which actually requires a transformation in the way we generate value and measure value, then when we do this and we do this intentionally then the performance, the holistic performance of the business is superior not only in terms of impact, but also in terms of financial performance.

So we are moving into that space. And I'm glad actually that the regulation now coming from the EU with EFRAG and also coming from global standards with ISSB are actually going to create an environment that is conducive for companies to focus on their nonfinancial reporting and the simple fact of providing a coherent and simple framework regarding the nonfinancial performance is in fact going to create an environment conducive for -- in our view, will create incentive for business people to reconsider the way they create value.

And we think actually that the mutual value creation that we propose can help them achieve this objective of being both more performance in terms of financial performance but also more impactful in terms of social and environmental impact.

Lindsey Hall: Now you mentioned EFRAG, which is the European Financial Reporting Advisory Group for any listeners who aren't familiar. And then also the ISSB. And it's been about 6 months since we saw this big development in the ESG standards world, which was the -- of course, the launch of the new International Sustainability Standards Board during COP26.

We've talked quite a bit about the ISSB on this podcast. And, as you know, that the group's goal is to develop a comprehensive, global baseline of high-quality, sustainability disclosure standards to meet investors' information needs. So in light of this development, I'd like to get your response or can you say a little bit more about why you see this as a positive step in the current sustainability landscape?

Bruno Roche: Today, the ESG space is very crowded, okay? And it's so crowded that it is at best confusing and at worst misleading. The last time we counted the number of ESG framework that exists, it was more than 400. And there is actually a thing that if you want to improve your ESG score, you can change ESG provider.

So it's real actually dysfunctional space at the moment. And that dysfunction has been described in different ways and probably the most credible source that I know is a work that MIT has undertaken under a program called Aggregate Confusion, which showed actually that there is a correlation of 0.6 only between all the main ESG reporting framework.

It showed actually that there is no real consistency across different ESG frameworks. And that's actually a problem because it is an open door to greenwashing, social washing, and eventually it is not good for to bring transparency and credibility into that space.

The good news is that because of the regulation taking place at the EFRAG, and you mentioned what it is, it is a EU Taxonomy effort but also at the ISSB, which is a branch of IFRS focusing on nonfinancial reporting standards. The good news is that over the next few years, we are going to move from 400-plus type of frameworks into maybe 4, 5, even less, okay?

So that is a real step forward, which actually will bring transparency into the system and will also help understand and compare the real impact of business investments across a number of agreed parameters. So that's, in my view, the greatest benefit of the work that's taking place between the different initiatives.

Lindsey Hall: So as we near Davos, I ask Bruno, how does the concept of stakeholder capitalism relate to this idea of mutual value creation?

Bruno Roche: The mutual value creation actually is a form of stakeholder capitalism. But we started this journey way before that term was coined by Klaus Schwab which actually is a good thing because when I heard Klaus talking about it. And actually, he kindly sent me his book. So I had a chance to read it probably before anybody else.

I was very happy to understand that we are gradually moving from a shareholder capitalism, which eventually was a norm under the Chicago School of Thought, we are moving into a stakeholder capitalism. What stakeholder capitalism does not develop or doesn't say is the type of relationship that we want to have across stakeholders and what eventually makes stakeholders work together.

And this is what the Economics of Mutuality proposes. So we propose that the purpose of business is no longer about maximizing profits, but the purpose of business is about creating scalable and profitable solutions to the problems of people in planet, not profiting from creating problems to people and planet.

And that definition of purpose, which is -- which requires a company to decenter itself. So the purpose is, in that definition, it is no longer -- the company is no longer at the center of its ecosystem. It is a purpose. And that decentering is critically important because all of a sudden, the purpose is about solving a systemic problem for other people, right?

Purpose is about solving a problem for other people and you want to do it profitably and at scale. But it changes the definition of purpose. And our research showed that when you define your purpose this way, it also very quickly defines the stakeholders that are material to the purpose. So it is within the context of purpose that stakeholders' capitalism can take place.

