Transcript by Kensho. 

Lindsey Hall: 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.

Stakeholder capitalism. If you're not familiar with this term, well, it's the idea that companies are responsible to a wide range of stakeholders, including their customers, employees, suppliers and communities as well as their shareholders. The concept has been gaining ground over the last few years, including at the annual Dave Summit in the Swiss Alps, organized by the World Economic Forum or the WEF, which brings together governments and business elites.

 Esther Whieldon: Two years ago, dozens of major companies agreed to use stakeholder capitalism metrics that the World Economic Forum helped to develop. These include things like corporate governance, climate disclosure and diversity. The company has used those metrics for their mainstream reporting. We're talking about things like annual reports and proxy statements. 

Lindsey Hall: Two years ago, stakeholder capitalism was the buzzword at Davos. The 2023 Davos event just finished up last week. And in this episode of the ESC insider podcast, we're looking at how discussions of stakeholder capitalism have evolved. For that discussion, let's bring in our Europe-based colleague, Jennifer Laidlaw. Jennifer is a senior writer on the thought leadership team at S&P Global Sustainable1 and a regular contributor to this podcast. So Jen, what have you been hearing out of Davos?

Jennifer Laidlaw: Well, stakeholder capitalism is alive and well in discussions at Davos. During one session, Bank of America CEO Brian Moynihan said business has to take a leadership position in this domain. He called on companies to use voluntary standards like the stakeholder capitalism metrics as it would prepare them for future regulation on sustainability reporting underway in jurisdictions all over the world. He said that "get the disclosure done because, frankly, it's coming for you anyway, so you might as well get going."

Since the WEF had a major role in developing the stakeholder capitalism metrics. I went back to Emily Bayley, the organization's project lead for ESG. She told me stakeholder capitalism was still very much top of the agenda and discussions at Davos. And from her point of view, definitely here to stay.

Emily Bayley: I actually think it's growing more so now than ever. When we spoke 2 years ago, we had about 60 companies who made a commitment to start doing something as it related to the forum's stakeholder capitalism metrics initiative, which is essentially an initiative to push for global alignment and global consistency of sustainability reporting. Now 2 years on, we have over 190 companies who are committed to working with us on this journey. We also have 137 companies who've actually done the reporting. So we're actually now able to see how companies from different regions, different geographies, different maturity levels of sustainability reporting are able to actually take these metrics on board into the reporting. 

And this has been really immensely helpful as we talk through with some of the different stakeholders and the global dialogue on this to show that it's achievable, businesses do want to integrate more sustainability disclosures and metrics into their reporting. They're able to do so, and this is all being done on a voluntary basis. Even though we all know on the horizon, there's quite a lot to come in terms of new reporting requirements around the world. So I would say it's not going away. If anything, our community of companies committed to this is growing, and we're starting to see companies not just talking and making commitments but actually putting steps forward into action. 

And also from these 137 companies that have done the reporting, we have actually started to look with them to see how we can capture the learnings that are coming out. So we started to compile a compendium of case studies to hopefully convince the skeptics of the value add of enhancing on a voluntary basis, your sustainability and nonfinancial reporting. So it's definitely not going away from our point of view.

Jennifer Laidlaw: Okay. Great. Now you mentioned because there's so many more companies that have joined that have started to use these metrics that there's different regions, different sectors. What differences are you seeing between regions and sectors?

Emily Bayley: So I think we have a lot of companies around the world who are working with most of the companies we work with in this effort are major multinationals or they have stakeholders around the world. So of course, we know the EU is pushing forward a very, let's say, progressive set of reporting requirements for companies that are listed or have a certain number of operations within EU. We also know last year that the U.S. SEC put out a proposal for climate-related disclosures. And you have also the International Sustainability Standards Board getting up and running and releasing their first set of global standards coming out later this year for proposed adoption and integration into global markets. 

So you see on the horizon, this mandatory reporting coming through. So companies are trying to understand even if they don't have a reporting requirement now, how do they start to grasp their hands around this, how do they actually start to understand and start to implement systems and integrate reporting into their suite of reporting materials? So we look at the stakeholder capitalism metrics, and we've heard from other companies that this is a helpful on-ramp. So we can talk to a company that's sitting in the Middle East that may have investors in Europe that they may not be required to report on EU specific metrics and disclosures, but they certainly have investors asking them to start thinking about it. So we're starting to see this as a helpful on-ramp for companies to actually start to build their internal systems, create a global alignment internally within their organization, streamline projects and initiatives with organization and also think about how they can start to actually move away from reporting and move further to more demonstrating progress and improvement. 

