New sense of responsibility
Despite a sense that capitalism as an economic system has left too many people behind, many citizens want corporations to help improve society. In the last few years, the idea of business models that put stakeholders first has become increasingly prominent, owing to social movements such as Black Lives Matter, events such as Covid-19 and the rise of climate activists, as well the vast sums of money pouring into ESG (environmental, social and governance) funds. Faced with reputational damage and the loss of investors, employees or customers, companies have embraced stakeholder interests like never before.
“One of the challenges for firms is that the number of stakeholders has multiplied. It’s not just shareholders but employees, customers and anyone who is affected by what they do,” says Andrew Scott, Professor of Economics. “This brings that sense of responsibility. Business used to be about focusing on the bottom line, a few clear criteria and not worrying about everyone and all the knock-on effects of your operations. But in a period of profound change, such as today, companies need to think beyond their profit margin.”
Professor Scott believes the fall from grace of shareholder capitalism is likely to prove more than a near-term shift, given the complexity and severity of the challenges society now faces. “We’re at a great cyclical turning point in history,” he says. “We’re seeing work being transformed by technology and a rising focus on sustainability. And in the gap between policy and solutions, you see a pressure for corporates to do something. We won’t resolve issues of sustainability, health, wellbeing and technology in the next few years. Until we sort that out, corporates will have a role to play.”
Firms can also be very effective agents of change, Professor Scott argues. “Businesses are so often a distribution network for social change. Through their products and working practices, they have an enormous impact on society, which will need to be rewired.”
He cites the example of how companies can help avoid a drop in economic output as the working population falls because of lower birth rates in some developed economies: “By adapting working practices to make work more appealing, businesses can ensure older people remain productive for longer.”
Concerns over greenwashing
Being given greater responsibility for social issues can be both a blessing and a curse for businesses, with pitfalls that leaders of organisations will need to navigate carefully. Focusing on broader stakeholder interests has become mainstream in the business world, but some of the problems with this approach are now surfacing. These include concerns over greenwashing, or making unrealistic or misleading claims, particularly with respect to firms’ environmental credentials. There are concerns over the accuracy, transparency and comparability of ESG data and reporting by companies and their investors. This is where rigorous analysis and evidence-backed initiatives are vital.
Anna Pavlova, Professor of Finance, has developed a methodology that helps “separate signal from noise” to determine the true ESG performance of a company. “Investment managers look at ESG ratings provided by rating agencies to evaluate companies and determine whether the company is green or brown,” says Professor Pavlova. “And what we have found is that there is a lot of noise in these ratings. And there is a big disagreement among different ESG rating agencies as to what the score of a company should be.”
She believes that models like hers will go a long way to helping channel capital into green projects. “There is a lot of appetite among investors to invest money consistent with ESG principles and this is where measurement comes in. So, we need to learn how to measure ESG. And I think this is where the future is.”
Rajesh Chandy, Professor of Marketing, is working on a set of metrics to enable commercial entities to show how their products and services are not just generating a profit for shareholders, but also having “spillover effects” and enriching lives in their local communities. “We have to go beyond the lazy assumption that what is good for business is necessarily good for the world,” Professor Chandy says. “At the same time, we have to recognise that businesses can have a profound impact on lives and livelihoods and, indeed, on the environment that surrounds us.”
He believes the tool he is developing will help unlock investment in sustainable companies that may not turn a profit for years to come: “If you can provide evidence that the business had an impact, not just on its own commercial profits but on society at large, then we can unlock a set of resources that are impact-focused that reward businesses for making investments in life-saving products and services.”
Re-regulation
What does all this mean for companies that want to embrace sustainability and elevate their role in society? Professor Scott says it’s key to recognise that the time to act is now because environmental regulation is expected to significantly tighten as the climate crisis continues.
“As a society, we went through a period of deregulation, which pushed market forces to the forefront, and we’re now going through a period of re-regulation because of economic, social and technological forces,” he says. In other words, if companies do not jump they are likely to be pushed – and it is better to get ahead of the curve of change on your own terms.
When it comes to acting on sustainability, Professor Scott argues that business leaders must also recognise that these matters are complex and will involve making trade-offs between different goals. In practical terms, this means businesses should set out their priorities for specific goals that address the most material impacts on their firm. “There are so many social pressures and firms will need to make a call. You cannot focus on everything – you have to focus on what the key priorities are; concentrating on where your profits are most at risk and where the opportunities are,” he explains.