Let's get down to business
The Rise of Conscious Capitalism
The Role of Corporate Sustainability
The Triple Bottom Line
A not so peachy situation
It’s no secret anymore that our societal and economic systems are overdue for a redesign.
Social We’re facing an unprecedented income disparity and inequality.
Political Populism, nationalism, and lack of accountability are redesigning our political landscape rolling back the progress made since WWII.
Industrial Mechanization and AI combined with globalization are improving how we produce things but countries are leaving people behind without retraining them for a new future.
Climate It takes a massive amount of heat energy to warm up our global oceans, yet global temperatures rose by 2°C since the pre-industrial era. The warmest years on record have happened between 2015 and now.
"Approximately one-sixth of all known species on Earth are on the verge of extinction."
— United Nations report, 2020
"The world’s richest 1 percent own twice as much as the bottom 90 percent."
— Oxfam International, 2020
"Leaders are not even pretending to be in charge."
— Barack Obama, POTUS 2009-2017
The past thirty years and the rise of Greed Capitalism
Businesses have played a crucial role in improving the quality of life standards around the world. They’ve provided jobs, scaled crucial (technological) innovations, and spurred economic growth and well-being.
In a perfect world, corporations fulfill the needs of diverse communities and provide purpose and dignity to people’s lives. In 2018, for the first time, 50% of the world population was “middle class” and global unemployment was 5.2% – the lowest in 38 years.
But greed took over. Companies had a singular focus – endless financial growth, the faster the better (just like governments with GDP). This simplistic view of relentless growth and sky-high financial gains is why corporations played a major role in the increased inequality and environmental degradation of our society.
Businesses did not have to take responsibility for the true costs of their actions (remember the 2008 financial crisis?). The true essence of capitalism has been hijacked and subverted to benefit only the few while penalizing the many. And the planet.
"We let people get away with the negative impact, the negative externalities that they have in society. They're not paying for it. Specifically, airlines are not paying tax on the fuel that they buy. I think when you look around society, you see a lot of these things that don't make sense."
— Nicolaas Koster
THE RISE OF CONSCIOUS CAPITALISM
Conscious capitalism and its current acceleration
Thankfully, in the past few years, a confluence of forces have come together with the power to shift the balance towards a capitalism that is once again at the service of the people who fuel it.
Today, companies are expected to do more than make profits. They are held accountable if they don’t positively contribute to society and our environment. Over and over again, the leaders who we interviewed said money in itself is not bad. It’s bad if used poorly. Businesses are waking up to this, pressured by the public, governments, and investors.
Generational changes have created new dynamics that shape the potential for future businesses across the world that can be different and better.
Let us explain a few of these changes in the following areas:
- Changes in people
- New generations
- Focus on sustainable brands
- Shift in investors' perceptions
- Brand performance
- Planet earth
- The pandemic
"I think sustainability has really come thankfully very, very high up on the list of what people care about. And the most important thing is that young people care about it. So we know that the conversation is going to be around for a long time."
— Marcus Samuelsson
CHANGES IN PEOPLE
The public is voting with their $ and their time
In this age of information, characterized by transparency, the public is more aware than ever about how our current economic system has contributed to our fragile societies and unfair economies. Consumer choices have drastically changed from mindless consumerism to conscious purchasing. The so called "attitude-behavior gap” (saying they’ll buy sustainable, but in reality don’t) is also disappearing because of the availability of sustainable choices in the marketplace.
Gen-Z, Millenials, Gen-X, and activism
As baby boomers age and their purchasing power declines, new generations become key to any company’s future success. Here is the not so new news: Starting with Gen-X then to Millennials and Gen-Z, the commitment to shift dollars towards sustainable brands is increasing dramatically. 62% of Generation Z survey participants prefer to buy from sustainable brands, on par with Millennials, compared with 54% of Generation X. And for brands that offer real sustainable quality, margins are a fair game: Generation Z is the most willing to pay more for sustainable products (73%) compared to Millennials (68%) and Generation X (55%). 76% of Millennials consider a company’s social and environmental commitments when deciding where to work (vs. 58% U.S. average).