So it's certainly something that we're seeing is companies saying, look, this is a simple set of metrics we can take onboard for our organization, and this can help to kind of educate us as we start to look at what might be coming in the future with mandatory reporting requirements either in jurisdictions in which we operate or recommendations from shareholders that we have around the world.

Jennifer Laidlaw: In terms of strategy, how much do you see that companies are really embedding this actually in their business strategy?

Emily Bayley: They are embedding this in their strategy. I mean we see it from the point of view of management teams and from boards, they're formulating ESG or sustainability committees if they don't have them already within their leadership teams. This is coming up more frequently on board agendas now. So there's also a stronger awareness from chairs and from Board members of the importance of this effort and the investments that need to be made for long term, whether it's for compliance or for creating a competitive opportunity to stand out amongst their peers. But it's really -- we're seeing it from other organizations. And when -- we look at the map of the different executives we work with on this effort. Of course, this was started at the CEO level of our organization, but it's really engaging with Chief Sustainability Officer, Chief Financial Officer, Chief Procurement Officers, Chief Accounting Officer. So it's going across an organization. And when companies are starting to think through their strategy or how they make net zero commitments, these are things that don't sit in one part of the house anymore. They're really a holistic organizational investment to make a shift and to make a change. 

And more companies now are trying to see how they actually navigate putting executive compensation packages together where you're rewarded based on not just your delivery of financial goals, but also your sustainability goals. So I think the awareness is growing and certainly increasing across executive management teams and boards from what we've been hearing in our work.

Jennifer Laidlaw: I also spoke to Suz Mac Cormac, a partner at the law firm Morrison Foerster based in San Francisco. She advises firms on corporate governance, and I wanted to get some sense from her how companies were approaching stakeholder capitalism. She mentions single materiality that refers to sustainability criteria that are material to the company's financial performance and double materiality that also takes into account a company's impact on society.

Suz Mac Cormac: I'm here in San Francisco. There are some of our tech clients that are 10 years ahead of their competitors. And once you start disclosing and they start disclosing and other companies see where they are, they're like, "Oh, I need to improve as well." So there is some kind of setting a benchmark and a standard for -- in some cases, they can say it's the lowest common denominator. But in other areas, it's going to be okay, this is to operate in this industry as soon as you disclose and then there is data about what everybody else is doing in terms of, for example, evaluation of climate risk, there will be pressure on companies. 

And once people are using the same data points, the same ways to measure so you can really compare against companies I think that will help move the needle on both single and double materiality and double materiality is your kind of stakeholder capitalism. 

I think stakeholder capitalism is here to stay. I think we need a lot more granularity and I think some of it will come with having reporting standards, both in countries and then through the ISSB, where accountants are really measuring where you can distinguish and tie sort of tie the ESG factors to medium-, short- and long-term value, but also operations in a more granular way.

Jennifer Laidlaw: Asset owners such as pension funds or foundations will also play a major part in expanding the role of stakeholder capitalism from Suz told me as they can put pressure on the firms that manage their assets.

Suz Mac Cormac: There is a rise of what's called the shareholder commons. I think it's at the very early stages, but I am hopeful that the asset owners will start imposing guidelines on the asset managers that again, will filter through to the operating companies. And I think that will be as or more effective than the disclosure or even the regulations. 

So the theory, the very simple theory behind the sort of shareholder of the commons is stakeholder capitalism as it relates to climate. So if you take 10 companies and none of them put in place what they need for climate risk or emission reduction, all of them over time are going to be less profitable. 

So how -- but if any individual company incurs the cost to be really climate resilient and to move to net zero or circularity or whatever they're going to do with their operations, it's going to be extremely expensive and their stock price is going to -- their shareholder value is going to be reduced significantly. But if all 10 of those companies drive for individual alpha, they're all going to lose. The asset owner is going to lose. 

So are there guidelines that the asset owners will impose on the asset managers public and private markets to create some guardrails around particularly embedding what needs to happen, a change in operations related to climate. 

