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Capitalism with a conscience?

Capitalism with a conscience?

David Solomon at the WEF in Davos

There is little doubt that a more ethical, more environmentally friendly movement is sweeping the world and changing the way companies view and conduct their business. But it is a complex issue and the correct balance between growth and sustainability must be struck. Omar Ben Yedder reflects on how this issue played out during the annual World Economic Forum in Davos

No business can be sustainable if we don’t have a planet to live on in the first place. If the 20th century saw the rise and victory of the capitalist and free market model, this coming decade may well be a turning point, where it’s no longer simply about the bottom line and shareholder returns but rather, a more sustainable form of business.

Last year in August, some 200 CEOs from the Fortune 500 companies pledged to shift their focus from simply increasing share price at all costs to taking into consideration a much broader range of factors to ensure that the benefits are more widely shared and that there is a purpose that goes beyond profit.

This was very much in response to the backlash from popular demonstrations and general discontentment around rising inequality. The CEO’s salary compared to that of the average worker at the largest 250 companies in the US increased from a ratio of 20-1 in 1965 to 221-1 in 2018.

However, the shift is much broader than this and is seen in changes in consumer and investor trends. Consumers are now increasingly looking at the ethics of a company when deciding on their purchases.

They are asking questions such as: where was the product sourced; is the company environmentally friendly; does it pay a fare wage and does it exploit child labour? These are considerations that investors are now paying attention to.

Earlier this year, Larry Fink, co-founder of BlackRock, the investment group that manages over $7tn of assets, said that the company would re-evaluate all investments and divest from companies that are not progressing on their sustainability-related disclosures. 

He says in his annual letter how the priorities of millennial investors are also driving change. A recent study by Cerulli Associates revealed that more than two-thirds of investors under 30 would prefer their investments to have a positive social or environmental impact.

Fink is actually late to the party. Sifting through annual reports, there has been a clear shift towards stakeholder capitalism, capitalism with a conscious  awareness of the environment in which it operates.

Climate change, the #MeToo movement, growing inequality, and the popular uprisings that have shaken the world these past few years, are now issues that not only policy makers but businesses need to grapple with and which are forcing them to operate in a completely different way to a decade ago. 

Boardroom executives can no longer ignore externalities such as climate change. Complexities in supply chains are no excuse for employees to be working in dire conditions in some far-flung country or goods to be sourced unethically.

Companies are being shamed for a lack of diversity in their boardrooms and management and investors are shunning companies seen to contribute to climate change – such as some in the oil & gas sector or polluters such as mining and energy companies dealing in fossil fuels. The World Bank and the EU have publicly stated that they will no longer finance projects deemed to be ‘dirty’. 

Any business that is not seen to be operating in a proper way will face a potential backlash from consumers and brands can be destroyed in a matter of hours with the free flow of information 

Sharp end of the spear

Hence the rise of ESG-linked investment – investment that meet Environmental, Social and Governance criteria. The industry is estimated to be worth in excess of $30tn and expected to reach $150tn by 2035, according to the Sustainable Investment Alliance. 

The general public, whose pensions, savings and insurance payments are being used by these investment funds, as well as direct investors, are increasingly conscious of the consequences of where their money is going and want to make sure it is being used to do good. 

This presents an opportunity for African banking institutions and also project developers. There are deep pools of capital that they can tap into as long as they can develop the instruments, structures and tracking mechanisms that will meet the standards of these funds.

That said, the situation is not as straightforward as it may first appear. A simplistic answer to a complex problem is often the wrong one. 

Warren Buffett, the renowned investor also known as ‘The Sage of Omaha’ for his wisdom and his philosophical approach to life and investing, has questioned whether it is right for a CEO to be focusing on anything other than the bottom line. That is not the responsibility of the CEO, he contests. In any case, who is she or he to assess or know better what is right and what is wrong. 

It is for policy makers, he argues, to set the rules and frameworks around which businesses need to operate. There are tools and mechanisms – taxes, penalties, incentives – to ensure companies behave in a sustainable way.

At the World Economic Forum in Davos, bankers hit back at the criticism they were facing and also demands for them to do more to tackle climate change. They said that it was not the job of banks to police the world’s companies and to assess how environmentally friendly they are.

Commenting on this, Mike Corbat, chief executive of Citibank, said it’s not for him “to be the sharp end of the spear…enforcing standards in an industry or business. 

“We don’t want to find ourselves being the person that dictates winners and losers. A bank’s job is to support the communities in which it operates. It is not to dictate outcomes.” 

David Solomon, chief executive of Goldman Sachs, who advised the Saudi parastatal Saudi Aramco on their recent IPO, argued that you need to allow time for the system to adapt and evolve. “There’s a transition that’s going on, and my view is this is going to be a multi-decade transition where we see changes in the way people allocate capital,” he said during a panel discussion.

“Should we not raise money for a company that is a carbon company or a fossil fuel company? The answer is no, we’re not going to [stop doing] that,” he added. 

Unfair for Africa?

On another panel, the Egyptian investor and founder of AlQaala Holdings, Ahmed Heikal, pointed out that one of his most successful projects, a $4.4bn investment in the Egyptian Refining Company, would not have seen the light of day in today’s business climate.

The project at the time received funding from two European Union backed financial institutions, the European Investment Bank and the European Bank for Reconstruction and Development. Today, governments in the EU, the UK and also other institutions such as the World Bank are refusing to lend to what they consider to be ‘dirty’ projects linked to fossil fuels.

Many see this as unfair given Africa’s negligible contribution to climate change compared to developed nations. Donald Kaberuka, when he was President of the African Development Bank, argued for an energy mix that would have to include some fossil fuels to help drive Africa’s development. 

African banks and players in the financial services will have to navigate this space carefully. The rise of green bonds shows the opportunity to tap into new investment sentiment towards sustainable finance. 

The growth of ESG investments also provides a new pool of capital that can be tapped. At the same time, the oil and gas sector as well as mining remain important industries for the continent and the transition will take time. South Africa, for example, currently produces over 90% of its energy from coal. 

Doing well should not be the enemy of doing good  – if anything, on the continent they must go hand in hand, as they are inextricably linked.

Read more about responsible finance

 

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