FOCUS ON SUSTAINABLE BRANDS
The growth of sustainable brands
Once upon a time there was a company called Patagonia. It was one of a kind with its love for the planet and its passion to explore it. Skip to 2020 and Patagonia is the first of dozens of brands that have achieved a good balance between profits and positive social practices. The number of sustainable brands is growing every day and the reason is simple – they are absolutely killing it. New entrepreneurs have entered the arena trying to change how business is done and with the simple belief that creating a successful business doesn’t have to come at a cost for everyone else.
From better employee practices, to improved material sourcing, to positive environmental impact. Today you get to pick where your shirt is made and how, or where the food you put on the table is grown. This is not a fad. It’s here to stay for a simple reason: it makes people feel good, and it generates money.
More on that in a few.
"It takes a lot of time, and a lot of effort, to understand what's truly sustainable. And it doesn't just have an eco-label on it. We have to peel back the layers of what that means to give out a sustainable product."
— Kelly Elsner
SHIFT IN INVESTORS' PERCEPTIONS
From shareholders to stakeholders
While narrow-minded Wall Street analysts still view the old Social Responsible Investing (SRI) as expensive and not a good investment, global institutional investment firms like Blackrock, Vanguard, and the government pension funds for Japan and Sweden, amongst others, have shifted their focus towards Sustainable Investing and its focus on ESG (Environmental, Social, and Governance) criteria.
According to the Harvard Business Review, “... the companies with the highest ESG ratings outperformed the lowest-rated firms by as much as 40%”.
All of this is moving an immense amount of capital towards companies that perform well in ESG, fueling a whole new marketplace for brands that understand how to thrive in the future.
An interesting take from HBR on Sustainable Investing strategies follows here: Sustainable Investing encompasses a menu of strategies that can be used in combination.
Here are seven common ones:
- Negative/exclusionary screening (eliminating companies in industries or countries deemed objectionable)
- Norms-based screening (eliminating companies that violate some set of norms, such as the Ten Principles of the UN Global Compact)
- Positive/best-in-class screening (selecting companies with especially strong ESG performance)
- Sustainability-themed investing (such as in a fund focused on access to clean water or renewable energy)
- ESG integration (including ESG factors in fundamental analysis)
- Active ownership (engaging deeply with portfolio companies)
- Impact investing (looking for companies that make a positive impact on an ESG issue while still earning a market return)
"Whereas shareholder capitalism exploits resources to maximize shareholder returns, the businesses of tomorrow must include wider considerations, adding value for employees, our community, and to another important stakeholder… Planet Earth."
— Peter Brabeck-Letmanthe, Chairman Emeritus of Nestlé WEF
Sustainable corporations outperform even during a global crisis
Top quintile of ESG companies like Target, Starbucks, PepsiCo, and T-Mobile have gone above and beyond for their stakeholders (raising wages for frontline workers and donating millions of dollars to struggling communities).
Our planet is burning
Here goes the obvious: The Amazons, Australia, and California are burning. The Mediterranean has become sub-tropical. The water is rising and cities like Cape Town have no water to drink. We could spend pages and pages on climate change. The world is warming up and we need to reverse the trend.
Scientists are predicting a point of no return in the next few years while some governments blinded by politics are refusing to accept real evidence. The next generations will not allow the older ones to rob them of their future. The time to act is now and we all know it.
Even those who say they don’t believe in it.
"At the end of the day, environment will always become a social issue if it's not dealt with."
— Simon Brossard
Accelerated by a global event
COVID-19, the pandemic that caused economies to crash and our day-to-day to come to a screeching halt, gives us a glimpse into the severe changes in lifestyles and economic structures needed to effectively improve our societies and move away from the old habits we’ve relied on for so long.
"Almost 40% of households with income below $40,000 were laid off or furloughed. Just 13% of households with income over $100,000 reported an employment disruption."
— US Federal Reserve, 2020
COVID-19 has created an acceleration towards sustainability in both the public and private sector globally. People want a new world out of this mess and they will have it soon. Milan, Italy – one of the pandemic epicenters – has moved its sustainability goals form 2030 to 2021. The Italian government is paying up to 500 Euros to any Italian who buys a bicycle in an urban center.