And that I have the most hope for that because I really think that is the only way we get -- that is one mechanism to get from here to there. I mean another tool shifting fiduciary duties, the Delaware Public Benefit Corporation when you have dual fiduciary duties and for example, if a company has climate change, an oil and gas company has climate change as a fiduciary duty, then, A: they're protected from litigation if their stock price drops, if they're focused on climate and B: they can be sued if they don't focus on climate. And so some of these new corporate forms can also provide a sort of viable mechanism to really move the needle on climate.

Jennifer Laidlaw: During Davos, there was a discussion between Nicolai Tangen, the CEO of Norges Bank Investment Management, Norway’s sovereign wealth fund; and Mark Carney, the UN Special Envoy for climate action and finance. They said that only 17% of company boards have credible net zero plans in place. We also talked about sharp rises in executive pay and an absence of board diversity. These are all issues that stakeholder capitalism aims to address. So I asked Emily what needed to happen to improve those numbers.

Emily Bayley: So I think from what we've heard and taking into account those comments made in Davos, there is certainly an opportunity for Boards to diversify the set of leaders they have on their board and the different skill sets that they have. 

We've been hearing from companies now, of course, that there's more awareness being brought by the executive management teams to the importance of these efforts and the fact that it's becoming compulsory to be compliant is probably going to make that move at a rapid speed. So I'd be curious to see what that conversation is in about 2 years' time because I think the 17% will increase exponentially because boards will need that. 

I think a couple of years ago, we were talking about the increased importance of having cybersecurity experts on your Board. And I think definitely now having sustainability experts and environmental experts on our Board is the next frontier. And I think companies will be grappling with that in the next couple of years. 

Jennifer Laidlaw: Emily then went on to describe what the WEF plans to do in the coming year to advance stakeholder capitalism goals. 

Emily Bayley: We're now hearing the importance of making sure that we're communicating clearly with our stakeholders, we're providing comparable information, and we're getting this information reasonably assured. I would say assurance and reasonable assurance were probably heard in so many of these conversations is that for this information to be decision useful and helpful not only does it need to be published in time with financial information, but it also needs to be reasonably assured. So I think that could be probably the next area of focus for us is making sure that we're getting all the ways in which we communicate with our stakeholders about the progress we're making in our companies and making sure that, that information is decision-useful through reasonable assurance. 

So that, I think, is probably going to be hot on the agenda for the forthcoming year. And we also heard as well the importance of now narrowing in on human capital and people-related thematics and topics. So certainly, a number of companies suggesting to the ISSB that, that would be the next area of focus and companies now trying to understand how they enhance their own reporting around their human capital and their people for future reporting cycles. So those are kind of the 2 things I think are coming through as kind of the next frontier where we'll be going as the forum and where the companies are certainly suggesting we take our course of action next.

Esther Whieldon: We heard both Emily and Suz speak about a lot of the different sustainability reporting frameworks that are out there. One thing we've been hearing a lot about is the potential convergence of the rules to create a global playing field. So Jen, was there any sense in the Davos discussions of when that might happen?

Jennifer Laidlaw: So I asked Emily, when we might begin to see some convergence and what role the WEF was playing in that. Our listeners will hear her mentioned several acronyms, the CDP, formerly known as the Carbon Disclosure Project; the CDSB, for Climate Disclosure Standard Board; the GRI, or the Global Reporting Initiative; and SASB, the Sustainability Accounting Standards Board, which are all global reporting frameworks.

Emily Bayley: So it's a race, but it's also we're trying to make sure we do it right. So the process in the EU started a few years prior to the establishment of the International Sustainability Standards Board and that's a legislative process that's moving on a very strict timeline. We have heard from companies, and you've certainly heard it in the public media that since the ISSB could be potentially a global solution for creating a global standard, it's important that there is interoperability and communication language that's between the ISSB and the EU. So there are a number of dialogues taking place between ISSB and the EU to make sure that what the EU comes out with in their jurisdiction and their legislation is reasonably well aligned to the ISSB's-proposed standards. 

Now there's still time. I know there are a number of companies who are advocating for that comparability that alignment and making sure that they are interoperable because that's what we really want to get towards, but it's not concluded yet. So we also now have, of course, the U.S. SEC, but the idea is that, hopefully, we can move towards one globally aligned system. 

