How can companies respond when environmental protection is demanded by consumers?
As environmental crises wreak havoc across the globe, consumers are demanding more from the business world. In turn, companies are waking up to the fact that maximising shareholder profits is no longer the be-all and end-all
Producing between six and 20 percent of the Earth’s oxygen, the incredibly biodiverse Amazon rainforest is vital to humanity, as well as to the millions of flora and fauna species that reside there. And yet, despite its importance, not enough is being done to protect it. So far this year, more than 80,000 fires have broken out in the area, most of which were the result of human activity. August was particularly bad – bad enough for the rest of the world to take notice. As the wildfires raged, shockwaves reverberated throughout the world and its media, while social media platforms buzzed with calls to action. The uproar has since faded, but it did prompt some companies to speak out about their role on this planet.
On August 25, 30 multinational firms made a dramatic statement in a full-page advertisement in The New York Times. Among them were several well-known consumer brands such as the Body Shop, Ben & Jerry’s, Danone and Patagonia. “Let’s get to work,” read the title in bold lettering. Addressed specifically to Business Roundtable (BRT) CEOs, it called on them to “make real change happen”.
“We are part of a community of Certified B Corporations who are walking the walk of stakeholder capitalism,” the open letter stated. “We are successful businesses that meet the highest standards of verified positive impact for our workers, customers, suppliers, communities and the environment. We operate with a better model of corporate governance – which gives us, and could give you, a way to combat short-termism and the freedom to make decisions to balance profit and purpose.”
As demonstrated by the recent Amazonian wildfires, the damage that humankind continues to inflict on our one and only planet has reached dire straits, and is quite possibly irreversible
The advertisement’s timing was key: the group had capitalised on the recent landmark decision from the BRT to alter its definition of the purpose of a corporation. For decades, the BRT, which is currently composed of 181 of the biggest companies in the US, had defined this purpose as making as much money as possible for shareholders, but on August 19, it redefined a corporation’s purpose as being to promote “an economy that serves all Americans”. That meant shifting from a shareholder-first principle to the notion of creating benefits for a far broader set of stakeholders, including local communities, employees and the environment.
“We were certainly thrilled to see that statement, and it is totally aligned with the stakeholder governance approach,” said Ben Anderson, Executive Director for US and Canada at B Lab, the non-profit behind the B Corporation Certification. “The B Corp world… demonstrates that this can work – that you can run a successful business [based on these principles].”
Speaking about the impact of the advert, Anderson told The New Economy that in addition to the media coverage garnered, it also created the opportunity for B Lab to engage with more BRT members: “In the first week since the ad came out, a number of companies totalling a half billion dollars in revenue called up and said, ‘We want to talk, we want to engage, we want to hear how we can support the movement [and how we can] learn from you.’” He added: “There’s been others around the BRT that we had discussions with before and have been curious – [they are] realising [that] now’s the time… This is what the world is expecting of us.”
The primacy of shareholder value stems from the work of economist Milton Friedman. In his 1962 book Capitalism and Freedom, he wrote: “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.” Though Friedman went on to explain that companies must abide by general ethical standards, and that shareholder interests do not equate to short-term profitability, that was not how his work was perceived. In fact, it shocked many at the time, as companies were seen as pillars of their communities. In the years since, Friedman’s notion of shareholder primacy – in its simplest form – became the bedrock of business.
Decades later, this foundation has now been shaken, and for good reason. Corporations play a central role in society – how they treat their employees and the communities they’re based in, their effect on the environment and the ethical standards of their supply chains all have a considerable, direct impact on both society and the planet. How they have acted up until now is simply no longer viable.
We are in crisis. As demonstrated by the Amazonian wildfires in August, the damage that humankind continues to inflict on our one and only planet has reached dire straits, and is quite possibly irreversible. Fortunately, however, the public is more aware than ever that change is needed, and it’s needed now.
Given the size of many of the BRT members, particularly those in the tech world (Amazon and Apple naturally spring to mind), their reach is nothing short of extraordinary. Changing policies within these giants could make a mammoth difference to both the environment and to local communities. Luckily, there is a financial incentive to this new approach: obtaining and sustaining trust from consumers has become crucial for their custom and their loyalty. To achieve both feats, companies simply cannot seek profits alone – as a society, we increasingly demand that they care more too.
Change is afoot
It’s taken some time since the global financial crisis – arguably when this movement first began – but it appears that a shift in the business world is finally underway. “You’re seeing it with shareholder activism,” Anderson said. “Many corporations are measuring ESGs [environmental, social and governance criteria], and are now recognising that it’s a material risk to not govern in this way. And so there’s pressures from investors [and] there’s also internal pressures from management to make this shift.” The figures say as much: according to the Global Sustainable Investment Alliance, assets managed under ESG criteria in the US, Europe, Canada, Australia, New Zealand and Japan increased from $22.9trn in 2016 to $30.7trn at the beginning of 2018.
This trend is set to continue as the public becomes more vocal. Anderson referred to the climate change protests that took place in late September, which saw around 7.6 million strikers around the world call out for action. “People are waking up and expecting more from business leaders,” he told The New Economy.
Naturally, changing a decades-old modus operandi is not going to happen overnight. “I think the system is really good at perpetuating the system,” Anderson noted. “And so, it does take bold leadership – it takes a willingness to shift from short-termism to long-termism. And that maybe doesn’t sound bold to you and me, but it is a bold step for companies that have moved beyond the
quarterly earnings report.”
While some argue that the BRT’s statement was merely lip service and the profits-first approach will continue to reign supreme, the optimists among us are inclined to think that it marked a crucial move in the right direction. Given the nature of herd mentality, it could well take some bold business leaders to catalyse a change that eventually reverberates across all industries and markets. Perhaps that time has finally come – and not a moment too soon.