Reshaping Capitalism: changing the focus from shareholders to stakeholders

Fifty years ago, Milton Friedman made his famous pronouncement that the social responsibility of a business is to increase profits. The trouble is that the dictum, according to many, has aided a dramatic increase in global income inequality, and contributed to global warming. Now, executives’ view of what they are trying to achieve is changing, and companies are wrestling with their wider purpose.

On September 9-11, I had the great opportunity to participate in the 2020 GSG Global Impact Summit, promoted by the Global Steering Group for Impact Investment (GSG), an independent organization that has the mission of articulating progress towards an impact economy. The summit is considered the main global event of its nature, happening annually since 2015.

The Impact Economy comprises organizations and private entrepreneurs in the ecosystem of private companies, non-profits, and foundations whose missions involve market-based approaches for addressing social and environmental challenges, including, for example, public health, education and greenhouse gas emissions. The scope of their work can range from global to hyper-local.

The 6th edition of the event, this time held 100% online due to the pandemic, brought together approximately 1500 people from 73 countries, across 60+ sessions, to discuss pathways for a just and impact-led economy. For 3 days, starting sharply at 6am Florida time, investors, CEOs, entrepreneurs, civil society representatives, researchers, multilateral organizations and governments across the globe, totaling more than 260 speakers, brought critical reflections about the challenge and the relevance of reducing inequalities around the world and within countries. This must be the norm for the post-Covid-19 economic recovery. “We are moving towards a world where impact is the new normal,” said Cliff Prior, executive president of the GSG, at the opening ceremony.

The need for a profound reform of capitalism was the tone set by the various panelists throughout the Summit. Paul Romer, 2018 Nobel Prize winner in Economics, stated that “Impact is about using measurement to get firms involved. To put pressure on firms to do the right thing.” Chairman of the First Bank of Nigeria, Ibukun Awosika, recognizes our global failure: “When you look at the youth of the world today, you realize that we haven’t yet created a world that supports the people of the future. Without a doubt, there is a need for us to disrupt the pattern of play right now.” And she adds: “My challenge to those of us who have the voice and the influence is to reset the game. We must think of entrepreneurs as tools of change. We must create an environment that allows them to disrupt in a positive manner.”

Achim Steiner, the United Nations Development Programme (UNDP) Administrator, agrees: “The time is now for a just and impact-led recovery, engaging the private sector to shape the future we want.” He spoke about the SDG Impact, an initiative led by UNDP focusing on generating and leveraging private sector capital in delivering the Sustainable Development Goals (SDGs). Launched in September 2018, SDG Impact aims to provide investors, businesses and others with unified standards, tools, and services required to authenticate their contributions to achieving the SDGs and to identify SDG investment opportunities in emerging economies and developing countries. The initiative highlights experimentation, innovation and partnerships as it focuses on developing prototype products and services that will be tested, refined and brought to the market in a relatively short time frame.

Philipp Hildebrand, the Vice President of BlackRock, financial institution with $7.5 trillion of global assets under its management, was direct: “Sustainability risk is intrinsically related to the financial risk of our portfolio, and not something apart. It is now a crossroad to our investment decisions”. And concluded: “Global finance has only one way forward – the sustainable way.”

Emmanuel Faber, the CEO of Danone, agrees with Hildebrand: “Impact has to be embedded in any businesses. There is a general consensus that sustainability is important. But if we really believe it, I think we should not keep discussing so much about it. When businesses believe in something, they don’t discuss that much, they just do.” He explained how Danone has incorporated social and environmental positive impact in all its production chain, which includes altering the organization’s By-laws and become a Mission-enterprise – a move approved by 99% of the company’s shareholders.

“Financial sustainability depends on social and environmental sustainability,” said Kristalina Georgieva, managing director of the IMF (International Monetary Fund), on the first day of the summit. “We can build a job-rich recovery that drives a sustainable and resilient global economy in the long run.” For the head of the IMF, it is important that the post-Covid world be shaped by financing and investments based on environmental, social and governance commitments (ESG).

Various statistics have shown how the pandemic disproportionately affected the less fortunate. Added to the consensus that effects of climate change have affected and will most severely impact poorer people and countries, all speakers urged an immediate change from the business-as-usual capitalist model.

Is this the time to reform capitalism? Could this be the moment to boost the impact investment agenda? Is this the way to get out of this crisis better? Sir Ronald Cohen, a prominent venture and impact investor and President of the GSG Group, has no doubt: “Companies and the market understand the connection between future success and meeting society’s expectations. We have a role to play in the economic recovery and changing the capitalist system to reach the fairest and most sustainable world we want.” The investor came to be known as “lord of social finance” and mentor of alliances for impact investing spread over 33 countries on all continents. During his inaugural speech, Sir Cohen announced that impact investments are expected to reach $ 1 trillion in assets in 2020.

James Cameron, the former UK Prime Minister, agreed with Sir Cohen and added: “It is necessary to reach a next level of engagement. Impact is something that should not be discussed only behind the scenes” he said. “COVID-19 has showed the worst problems we have in the world and made them worse.” In 2013, during a G-8 meeting, Cameron launched the Social Investment Task Force in the UK. Despite the advances, Cameron points out that “Impact needs to reach the offices and be in the statements of nations, prime ministers and presidents.” When asked by Cohen about a “new deal”, along the lines of the New Deal implemented by Roosevelt to overcome the Great Depression in the 1930s in the United States, Cameron replied: “This is a great hope, but I see that leaders from some countries like the US are not currently pursuing that direction.”

