The modern corporate sustainability movement started in the late 1990s, in the wake of globalization debates and the Battle of Seattle. Since then it has grown and matured enormously. Investors are beginning to realize that the integration of environmental, social and governance (ESG) factors can enhance performance. We are now at the brink of an inflection point where market-led changes will accelerate a massive transformation towards cleaner, healthier and socially more inclusive outcomes. But in the current environment of eroding liberal principles, low trust and a weakening of the rule-based system, the question arises whether the corporate responsibility movement has a future at all.
What has since evolved into a global movement started out as a response to stakeholder pressure. Nike CEO Phil Knight, for example, in response to consumer boycotts about the use of toxic glue and dismal workplace conditions, joined UN Secretary General Kofi Annan to initiate major changes in the supply chain at the launch of the UN Global Compact in June 2000. Today, over 10,000 companies are part of the UN Global Compact and many other similar initiatives have sprung up over the years. Twenty years ago, corporates did not bother much about human rights in the supply chain. Environmental pollution was considered an “externality.” And corruption was qualified as a tax deductible, “useful expenditure” in some EU countries. This has all changed dramatically. In 2018, most corporations are taking sustainability issues seriously and are changing strategies and practices to better navigate ESG issues.
Of course, there are corporate leaders and laggards, and there are still many fence sitters, but overall the movement has become part of normal business practice, including the practice of reporting. Over 90% of the world’s largest corporations today report on their sustainability performance using standards developed by GRI, the most widely adopted framework for sustainability reporting. The recent letter to CEOs by Chairman and CEO Larry Fink of BlackRock, the world’s largest investment firm, in which Mr. Fink called on corporate leaders to “make a positive contribution to society,” exemplifies how the corporate responsibility movement has gone mainstream.
The business case for corporate responsibility has long been an article of faith for the advocates of the movement. But showing the empirical evidence was difficult, except in situations where corporations made big mistakes – for example by getting involved in corruption or environmental pollution scandals that made the headlines. In such situations the cost of getting it wrong was clearly apparent. Corporate crises quite frequently were and still are a wakeup call to take ESG issues seriously. The benefits of getting it right, on the other hand, were more difficult to show.
A breakthrough occurred in 2014 when academics and investment bankers produced one of the first major meta studies that showed the link between good corporate ESG performance and financial performance. The finding that there is “alpha” in ESG information has greatly spurred the sustainable investment movement, which has evolved in parallel with the corporate responsibility movement. The UN Global Compact’s sister initiative, the Principles for Responsible Investment was launched by Kofi Annan with a handful of asset owners at the New York Stock Exchange in 2006. Today it has over 1,600 members representing over $70 trillion assets under management. And new tools based on big data and machine learning such as the Arabesque S-Ray technology enable a systematic application of ESG information for both investors and corporations. This holds the promise to relocate capital away from less sustainable companies toward more sustainable ones, thus greatly accelerating the transition towards low carbon and cleaner, healthier and socially more inclusive business practices.
But can this movement deliver on its potential in the face of rising populism and protectionism and a rapidly changing environment, where the assumptions of a fair level playing field based on rules and trust in public institutions may no longer hold? Doesn’t the business case for good environmental and social performance depend on the existence of the rule of law and credible policy support that upholds the values underpinning it?
One way of exploring this question is to ask whether the forces that have been shaping the corporate responsibility movement depend on government support. Clearly, policies have played an important role, for example in the form of setting performance standards and mainstreaming disclosure practices. But government support has not been the only driver. The movement was and is largely voluntary. Why?
First, technological change has been and remains the most powerful force. It has given rise to greater transparency and reporting, and is delivering powerful new solutions. Technological change is irreversible and will continue to facilitate transparency, digitalization and low carbon solutions. Policies can help to accelerate the role of technology, but they cannot stop it. At worst, a hostile policy environment can slow down the diffusion of winning solutions.
Second, natural boundaries will increasingly put a premium on low carbon and environmentally friendly practices as any kind of natural asset is bound to increase in value over time, given global demographic and consumption trends. Good environmental stewardship will thus increasingly enjoy a market premium. Human impact on the natural environment will continue to increase. It is therefore predictable that the environmental agenda is here to stay, irrespective of political beliefs or swings. Nature can’t be fooled, and no populist or autocrat can command or seduce nature to behave differently.
And third, governance changes in both the West and East point towards greater divergence. On the one hand we see greater fragmentation, while on the other, we see more centralization. But irrespective of this divergence, people everywhere are increasingly able to express their own values by making choices about their lifestyles, such as what they buy and how they invest. As awareness about social ills and environmental degradation grows, it can be hoped that people will increasingly seek to make a difference through their own choices. There are indeed countless social movements all over the world that show how the next generation is bringing about improvements in alignment with the corporate responsibility movement, from adopting plant-based diets and “plogging,” a Swedish movement that combines jogging with picking up garbage, to making sure that personal savings are invested in sustainable companies.
Clearly, the forces that propel corporate sustainability forward are largely independent of policymaking and they will continue to drive the movement even in the face of weakening support for international cooperation and a rule-based trading system. But only up to a point. Should the destruction of the international rule-based system become the new dominant way of policymaking, then all bets are off. Unfortunately, such a scenario is currently in the cards. In a recent article, the Economist concluded a lengthy analysis of the current destruction of the rule-based international order with a warning that a world “of trade wars, nuclear proliferation, fractured alliances and regional conflicts may soon show.” Such a world would not only spell the end of the corporate responsibility movement as we know it. It would also destroy the foundation for markets to create and spread prosperity and technological solutions.
As protectionism and ethnic chauvinism continue to spread around the world, there is now an urgent case for responsible business leaders to speak up and to use their influence to defend and strengthen the rule-based market system and the values that hold markets and humanity together.
More specifically, they can reaffirm and bring to life within their own organizations and within the value chains and the communities they impact, the universal principles and norms advocated by The 10 Principles of the UN Global Compact and the UN Guiding Principles on Business and Human Rights.
They can also show their care for all stakeholders and the public good by advancing the UN Sustainable Development Goals, a comprehensive set of goals that express global development aspirations.
Last but not least, CEOs can demonstrate “Corporate Statesmanship” by speaking up and making their influence work in support of basic values of humanity and the system that supports them. Recent high-profile examples, such as the reaction to racial discrimination by Starbucks CEO Howard Schultz and the public rebuttal of ethnic chauvinism by Siemens CEO Joe Kaeser, show the way ahead.
Corporate and investment leaders today have greater influence than ever before. Their voices and actions can shape tomorrow’s world. The time for responsible corporate leadership is now.