To reorient our economic system from shareholder primacy to stakeholder capitalism, we must be ambitious in creating systems to measure, manage, and motivate that change.
The European Union’s Sustainable Finance taxonomy, a system designed to “help investors understand whether an economic activity is environmentally sustainable and navigate the transition to a low-carbon economy,” has been a cause of consternation for investment shops across the continent. With rigorous requirements for what qualifies as sustainable, many finance executives are concerned they won’t be able to meet “the booming demand for green investment products when only a fraction of assets would fall under the taxonomy,” as Kate Mackenzie wrote in a recent Bloomberg column. Their solution? More inclusive, some might say watered-down, standards that would allow a greater share of products to qualify as “green.”
If the purpose of the classification system was to help investment managers sell more products, looser standards would be a great idea. But the point is to create more transparency and a deeper understanding of climate impact to move more money towards low-carbon or net zero solutions to ensure we have a future on Earth. That is much more compelling.
This reaction to the taxonomy, while understandable on some levels – it is dense, technical, and will be challenging to enact – is indicative of a larger problem facing finance, one most recently highlighted by BlackRock’s
Shifting to stakeholder capitalism requires more than inspiring rhetoric that comes with the greener marketing that many of these funds employ; it requires reorienting the system around a different purpose, one that values and accounts for the well being of the environment and society, not just shareholders.
Creating more transparency and better systems to manage and measure impact is a small part of what is required to make that transition, but an essential one. It is important that we are ambitious with these efforts, like the EU taxonomy intends to be. Efforts like the Operating Principles for Impact Measurement have also gained traction, and uniquely, require signatories to receive independent verification of their impact management practices. Sir Ronald Cohen and Harvard Business School are approaching the issue from a traditional accounting standpoint with Impact-Weighted Accounts (IWA), another idea picking up steam. IWA are line items on a financial statement which would reflect a company’s impacts on “employees, customers, the environment, and broader society.”
Beyond measurement, a real transition requires institutional frameworks that help investors make capital allocation decisions to be adjusted as well. If investment managers continue to put clients in the same model portfolios, just with greener marketing, companies will continue business as usual, and this will create the same outcomes we’re challenged with today. We need more effective tools for investment managers to make better decisions for their clients and we need to invest in behavior change for those tools to be broadly adopted. Tools like Invest Europe’s Due Diligence Questionnaire for Private Equity Investors and their Portfolio Companies are a good example of where to start.
However, we know that even with the most committed institutions, the shift towards stakeholder-primacy is challenging to execute. The recent case of Danone, a star B Corp, ousting their CEO shows just how challenging it is to shift from a short-term mindset. As B Lab’s Andrew Kassoy wrote in a recent op-ed, “It’s about systems change. And changing the economic system requires us to change the rules of the game.” Changing the rules of the game can’t be done by the private sector alone. It will require robust public sector involvement and expanding the notion of fiduciary duty, Kassoy notes, “beyond profits in favor of real value creation in their underlying investments; investment fiduciaries must be responsible for the impact that their portfolio investments have on society.”
Standard, rigorous metrics by which we can evaluate and compare the impact that companies and investors are creating is essential to the stakeholder capitalism shift. Like the EU Taxonomy, they won’t be perfect, but they will help focus our efforts in the right direction. Markets will not self-regulate when it comes to prioritizing our survival and if we don’t hold ourselves to higher standards, we’ll all suffer the consequences.
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