Some of the world’s biggest asset managers have been talking a lot lately about sustainable capital markets, stakeholder capitalism and how improved environmental, social and governance (ESG) disclosure can contribute to more resilient markets. While these organizations are taking steps in the right direction, their companies’ actual behavior in the marketplace often falls short of their leaders’ proclamations, and those leaders’ visions for capital markets fail to rise to the increasingly urgent challenges that confront our society.
At the recent 2020 Sustainability Accounting Standards Board (SASB) Symposium, the CEOs of Bank of America (BofA), BlackRock and State Street provided their views on the role of the private sector in addressing societal challenges and why ESG integration is no longer optional. They led with their thoughts on stakeholder capitalism, a concept that has exploded since Aug. 19, 2019, when the Business Roundtable (BRT) updated its Principles of Corporate Governance to redefine "the purpose of a corporation to promote an economy that serves all Americans."
CEOs from 181 publicly traded companies — including those addressing the SASB Symposium — signed the principles, which purportedly signaled an end to Milton Friedman’s doctrine of shareholder primacy established in the 1970s, and the beginning of a new era of stakeholder capitalism.
"The concept of just one stakeholder — shareholders — has evolved and changed," said Larry Fink, CEO of BlackRock, the world’s largest asset manager. He noted the need for businesses to work with their employees and clients, and in a globalizing world, to work with the societies in which businesses operate.
We’re not looking for short-term blips as a shareholder but rather durability.
"This creates some difficulties but companies that manage this set themselves up for long-term profitability," Fink said. "We’re not looking for short-term blips as a shareholder but rather durability. In challenging cycles like the pandemic, those companies are the ones that make it through and endure. That’s how management and boards need to think about this."
Bank of America CEO Brian Moynihan concurred, adding that a long-term focus on all constituencies helps to attract talent and customers.
State Street Global Advisors CEO Cyrus Taporevala remarked that asset managers and owners are reacting to three trends: a growing correlation between ESG factors and investment risk; end investors wanting to see their ESG preferences expressed in their investments; and regulators around the world signaling an intention to require more around ESG criteria, reporting and investing.
A clarion call to convergence
All three CEOs repeatedly asserted an urgent imperative for the financial services industry to "coalesce" and "converge" around standardized disclosure of ESG information and data, perhaps unsurprising given that SASB — the symposium’s host — is a leading disclosure framework. Their general argument was that standardized disclosure is less burdensome for companies, which will enhance the quality of reporting and encourage smaller companies to participate. It allows for collection and analysis of large data sets that help investors, regulators and the public to assess and compare companies’ ESG performance, they said.
In addition to SASB, the CEOs pointed to the Task Force on Climate-related Financial Disclosures (TCFD) as a leading standard. Moynihan recommended convergence with the United Nations Sustainable Development Goals (SDGs).
"If that’s what the world told us we need to do across 90 countries in 2015, then that’s what we should be aiming to achieve," he said.
The CEOs also emphasized the value of transparency.
"We need people to say what they’re doing so they can be encouraged to do more," Moynihan said. "When we [at Bank of America] make decisions about whom to lend to, we have the information, but the world may not. It’s a little behind the curtain. Standardized disclosure will cascade down the system, even to a middle-market private company where employees and customers will ask, ‘Where’s our disclosure?’"
"Transparency reveals the good and the bad," Fink said. "Better financial and sustainability disclosure forces management and the board to have laser focus. It lifts us faster, even if we’re embarrassed at times when we’re not moving as quickly as we should."
Too little too slowly
And indeed, they’re not moving as quickly as they should, and the actions of these three companies are not entirely setting the examples these CEOs espouse.
Bank of America is the world’s fourth leading financer of fossil fuels, even as the imperative to decarbonize the economy to stave off the worst effects of climate change grows more urgent by the day. In 2019 the company agreed to pay $4.2 million to resolve employment discrimination allegations brought by the Office of Federal Contract Compliance Programs. Nevertheless, Bank of America maintains it is fulfilling its commitment to stakeholder primacy.
Standardized disclosure will cascade down the system, even to a middle-market private company where employees and customers will ask, ‘Where’s our disclosure?’
Among 60 of the world’s largest asset managers, BlackRock was the fourth least supportive and State Street the 13th least supportive of shareholders’ efforts to promote better social and environmental stewardship among companies in their portfolios, according to a recent analysis by campaigning organization Share Action. Both companies’ own reporting and disclosure on their social and environmental stewardship lacks the sort of transparency and meaningful information they purport to champion in the marketplace.
This may be because a pernicious tension is built into the entire stakeholder capitalism construct.
A question of purpose and prosperity
"We’re not trying to disrupt a company or destroy their footprint or business," Fink said. "I know some people would like for us to do that, but that is not our fiduciary responsibility. Our fiduciary responsibility is to maximize profit."
"State Street Global Advisors is looking to get the best risk-adjusted return for investors, and we come at ESG from a perspective of value, not values," Taporevala said. "It’s not up to us as a fiduciary to decide what the right values are."
Therein lies the conundrum: What’s best for the social and environmental systems on which our economy depends won’t always align with an individual company’s profit maximization. Companies, investors and shareholders will have to reckon with this reality.
Rick Alexander, founder and CEO of The Shareholder Commons, expounded on this point in a February article:
Most investors hold broadly diversified portfolios and rely on their job as their primary financial asset. They need a healthy economy and planet in order to have solid portfolio returns, decent wages and good lives. They know that some companies need to surrender shareholder value in order to preserve the critical systems we all rely on (think coal, oil, tobacco and, not coincidentally, large financial institutions that threaten systemic stability).
A recent study determined that publicly traded companies create annual social and environmental costs of $2.2 trillion. While any given company may profit by ignoring costs that it can externalize, its diversified shareholders ultimately pay the price.
Moynihan emphasized that the world’s problems cannot be solved without leadership from the private sector. He pointed to the SDGs, noting that all the charitable spending in the world doesn’t amount to the estimated cost of delivering on those goals.
"You could go to governments, but they’re running huge deficits, and they don’t have the money," Moynihan said.
The three CEOs talked at length about the importance of coalescing around a common set of metrics and data, but that’s only a partial solution. If the objective is truly to assure our ongoing prosperity, then everyone involved in capital markets must prioritize the vital systems upon which a thriving economy depends, rather than profit margins at any one company. At the end of the day, only that approach will serve both shareholders and stakeholders.