Amsterdam, The Netherlands has committed its economy to the sustainability based “Doughnut Model” by economist Kate Raworth.
The European Union has unveiled the “green” economy stimulus package.
China prioritizes employment vs GDP for 2020 and 2021.
American Express plans to avoid job cuts in 2020 and will find other ways to ride out the impacts of the coronavirus.
Danone committed 250 million euro to 15,000 small businesses in its ecosystem.
"The recovery from the COVID-19 crisis must lead to a different economy."
— António Guterres, Secretary General of the United Nations
"COVID-19 really lays out the limits of thinking of people as solely interchangeable units and not as human beings, treating them with dignity and respect as an integral part of the production enterprise."
— Rebecca Henderson, Harvard Business School professor and "Reimagining Capitalism" author
Change or fiddle away
Corporations are realizing their success is interlinked with the success of their ecosystem. In some cases it is because they truly believe in what the future holds, in others it’s to avoid the risk of being irrelevant very quickly. A new demand for assessment and accountability is driving real change across the business community, leading to a fairer, more stable, and resilient world. Businesses that won’t change will die quickly, leaving room for fresher, more resilient brands that get how the world works.
Don’t forget, it wasn’t too long ago when people thought Amazon was a small internet company that would never grow beyond books.
Change is here. It can’t be stopped.
THE ROLE OF CORPORATE SUSTAINABILITY
Corporations sense the pressure
As the public becomes more aware of the environmental, social, and political threats humanity is facing, and the role businesses have in creating them, companies are sensing the pressure to step up. They’re asked to take responsibility and play a role in coming up with solutions instead of adding to the problems.
Corporations are expected to take all of their stakeholders into account when it’s time to make decisions. Including employees, customers, communities, and the planet — all while maintaining shareholder gains.
C-suites of legacy companies have been talking about this and asking: How can we create a more sustainable economy where purpose and profit are not at odds, but strengthen each other? An economy where our shareholders profit, but so do all of our other stakeholders as well?
"It is more critical than ever that businesses in the 21st century are focused on generating long-term value for all stakeholders and addressing the challenges we face, which will result in shared prosperity and sustainability for both business and society."
— Darren Walker, President of the Ford Foundation
C-levels are embracing the inevitable
In their Business Roundtable statement of last year, 181 CEOs at leading companies like Apple, Ford Motors, Coca Cola, JPMorgan, and Walmart, collectively announced that the role of corporations has changed. Focusing on creating shareholder returns is not enough anymore; today it’s about creating benefits for all stakeholders.
The Business Roundtable indicated that people in power are listening and thinking about how to change course.
Starbucks’s CEO Kevin Johnson says: "Our commitment is to pursue a bold, multi-decade aspiration, become resource positive and give more than we take from the planet. This is an aspiration that we take on recognizing it will come with challenges and will require transformational change."
Larry Fink, who leads BlackRock – the largest asset management firm on Wall Street – agreed in his most recent yearly letter to clients. Starting with “Dear CEO”, he urged that sustainability is the new standard for investing. If your company does not take climate and societal issues seriously and fails to publicly expose how it deals with this, there will be consequences.
World leaders at the World Economic Forum in Davos echoed that we have entered an era of “stakeholder capitalism”. Through this lens, a business implements strategies that spurs profits, but also benefits people and the planet.
"Over time, companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing skepticism from the markets, and in turn, a higher cost of capital."
— Larry Fink, "Letter to CEOs"
"Delta commits $1BN to sustainability drive."
— Forbes, 2020
"Stakeholder capitalism has reached a 'tipping point', says Salesforce CEO Benioff."
— Business Wire, 2020
"Airbnb's new compensation plan asks shareholders to share with other stakeholders."
— Wall Street Journal, 2020
The shift towards corporate sustainability
The rise of corporate sustainability is more important than ever because:
- People demand it
- The planet needs it
- It’s either a risk or an opportunity for business
Historically, according to Milton Friedman, “social” responsibility for business is to maximize the wealth for stockholders. But, we all know that system functions too often at the expense of the interests of society and even the long-term interests of stockholders who are after all part of society itself. Sustainability, on the other hand, was perceived as little more than green or social projects at the periphery of a business – mostly useful for image reasons, to reduce energy, and waste disposal costs.