Darren Walker, President of the Ford Foundation, stressed the importance of recognizing the moment we are going through. He began his speech by highlighting the racial tensions ignited by the murder of black American citizens by the police. According to Walker, the episode “took the band-aid off” the level of systemic racism in American society and started a global debate about race, class and caste.

He also emphasized that the impact movement is fundamental in this dialogue, because capital is an intrinsic part of the solution. How it is allocated, who will benefit, what it will be directed to, are issues that add a fundamental social dimension to progress.

Walker talked about funding difficulties for foundations during the pandemic. In an unprecedented operation, the Ford Foundation issued the first Social Bond, raising $ 1 billion to finance programs and projects impacted by the pandemic. To explain the operation in a nutshell, the foundation issued debt with maturities of 30 and 50 years and interest rates of 2.415% and 2.815% per year. Due to the size and reputation of the foundation, the operation was viewed favorably and became a product in high demand by ESG investors.

Darren Walker ended his speech with an alert: “The average worker feels marginalized by elites who spend a lot of time in think tanks and global meetings with other elites and this does not translate into real improvement in their lives. If we do not deal with these issues, inequality and climate change will soon put us on a path with implications that have not been fully considered.”

The role of the Academy was also highlighted in the Summit. Researchers from different countries are getting engaged in different actions to propose impact solutions to different challenges.

The University of Porto created an assessment tool for the Transformers Movement in Portugal, an impact initiative focused on education. The researchers generated disaggregated data that support holistic assessments and more effective solutions to reduce inequalities.

In Brazil, the ICE Academy Program, led by the Instituto de Cidadania Empresarial (ICE), aims to engage teachers and strengthen the performance of Brazilian Higher Education Institutions in the areas of Social Finance and Impact Business, with emphasis on the three basic dimensions: research, teaching and extension. The program also favors knowledge exchange between Brazilian and foreign universities and third sector organizations, in search for innovative solutions to Brazil’s social and environmental challenges. Celia Cruz, executive director of ICE, highlighted that the “ICE Academy currently has five strategic working groups, one of which is focused on engaging stakeholders in developing solutions for the Amazon.”

The Center for the Advancement of Social Entrepreneurship (CASE) at Duke University’s Fuqua School of Business has created the CASE i3 Initiative on Impact Investing. It is an intellectual hub led by Dr. Cathy Clark, aiming to establish a rich set of resources and activities for MBA students, entrepreneurs, investors, funders, academics, policymakers and others to explore and support the practice of investing for social and environmental impact as well as financial return.

Dr. George Serafeim leads the Impact-Weighted Accounts Initiative (IWAI) at Harvard Business School, with the mission of establishing global metrics to measure a company’s financial, social, and environmental performance. Their ambition is to create accounting standards that transparently capture external positive and negative impacts in a way that drives investor and managerial decision making.

Dr. Sarafeim led a relevant study launched in July 2020, through which an extensive set of information was analyzed under the impact lens, based on data from 1800 companies. “The result brings a new perspective on the true profitability of global companies. Many generate environmental costs higher than their total profit (EBITDA),” affirmed Serafeim.

According to the metrics designed at Harvard, of the 1694 companies analyzed that had positive EBITDA, 252 (15%) would have their profit eliminated by the environmental damage they caused, while 543 (32%) would see their profitability reduced by 5% or more. Using the same calculations, industries in the aviation, paper and forestry, energy, construction and packaging sectors would see more than a quarter of their EBITDA eliminated to offset the negative impact they have on the environment.

“Transparency in terms of socio-environmental impact has the power to change the rules of the game”, affirms Sir Ronald Cohen. “The effect would be comparable to the accounting rules defined in the 1930s and also the risk measurement system that emerged in the 1970s. A third moment would begin now, anchored on the risk, return and impact tripod.”

Overall, I found the event inspiring but also challenging. Global leaders seem sensitive to the world’s inequalities. However, I question to what extent the rhetoric goes from commitment to action in the speed and volume of resources needed. I also raise the question if impact investing might fall into the trap of reproducing the top-down colonization approach that we have seen in international cooperation and philanthropy in all these years; or if solutions will come from local entrepreneurs and be scaled-up while respecting cultures and prioritizing benefit sharing.

We do not have the time for failure, and this might be a chance for a turning point. Let us hope and keep mobilized, working and pushing towards a path of no return. It has already passed the time to reshape capitalism – changing the focus from shareholders to stakeholders, seeking inequalities reduction, with social wellbeing to all peoples and respecting our planet’s environmental boundaries.

NOTE: The recorded panels are available in GSG YouTube, through the link:
https://www.youtube.com/playlist?list=PLa_H7bisaN1IBHO9SrfKXZR6mL-0AwdpC .

(*) Juliana Santiago is UF Research Assistant at the GIA/TCD project and Master of Arts candidate in the Center of Latin American Studies