Businesses need to work for their stakeholders, not just their shareholders: That was the message coming from corporate leaders at the World Economic Forum's annual Davos conference.
Stakeholder capitalism — the idea that companies are responsible for their role in society in addition to making money for shareholders — has taken on new meaning thanks to COVID-19. It was the buzzword among major players in the ESG world like BlackRock Inc. CEO Larry Fink as well as heads of government at Davos, which was virtual this year.
In the latest episode of ESG Insider, a podcast hosted by S&P Global, we dive into stakeholder capitalism — what it means and what people were saying at the Davos gathering. You'll also hear an interview with the World Economic Forum's Project Lead for ESG, Emily Bayley. She describes the story behind a set of new stakeholder capitalism metrics that more than 60 major companies just agreed to use in their mainstream reporting, such as annual reports and proxy statements.
Listen to the ESG Insider podcast on SoundCloud, Spotify and Apple podcasts.
Here some key takeaways we heard during Davos:
1. It's now 'obvious' that the role of business is to create economic and social value.
The conference took place against the backdrop of the global pandemic, which company executives said had accelerated a shift among corporations to join the growing ESG movement.
Claudia Azevedo, chief executive of Portugal's Sonae SGPS SA, a diversified group spanning retail, fashion and investment management, said prior to the crisis, people would tell her it was "impossible" to combine market returns and social value. "Nobody would say that this year," she told the same panel.
"In the business community, everyone thinks now it is obvious that you should have a vision that is to create economic and social value," she added.
ESG funds remained relative safe havens early in the pandemic, and fund management giants at Davos said investor preferences are shifting in favor of companies that take stakeholder capitalism into account.
"Across every industry you see a widening gap between the best-performing companies in the industry and the worst-performing companies," BlackRock’s Fink said during a panel on stakeholder capitalism.
"We're seeing now valuation shifts and that is because of companies' role in their stakeholders' [lives] and how they are building a better community around their stakeholders," Fink said.
He made the remarks on the same day that he published his 2021 annual letter, telling CEOs that their shareholders will benefit "if you can create enduring, sustainable value for all of your stakeholders."
2. Businesses must work on environmental and social issues in tandem.
As businesses consider critical issues such as reducing emissions and workforce diversity, they also need to "think more broadly and at the same time more deeply and they have to be constantly be connecting the dots between all those areas," Anisa Kamadoli Costa, chief sustainability officer at jewelry firm Tiffany & Co., told a panel on delivering social justice in the recovery.
Companies that want to take part in a just recovery need to listen to their employees across all levels and geographies in what is an era of employee activism, Kamadoli Costa said.
Tiffany, as a purchaser of mined materials, takes part in the Initiative for Responsible Mining Assurance, which aims to create more socially and environmentally friendly mining by bringing together nongovernmental organizations, labor unions, affected communities and downstream businesses such as Tiffany's, she said. Giving all stakeholders representation and a voice at the table ultimately ensures stronger standards, she noted.
It is also critical that businesses back up their words with action, she said.
"You cannot put something up on an Instagram page without having the appropriate underlying work be in place," Kamadoli Costa said.
In the midst of coronavirus pandemic, many U.S. corporations responded to George Floyd's death with statements condemning racism and voicing support for the Black community. Darren Walker, president of the nonprofit Ford Foundation, told the same panel that corporations needed to ask themselves how they can push the issue further.
"How can it be that one third of the S&P 500 does not even have one African American on its board? How would a company with that composition of a board be able to authentically implement, execute on, and sustain diversity as a value?" Walker urged companies to ask themselves, adding: "We have work to do."
3. To prevent greenwashing, more 'rigor' is needed to prevent in applying ESG data.
As the ESG movement has taken hold, so have concerns about greenwashing — making an investment sound more environmentally friendly than it actually is. Growing interest in social and governance issues has also led to fears about so-called "impact washing."
The lack of standardized data on ESG investments is widely seen as an impediment to the growth of sustainable investing, and rules on disclosure and green investments are in their infancy. During Davos, dozens of the world's largest companies representing trillions of dollars in market capitalization pledged to use a uniform set of "Stakeholder Capitalism Metrics" in their mainstream disclosures.
"There's a lot of willingness" to work on diversity and inclusion, but "not all programs actually are working effectively and therefore I think we need more rigor in applying the metrics, having the accountability and utilizing techniques that make a difference," Martine Ferland, CEO of asset manager Mercer LLC, told a gender parity panel at Davos.
The EU sustainable finance action plan, announced in 2018, created a common classification system, or taxonomy, to define environmentally friendly investments. The taxonomy assesses 67 economic activities, spanning manufacturing to transport, and is designed to steer companies as they adapt their business strategies to climate change, as well as help investment funds judge sectors based on their environmental performance.
Anne Richards, CEO of Fidelity International Co. Ltd., told a panel on corporate risks that she sees the ESG movement going in the right direction as more investors show interest in sustainability issues and as stakeholders coalesce around standards.
Most investors are "very passionate" about ESG, even those who were not interested three or four years ago, she said. "The coming together of all the different taxonomies, the convergence into commonly accepted standards which can then be properly measured against is the way we will cut through all of this."