Commentary

ICYMI, Stakeholder Capitalism will Save us

It’s not yet clear companies are on the same page as shareholders, let alone wider stakeholders.

The damage humanity has wreaked on the planet is often blamed on the way capitalism has treated these costs as externalities, focusing too often on financial metrics and short-term profits.

This week, BlackRock CEO Larry Fink, effectively the world’s largest investor, put his faith in stakeholder capitalism, encouraging CEOs of investee firms to align their sense of purpose more closely with the needs of “the employees, customers, suppliers, and communities your company relies on to prosper”.

US CEOs have been trying and largely failing to embrace stakeholder capitalism for some time. Fink urged them to try harder, not only to deal with the “1,000 unicorns” of the net-zero transition, but also to adapt to a “new world of work” heralded by the ‘Great Resignation’ experienced most markedly in the US and UK.

While some criticised Fink for trying to save capitalism rather than accepting the limits of planetary boundaries, he wasn’t alone. Researchers at the Wharton School of the University of Pennsylvania backed his argument, finding that firms which ‘walked the talk’ – pairing stakeholder-orientated language with performance on ESG metrics and capital allocation – delivered stronger returns.

The case was also backed by the UK’s Institute of Directors and Japanese Prime Minister Kishida Fumio, who told the World Economic Forum that a new ‘liberal democratic capitalism’ would help lead the country’s green transformation.

New Morningstar analysis suggests that sustainable investments paid in 2021, but many boards are not currently on the same page as shareholders, let alone a wider range of stakeholders.

For all its efforts on sustainability, consumer goods group Unilever faces a shareholder proposal over the health impacts of its foods, while fighting off other investors’ concerns over its wider strategy. Oil and gas major Exxon Mobil committed to a 2050 net zero strategy, but its failure to address Scope 3 emissions is unlikely to convince sceptical asset owners including Nest and the Church of England.

Citi’s update on its net zero strategy was more warmly received for its commitment to absolute reductions in financed emissions by 2030, with the caveat that the bank does not explicitly rule out financing future fossil fuel expansion.

Overall, this year’s AGM season could be even rockier than 2021’s as asset owners seek clarity on whether the priorities of investee firms’ boards and CEOs align with their own. Certainly, investor efforts to secure meaningful data on key environmental performance indicators from large corporates remains an uphill struggle, according to disclosure platform CDP.

This continued lack of clarity makes regulatory efforts toward mandatory sustainability reporting all the more important. While there are concerns over delays and compromises in Europe, many Asian markets – including Indonesia, Taiwan and the Philippines – are actively building out sustainable investment frameworks. Even the US Securities and Exchange Commission is considering including Scope 3 emissions in its long-awaited climate disclosure rules.

Greenwashing practices are gradually being closed out, even in the ‘wild west’ of the voluntary carbon markets. Investors and businesses are seeking out new opportunities to invest in renewable energy. But governments’ progress on sustainable investment rules needs to be supported by bigger calls and faster action across a wide spectrum.

In different ways, the scale of the challenge was highlighted by the multi-billion-pound risks flagged in the UK’s new Climate Change Risk Assessment and US President Joe Biden’s admission of the need to break up his Build Back Better plan. Evidently, it’s not just capitalism that needs to be cured of short termism.

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