The second element is that we're proposing to shift from power relationship, which is all about extracting value to mutual relationship, which is about creating mutual value for all stakeholders. So these 2 elements of purpose as a way to organize the ecosystem in which stakeholders operate and the notion of shifting from power relationship to mutual relationship is what we are adding in a sense to the notion of stakeholder capitalism.

And the third element of my response is that we have now dozens of examples that shows that this is a superior form of value creation. So yes, stakeholder capitalism based on purpose and maturity is really the new frontier for value creation.

Lindsey Hall: So I had some trouble wrapping my head around this idea of purpose until you gave me some really compelling examples. And I wonder if you could share those examples with our listeners to help them also understand this idea of purpose.

Bruno Roche: Yes, I'm going to take the example of a pharmaceutical company that is in the business of producing insulin to fight diabetes. And that company a few years ago thought about what is the purpose of my business? And they could have said, okay, we are making insulin, right? And insulin is an important treatment for diabetes.

And they could have stayed there, right? So our purpose is to create -- is to produce more insulin so that more diabetics would have access to more insulin maybe at a cheaper price or with more availability. But instead of that, they decided to say, no, no, we are in the business of eradicating diabetes.

And it is interesting case study that eventually by choosing this purpose, they choose the purpose which eventually meant the end of their business model of today. And if you are in the business of eradicating diabetes, it's not only about selling more insulin. It's about treating a number of important other elements like access to water, access to food, it's about also sports, exercise, et cetera.

So there is a number of -- a greater number of stakeholders that are suddenly material to the purpose of eradicating diabetes. And the case study that we have written which is based on the sort of the interviews, understanding of diabetes model showed actually that the simple fact of choosing this purpose, which is all about solving the systemic problem in the ecosystem in which you operate instead of just focusing on your own activity opened up the new strategy for innovation and also for organizing and orchestrating an ecosystem of stakeholders, they eventually created a very strong and resilient business model that eventually translated into higher and also sustainable financial performance.

That's an example of purpose, right? It's about defining a problem, a big problem in the ecosystem in which you operate and finding ways, finding commercial and business ways to solve this problem profitably and at scale. That's an example.

The second one that we talked about is a pet food company that also was in the business of selling high quality pet food to cats and dogs. And their vision that through this healthy food they would eventually serve a higher need of cats and dogs health.

And as they were on this concept, they eventually moved from seeing themselves as a maker of highly nutritious food to a situation where they saw themselves as a health company, that's a company that provides health. But if you are in the business of health, food is only, again, one way of contributing to the healths of the cats and dogs.

But then you have -- if you're in the health business, you have to deal with veterinarians, breeders, pet shops, pet services. So there is a whole network of stakeholders that are becoming all of a sudden material to this new notion of purpose.

And actually, they gradually as they were developing this business model, they moved into a truly stakeholder capitalism, which is all about orchestrating stakeholders that are all material to the same purpose. So it's no more about extracting value, right, and using your power to extract value, but it's more about understanding the need that exists across different stakeholders in relation to one purpose and smartly organizing this ecosystem of players.

Lindsey Hall: I think a lot of people might come at this idea as something kind of revolutionary or very different from what they think of when they think of a company.

Bruno Roche: Yes. I mean sometimes we think that we are creating new things, and we are innovative. But eventually, we are not. I mean as I was doing my research on this topic, my co-author, Colin Mayer, who is a Professor at Oxford University, shared with me this nice anecdote that the word company comes from 2 Latin words which are com and then panis, P-A-N-I-S. And it literally means the sharing of the bread.

So company is about sharing bread. And the sharing of the bread, as you probably know, is a symbol of fellowship among human beings. You share bread with your companion, you share bread with your friend, your share bread with the people who are at your table, right?

