Business can earn a licence to lead

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Georg Kell – Vice Chairman of Arabesque Partners

 

 

 

Political upheaval, technological disruption and environmental constraints are making the business environment more complex and less predictable than ever before, posing new challenges for strategic orientation and decision-making. Underpinning these developments are long-term trends – often unfolding in small but cumulative increments – that are reshaping the business environment and the role of business in society.

Recognising these trends and acting in a timely fashion can help to build adoptive flexibility and safeguard survival and growth. They flow from and are related to changing political regimes, social, environmental and technological changes. And as the world enters a new era, following several decades of market liberalisation and global integration, the following three trends are especially relevant at this juncture.

From horizontal integration to vertical rivalry

The system that was created from the ashes of the Second World War and the rule-based liberalisation that has shaped policy making across the globe following the fall of the Berlin Wall is now being eroded. Ethnic nationalism and a narrowing interpretation of national interests are influencing decisions in many parts of the world. The idea that shared responsibility and common rules are the foundations for managing interdependencies is no longer high on political agendas. Instead, zero-sum game thinking is the new populist gospel. Protectionism is on the rise and bilateral and regional agreements are replacing global rules. The changing political context has been in the making for several years already and its full implications for business are not yet clear.

In continuing to spread technology and wealth, business now needs to develop a new narrative: from resource taker to market builder. The era of building low-cost supply chains and accessing cheap labour and resources must now give way to a new approach, based on localisation. Using technology to manage greater decentralisation while showing economic benefits for local economies, such as job creation and good social and environmental stewardship, is vital. Businesses that aspire to compete everywhere will also need to ensure that highest environmental and social standards are practised everywhere, upholding universal values.

Environmental externalities will increasingly be priced

Another profound game changer is being driven by the dawning realisation that human impact on the natural environment may threaten our basis for healthy and secure survival. The rapid degradation of our natural environment, such as loss of biodiversity, pollution of the oceans and the massive dumping of greenhouse gases into our thin and fragile atmosphere, is increasingly showing that we need new business models and a transformation of our energy systems. Contrary to the belief that they are unlimited, natural assets, such as water and the air, now need caretaking. The Paris Agreement on climate change and numerous national and sub-national actions point to the growing tendency to use market mechanism to accelerate changes. This means that natural assets which used to be considered as free public goods will increasingly be priced.

For business, this means that the adoption of rescource-friendly, low-carbon technologies, including new concepts, such as the circular economy, become a factor for competitiveness. As resource constraints and the mounting implications of climate change affect societal choices, the challenge and opportunity is there to innovate for the future.

Radical transparency is here to stay

“Governance, corporate culture and leadership in an era of radical transparency will need a strong, ethical foundation and a purpose-driven orientation that connects with the zeitgeist”

The spread of technology and improving analytics to handle big data is today causing disruptions across all industries, offering new opportunities for solving many challenges. This will have fundamental implications for how business conducts itself, how it is governed, and how it relates to customers and citizens. Indeed, there is nowhere to hide anymore. Corporations have been responding to this trend for a few years now, disclosing information beyond their financial performance. This company data was initially about ‘doing good’ and the building of a narrative to improve the brand. But over the years the quality of data and transparency has improved and more and more businesses are trying to measure and disclose environmental, social and governance (ESG) issues that matter.

According to the Global Initiative for Sustainability Rating (GISR), there are currently more than 500 rating products on the market. In 2011, only 20 per cent of S&P 500 companies disclosed such information. Today, more than 80 per cent do so and most of them are externally certified. There is still much incoherence and there remain many data gaps, but already it is possible through smart algorithms and systematic approaches to establish a strong correlation between sustainability performance and value generation. A 2015 report published by Arabesque and the University of Oxford, analysing more than 200 academic sources and industry studies, revealed that 80 per cent of them showed a direct link between stock price performance and good sustainability practices.[1]

Some investors are already making use of ESG information to make smarter decisions.    As the quality of ESG data improves even further, the business case for transparent and sustainable practices is destined to become the new normal. ESG will do to the world of finance what the X-ray did to medicine.

With technological change irreversible, the rise of transparency will increasingly put a premium on those businesses that effectively integrate ESG factors into their strategies and operations, and which measure and disclose accordingly. It will also challenge businesses that fail to adapt. Governance, corporate culture and leadership in an era of radical transparency will need a strong, ethical foundation and a purpose-driven orientation that connects with the zeitgeist.

In response to these trends, businesses have already started to change. Over the past two decades a growing number of companies have gradually embraced strategies and practices under the banner of ‘corporate social responsibility’, ‘sustainability’ and ‘shared value’. The growth of the UN Global Compact – the world’s largest corporate sustainability initiative – from 47 participants at its creation in 2000 to more than 9,000 participants from more than 150 countries today, exemplifies this trend. Many of these corporations are still at the early stage of change. But a growing number are now bringing ESG issues right into the boardroom; introducing new policies and integrity measures, accounting for externalities, and embracing transparency to foster innovation and more direct relations with customers and investors. Furthermore, financial markets have started to pay attention to these issues. The UN-backed Principles for Responsible Investment (PRI), launched in 2006, today has more than 1,600 members, ranging from large asset owners to small service providers, with many ongoing efforts to better integrate ESG information into analysis and decision-making.

While these developments are encouraging, too many companies are still operating on the assumptions of the industrialisation era, treating workers as a commodity and polluting the environment without concern for the common good. As the framework conditions for business success continue to rapidly change however, more companies will embrace good ethics, social responsibility and environmental stewardship so that responsible and sustainable practices become the new norm.  Will this shift happen fast enough to counter the risks we face in our era of uncertainty? The race is truly on. Business leaders can now earn a licence to lead by accelerating this shift. By doing so, they will not only secure their own future. They will also contribute to humanity’s shared aspiration of peaceful co-existence and prosperity.

 

About the Author:

Georg Kell is Vice Chairman of Arabesque Partners, an Anglo-German asset management firm offering a quantitative approach to sustainable investing.

He is the Founding Director of the UN Global Compact which today is the largest corporate sustainability movement with more than 9,000 corporate and 4,000 non-corporate participants in more than 160 countries. Georg also oversaw the conception and launch of the Principles for Responsible Investment (PRI), the Sustainable Stock Exchange Initiative (SSE), and the Principles for Responsible Management Education (PRME).

Footnotes:

1http://www.arabesque.com/index.php?tt_down=51e2de00a30f88872897824d3e211b11