If investors want to save our threatened environmental, social and economic systems, they must think and act systemically.
Beyond ESG Integration
This call to action goes beyond the type of sustainability envisioned in BlackRock’s recent letter to CEOs, the JANA/CalSTRS letter to Apple, and last year’s successful shareholder votes on climate change at Exxon-Mobile and Occidental. Each of these examples involved shareholder advocacy on a social or environmental issue that the proponents contended would improve individual company performance.
But this company-only perspective must evolve: investors must focus on the systemic effect of company practices. To date, institutional investors have been encouraging ESG integration, the idea that individual companies can do well by doing good through practices like saving energy and addressing diversity. Indeed, there is plenty of data showing that certain environmentally and socially
responsible practices can increase the bottom line, especially over long time horizons.
The Leading Edge of Systemic Investing
In short, shareholders must do more than encouraging companies to do well by doing good; they must also discourage them from doing well by doing bad—even when that might be the most profitable alternative. On the leading edge, investors like the New York Common and Hermes are beginning to recognize that a focus on individual company performance can only have limited impact. These investors are moving to monitor and influence the effect that the companies in their portfolios have on critical environmental, social and economic systems.
Critically, however, the current corporation governance model revolves around maximizing financial return to shareholders. This notion of “shareholder primacy” is an obstacle for investors who want companies to consider the impacts of their decisions on society and the environment as ends in themselves, and not merely as means of increasing share value.
Governance for Systems
This obstacle can be addressed by the benefit corporation model of corporate governance. Benefit corporations facilitate positive impact by allowing corporations to balance competitive financial returns with the needs of our economic, social, and environmental systems. Companies using this model have raised more than $1.6 billion recently, in both public and private markets, and 2017 saw the first IPO of a benefit corporation.
This idea – going beyond individual company returns, whether financial, social, environmental, or otherwise – is a big advance. If investors continue to move from ESG integration to systems-level thinking, the benefit corporation movement will grow in importance, as investors recognize that benefit corporation governance is a critical tool in managing systems from an investor perspective.
This systems-level, benefit corporation thinking is the logical conclusion for most large investors, who are diversified across most markets, and who have long time horizons: for these investors, it is the performance of the market that determines portfolio return, not individual company return—and shouldn’t they focus on what matters most to their return, and on preserving a planet and society where that return can be enjoyed?