When we spoke 2 years ago, we had the convergence happening between the different standard setters like CDP, CDSB, SASB in conversations about GRI. Now we're talking about how do we make sure the ISSB can work across jurisdictions that may be taking their own path like the U.S. SEC or the EU. So time will tell, but we remain cautiously optimistic here at the forum that there will be ways to make sure that we can move towards an interoperable global system between the jurisdictions and the international standard setting body.

Jennifer Laidlaw: Suz explained how convergence would be necessary, but also very challenging. She talks about Scope 3 emissions. Those are emissions that occur up and down the company supply chain as well as when customers use the company's products.

Suz Mac Cormac: It's going to be a big issue because most of the large companies where most of the wealth are multinational, right? So -- and if you look at who they're impacting, I go to -- I know there's a lot of discussion at Davos about Scope 3 emissions — their suppliers, their distributors, all of their partners are also international. And so if you are some manufacturer in Micronesia providing fabric to 15 clothing suppliers all the world, they all need different data and different information and you to verify. I mean, it's going to be a mess. I mean I don't -- how it's going to happen unless there's convergence. That's kind of the practical side. 

And then then the finance side is how as an investor in the public or private markets, how do you evaluate company A and company B in terms of climate resilience unless they're both using the same data points and measuring the same things in reporting. I think it will be very difficult. I think we do need convergence. 

Jennifer Laidlaw: In Davos, there were several discussions about how a global recession can dampen the growth of stakeholder capitalism as companies are forced to cut jobs and focus on short-term growth to ride out the economic storm. Here's what Emily had to say. 

Emily Bayley: We talked about this last week in Davos, I mean, capital is focused on the long term. Capital flows are flowing into companies that are doing good. and those companies are doing well. So companies that are focused on the long-term commitment they make to their stakeholders, whether they be employees, members of the communities in which they operate, or their shareholders those are the companies that are being rewarded by capital flows into their company. So I think the companies that are committing to the long term are the ones that are going to see through this recession and are thinking with a long-term point of view and not a short-term point of view. 

There are companies now that are discussing downturns and how they're going to stay the course. And so that they'll have to decide based on what makes the most sense for them. But from our point of view, what we heard in Davos last week, the companies that are making long-term commitments and staying the course navigating through this are the ones that are doing well to their stakeholders and the capital flows will continue to flow into the organizations.

Jennifer Laidlaw: The impact may not be so much on companies but on low-income communities, Suz told me. You'll hear her mention the IRA that stands for U.S. Inflation Reduction Act passed in August 2022, which includes incentives and other measures designed to drive investment into clean energy. 

Suz Mac Cormac: Climate when we had the 2008 implosion, before 2008, a lot of companies were starting to invest more heavily in their internal sustainability, and we did see a significant drop off. 

This recession on climate, the physical manifestations of climate are so evident that most companies and investors understand that they need to be doing more to reduce emissions, but also to manage their climate risk just because it's, it's good business. Their manufacturing site has not been able to produce because it's been underwater because it was in Pakistan, for example. 

So on the climate side, I don't see any reduction. And in places like the U.S., particularly with the IRA, you have so much government funding and philanthropic funding again to offset some of the risk, I don't see a lot of downturn. 

The focus on equality, I think that is going to be significantly impacted. And again, our low-income communities, which are getting poorer and are not climate resilient at all and are not impacted by what happens with the big global corporations that's where I think the recession is going to have a disproportionate impact, just like COVID had a disproportionate impact. I mean COVID, most of the Davos crowd, the stock markets didn't tank, meanwhile, Main Street was devastated — low-income communities in this country and around the world —have been devastated and they have not come back.

Lindsey Hall: What we just heard from Suz really brings home to me the idea of just transition, the importance of not leaving communities behind in the energy transition or when addressing the physical impacts of climate change.

Jennifer Laidlaw: Yes. And I think stakeholder capitalism at its heart, really does try to address that. We heard from Emily how many of the Davos discussions centered around people and how the WEF expects to incorporate more people-related themes in its work. 

Esther Whieldon: And please stay tuned as we continue to track how companies are balancing near-term economic pressure with longer-term sustainability goals.

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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