The Sustainability Equation: Why Money Matters
When Charles Dow created the Dow Jones stock index in 1896 to complement his existing index of railroad stocks, he found only 12 industrial corporations worthy of inclusion. But by 1900, 185 new publicly held industrial amalgamations had formed. The largest -- JP Morgan’s U.S. Steel with a market cap of $1.4 billion -- was worth nearly five times the value of the U.S. government’s annual budget of $350 million.
That kind of accelerated pace of stock growth and creation of new companies has continued ever since in this country. Over the past century, the global consequence of our publicly held corporate sector has surpassed the expectations and comprehension of public policymakers and corporate executives alike.
During the 1990s, an incredible bull market spurred on by the super-hyped dot-com craze rendered an aura of invincibility to the wealth that can be created as greater numbers of U.S. citizens began to plow their savings into the stock market. In the past, the ups and downs of the stock market did not carry nearly as much weight as today. That is because the percentage of citizens that now own stocks is at an all-time high. And more than ever, their retirement plans and pension funds hinge on the performance of the stock market.
In The Equity Culture, Mark Smith, a 20-year veteran of Wall Street, sums up the many intellectual, economic, political, and social influences that have combined to create what can best be termed our “global equity culture:”
“This culture is pervasive. It is now commonplace for citizens in many countries to invest a substantial portion of their savings, including retirement monies, in equities; 50 years ago, this was unheard of, and would have been deemed grossly imprudent. Medium-sized businesses in Europe and Asia that a mere ten years ago would never had dreamed of selling stock in a public market now suddenly have not only the opportunity to do so, but frequently find themselves with no choice but to consider equity offerings as other more traditional modes of private financing disappear. Countries as diverse as Malaysia and France have been forced by the new market realities to reconsider their entire structure of corporate governance and economic regulatory legislation, which in turn requires them to reconsider some of the fundamental underpinnings of their social compacts.”
The fate of corporations now has far-reaching repercussions throughout the globe for literally millions of small equity investors. As the clout of corporations has increased with the advent of the globalization of the economy, a few forward-looking companies have radically altered their perspective and behavior. They are developing their own social programs that mimic activities most of us associate with governments. They have often done so in response to social pressures.
The quality, price, and performance of a company’s products have always had a major impact on a firm’s stock value. But today, issues that were once invisible –- such as an individual company’s governance structure and make-up -- can help determine the true value of a firm in the marketplace. And it is discovering this hidden value that really matters when it comes to calculating how well companies are serving the interests of society at large.
This convergence between a multiplication of individual investors, and social response product development, has evolved into what can be called the “logic” of a global equity culture. The personal consequences of actions taken by publicly held private corporations have never been greater.
Consumers are often portrayed as being at the mercy of global corporations increasing in size and reach. With the help of third-party credit agencies the likes of Innovest, CoreRatings and IRRC, we consumers are actually in control. Our pension fund investments are recycled into investment capital. In a global equity culture, we the consumers not only provide investment capital, we also purchase the products. In a sense, consumers can exercise absolute control over the system. We don’t have to buy the products, we don’t have to give them our money. We all have a vote. This is the very antithesis to Marx. Our money joins hands at both ends of the corporate chain.
Over the last five years, these new third-party institutions have popped up to provide the growing ranks of equity investors with credible, independent sources of information about the risks facing investors. These risks come in all shapes and sizes, ranging from environmental threats such as global climate change to more specific and targeted threats, such as depletion of oil or hostile business climates due to local cultural practices or government policies. A plethora of rating agencies and other third-party institutions are now scrutinizing company risks in ways unheard of just a decade ago. These increasingly visible market observers are bringing methods of calculating a stock’s value to whole new levels of unimaginable sophistication. Once vague and nebulous concepts such as “sustainability” can now be measured with some hard numbers.
According to a study conducted by the Social Investment Forum, broadly defined SRI funds now represent $2.16 trillion in assets. While that is a substantial sum, it represents less than 5 percent of the total equity culture that underwrites much of the world’s economic activity. Clearly, if better products are going to make a better world, ideas on sustainability and social matters have to infiltrate beyond the small socially responsible investing community.
Today’s global economy requires multinational corporations to understand the viewpoints and unique perspectives of emerging markets, particularly in Asia. Whole new infrastructure designs being contemplated there could represent breakthrough opportunities for U.S. companies pushing better products for a better world. If corporations can prove with hard numbers how they are differentiating themselves from the pack based on social response product development, and can therefore manage risks better than competitors in their industrial sectors, then third-party credit agencies become the key players that can capture this hidden value.
Once these former intangibles become indeed tangible, companies embracing social values such as sustainability will be able to jump out ahead of their competitors and even possibly transform entire product lines to better serve both company bottom lines and society in general.
Dr. Bruce Piasecki is the president and founder of the American Hazard Control Group, a management consulting firm specializing in energy, materials, and environmental corporate matters since 1981. Dr. Piasecki is the author of five books on business strategy, valuation, and corporate change, including the Nature Society's book of the year, In Search of Environmental Excellence: Moving Beyond Blame.