So when you run a company, literally speaking, it means that you are managing fellowship. So managing company is not about maximizing profit. Profit is just the outcome but you're running a company. You're effectively managing an organization that's all about nurturing fellowship. It's all about sharing the bread.

Lindsey Hall: I'd like to end our interview on a bit of a forward-looking note. Are companies and investors ready for your ideas?

Bruno Roche: I think there is a time for everything. The environment in which we are operating as business investors is shifting and is shifting for good. Our argument is that we are entering a period of systemic crisis. So the crisis will be the norm and no one got the exception. And it's not the first time actually that business is facing this kind of situation.

Business existed before capitalism and will exist after capitalism if capitalism does not reform itself. So our argument is that the pursuit of profits for shareholders is a system that worked, right, but it's no longer the system that business and investment will need to adopt in order for that business to prosper and thrive and survive.

And so the sooner business and investors adopt this kind of, what we call, mutual value creation, which is all about taking into account the needs but also the resources that exist in your ecosystem and remunerating these needs and ecosystem in a way that is fair and mutual, the better it is for your business but also for the environment at large.

And we don't have much time. So I'm glad there is, yes, there is a concerted effort, if you like, from the academic world. The academic world is really changing at the moment. And you can see actually there is a realization that teaching of business leaders is changing.

And that's good because without knowledge, people perish. And we need an acceleration of change in management education. We all need a change in the way business are led. And we hope actually that this mutual value creation that we are proposing is going to be a source of inspiration for more business leaders. It's also about investment.

And we know actually that investors are moving fast. And also, there is this change in regulation. So we are -- the world is changing. There is -- we are talking about a systemic change. And in a sense, we need to respond to this systemic change with systemic response and the systemic response would rely on education, from business calls. Also, it will rely on business leaders to adopt new ways of value creation.

It will require investment world to change and allocate capital where it matters, and it will require policymakers to adjust the standard settings. But I can see actually this -- there is a lot of activities behind each of this pillar, education, business, investment and policymaking. So I think in a sense, the train has already left the station, and it's no longer an optional alternative. Business who do not embark on this new concept of value creation will not prosper and will not succeed.

Lindsey Hall: Bruno, anything that we haven't talked about today that you think is important for our listeners to understand that you wanted to touch on?

Bruno Roche: I think because you are talking a lot to finance people, I'd like to say a word of encouragement but also provocation. It is widely accepted that some of the problem we are facing is coming from finance. And therefore, my argument is that the solution must come from finance. CFOs and finance people have incredibly important role to play in shifting from a model that profits from creating problem to a model that profits from creating solutions.

This is something that actually is the duty, but also the opportunity for finance people. And I hope actually that this explanation or this presentation of what we talked about mutual value creation will be an inspiration for CFO and finance people to shift from profiting from creating problems to profiting from creating solutions.

Lindsey Hall: So Esther, as you can hear, Bruno is advocating for a fundamental reshaping of the way companies approach accounting, and he says rapid change is on the horizon for the world of ESG reporting. Within a few years, he expects companies will have to develop a framework to translate their purpose, the metrics associated with that purpose and the impacts into ESG measures so that investors have a guide to help them make better informed decisions on the companies they're investing in.

Esther Whieldon: If you'd like to hear more about the topics we discussed in today's episode, please stay tuned for our upcoming series where we take the ESG Insider podcast on the road. Throughout May, we'll bring you interviews and key highlights from the S&P Global Sustainable1 Summit. The Summit will be held in Paris on May 10, in New York on May 17 and in Sydney on June 9. We'll include a link in our show notes in case you want to sign up to attend any of those events in person.

We'll be digging into topics like net zero and nature positive, advancing social equity and measuring progress. So we hope to see you there.

Lindsey Hall: Thanks so much for listening to this episode of ESG Insider and a special thanks to our producer, Kyle Cangialosi. Please be sure to subscribe to our podcast and sign up for our weekly newsletter, ESG Insider. See you next time.


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