As we have seen, sustainability is now becoming mainstream and central to a company’s core business.
Let’s start with what sustainability is not
Sustainability is often misunderstood as only focusing on environmental action, a costly investment, or perceived as greenwashing or, more recently, “purpose-driven” (which sounds to us like marketing-speak – more on that in Chapter Three).
If we’re being honest, this has been the MO of most companies over the past few years.
Sustainable business is smart business
Corporate sustainability is a smart business strategy that includes managing social, environmental, and economic performance to create long term value. Finding innovative ways to combine social impact and profit, is simply smart business, creating shared and durable prosperity for all, while building a resilient business and ensuring long-term success.
Sustainable companies aren’t just creating value for people and the planet, they’re also outperforming the stock market in the long run.
The benefits of a sustainability strategy:
- Better financial returns
- Higher underlying profitability (ROE-Return on Equity)
- Limits downside risk
- Aligns with investor values
In the new sustainable economy, businesses create value for shareholders and all other stakeholders, including the planet.
It’s a win-win for everyone.
"We cannot choose between growth and sustainability – we must have both."
— Paul Polman
Taking care of workers generates higher returns
Workers: strong correlation between companies providing fair and equal pay, strong benefits and work-life balance, and a safe work environment during the COVID-19 crisis and higher financial returns.
Why does it work?
The reason is quite simple: Business success is interlinked with the success of its ecosystem.
THE TRIPLE BOTTOM LINE
What is The Triple Bottom Line? It evaluates corporate performance in a broader perspective in order to create greater value. Fueled by empathy at the core and different for each company (much more on this in Chapter Three).
"People talk about balance, but that’s just compromise. One goes down and one goes up. I like to see it consistently in harmony. They strengthen each other."
— Mayer Vafi
THE TRIPLE BOTTOM LINE
Explaining the 3P's
People How employees, community, customers, and everyone involved benefits from a business.
Planet Not just to try to minimize negative impact but also, over time, to create positive impact.
Prosperity The ROI, viewed with a long-term lens, not the Wall Street three-month short-sighted view.
A note of caution: It’s not about balancing the 3P’s for accounting purposes; it’s about finding harmony to grow a business. The 3P’s can be a guiding light to support a company’s goals and a filter for what is right and what is wrong in marketing and operational decisions.
THE TRIPLE BOTTOM LINE
Some benefits of managing the 3P’s
A sustainability focused business strategy around the 3P's has positive consequences on multiple levels:
- Improved customer engagement and loyalty
- Higher employee engagement and productivity, and lower turnover
- Cost savings through smarter resource management
- Attract investors increasingly asking for ESG
- Outward looking approach to identify new markets
- Discover more opportunities for innovation
- Proactive management of the inevitable progress towards regulation and demand
The bottom line?
A more relevant and resilient company that can continuously engage with key stakeholders, and better understand the world that surrounds it, capitalizing on the opportunities it presents.
"Sustainable business is a business that can make a profit, and at the same time serves a purpose that goes beyond the profit itself."
— Rocio Fernandez Brusseau
In summary: A virtuous cycle of truly positive growth
In the sustainable economy, corporations focus on creating profits by having a positive impact on society and the planet. This money will be reinvested in the company to increase impact and, therefore, future profits. It’s a sustainable growth model.
Could this be the turning point?
The COVID-19 pandemic could very well be the accelerator. This is the time we can see the stakeholder-first model overturn shareholder primacy.
All of of this can happen if we change one simple question.
From: How do I make a profit? To: How do I make a profit by creating prosperity for all involved?
What can we learn from this? There’s no one-size-fits-all solution for sustainability, and that’s what makes this such a huge opportunity. But, there is no way of escaping the evolution to it. There are a few questions you can ask yourself: How will you create more benefits for people and the planet? How can this strengthen your company and your impact on all your stakeholders? Every business needs to define that for themselves.
The next few chapters try to give some thoughts and ideas on how to take advantage of this new world.
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