Stakeholders: Finance/Wall Street Archives

November 6, 2011

You Can't Impress Stock Analysts...and Shouldn't Try

ExxonMobil reported last week that its net income reached $10.3 billion...in just the third quarter. The oil giant is arguably the most profitable corporation in history. Ten billion in three months is historic, but as the New York Times reported, "analysts were not impressed."

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Is there a better distillation of the serious problem with our economic system? Not to put too fine a point on it, but the relentless pursuit to satisfy analysts, and not customers or other stakeholders, is killing our economy and our planet.

Earlier this year, I asked a CEO of Fortune 100 company how he dealt with analyst pressure. Even though he answered on stage in a public forum, I'll keep this anonymous in case it was a moment of mistaken honesty. What he said was this: "I don't know any CEO that would want to run a company the way analysts would want us to."

And yet...I keep hearing from top executives at large, profitable companies that they're under "P&L pressure." This pressure comes not from being anywhere near unprofitable; no, it stems from fear of not hitting growth targets for earnings per share. What all senior executives seem to have forgotten — in some mass delusion — is that these growth targets are arbitrary.

Who declared 7 or 10 or 15 percent growth in earnings a sacrosanct pursuit, above all other corporate goals — like the innovation that leads to novel solutions that address customer needs? If you believe the best-selling business books from the last 25 years, companies are "In Search of Excellence" or trying to go from "Good to Great." Nobody writes a paean to the search for 9 percent EPS growth.

Moreover, pure growth targets are even wackier right now. The debt and overleverage explosion artificially inflated our economies and corporate earnings. So expecting growth in earnings today, while we re-set the economy to a more "normal" growth level, is absurd.

Now imagine for a moment that a proverbial alien lands on the planet and looks at the financial statements of many of our largest companies (I know, aliens might have better things to do, but go with it). They would see massive profits, tons of free cash flow, and healthy balance sheets. Since they wouldn't know that the companies had set and missed growth targets, they'd declare them very successful. But not the analysts.

Our big, profitable companies have the resources to do everything they might consider a priority in the long run — invest in R&D, pay shareholders well, build new businesses and hire people, create a more sustainable enterprise...whatever.

The strategic decisions that would lead to these outcomes require broader thinking, not quarterly focus. But the pressure to "impress analysts" means that leaders can't pursue the long-term perspective that creates truly lasting, great, and sustainable organizations. It's a strategic and operational straight-jacket.

A few leaders — from companies such as Google and Unilever — have told Wall Street that they won't provide "guidance" anymore. In essence, they'll report their results to GAAP standards and as the SEC, FASB, and other quasi-regulatory bodies require...but they won't answer to analysts. Not coincidentally, these CEOs are also deep sustainability thinkers.

I have a sneaking suspicion that most CEOs and CFOs would enjoy this kind of freedom from analyst conversations. Wouldn't it be more personally rewarding for them — and all the layers of management beneath them — to build and lead fundamentally more profitable organizations (versus maximizing short-term profits)?

As Unilever CEO Paul Polman told the crowd at the World Economic Forum in Davos in January, "The worse thing would be to do what is probably right for the long-term benefit of society and being forced out of that because you don't get the short-term results...I want people to focus on cash flow, which is a much longer-term measure than short-term profit."

Sustainability is about the real long-term health of both the planet and enterprise. I hope we see more leaders walking away from these absurd pressures that keep them from building innovative, profitable, sustainable companies.

(This post first appeared at Harvard Business Online.)

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @GreenAdvantage)

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January 22, 2012

A Vision of Real Corporate Leadership on Sustainability

[This piece appears on Sustainable Brands' site as part of a special monthlong focus on leadership. Chris Laszlo and I are guest editing. We have laid out a framework for true sustainability leadership to help shape the discussion. We each are also offering a deeper dive on one half of the two-by-two matrix we suggested. I'm focusing on the “external” side of leadership which focuses mainly on (a) how a company responds to global sustainability pressures and (b) how it does business in a way that’s visible to the outside world…its products, processes, relationships, and so on.]

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The basics of sustainability excellence are fairly well known by now: reduce your footprint, create products and services that help customers do the same, drive employee engagement, think value chain, track data and enable transparency, and on and on. But real leaders will go further and address the scale of the sustainability challenges we face by fundamentally remaking their companies. Here’s what I envision in a few key areas:

Science-Based Goals

Footprint reduction targets are important, but if the goals are not based on what scientists tell us – i.e., we need an 80% reduction in absolute greenhouse gas emissions – they’re not good enough. Sony and a few others have targeted zero impact by 2050. This level of commitment needs to become the norm, and then a few brave souls can go beyond reducing harm (even to zero) and set goals to build restorative enterprises.

Policy

While uncommon today, the basic level of performance on policy should be to make lobbying efforts consistent with core business strategy and public messaging (for example, are you proudly launching products that use less energy, yet lobbying hard against higher efficiency standards?). Real leaders go much further and lobby for stricter standards and aggressive action on climate. CEOs can demonstrate their external leadership by promoting this agenda with corporate peers and government leaders. Some companies are on track, committing to the recent “2 Degree Challenge Communiqué” or joining groups like BICEP (led by Ceres, Nike, and others) which demand strong climate policy action.

Product and Service Innovation

Reducing the customer’s footprint will need to be the core aim of all innovation efforts and all product lines (not just a sliver of the portfolio as it is today). Sustainability innovators will open up their creativity process, inviting customers and partners to offer innovative solutions (GE’s Ecomagination Challengeis a good example). Innovators will embrace disruption and heresy (which I’ve written about before) by helping customers use less of their products. For a glimpse of the future, see Unilever’s campaigns to get customers to reduce water use and Patagonia’s Common Threads, which offers a grand bargain: “We make useful gear that lasts a long time…You don’t buy what you don’t need.”

Valuation and Investments: Financial and Operational Metrics

Leaders such as P&G and GE have set aggressive revenue targets for their greener products. A few companies put a price on carbon for internal capital allocation decisions or, like DuPont and Owens Corning, set aside a percentage of capex for eco-efficiency investments. These actions help correct the inherent flaws of ROI decision-making by valuing sustainability more explicitly. The next step is fully incorporating intangible value – employee engagement, customer loyalty, brand value, and the like – as well as measuring and including all externalized costs in investment decisions. Two trendsetters, Puma and Dow, have begun this important journey.

Investor Relations

I believe that the relentless pursuit of short-term, quarterly profit goals to please Wall Street analysts is bad for companies – great enterprises very rarely seek profit alone – and certainly isn’t good for the planet. Like Unilever’s CEO Paul Polman, the real leaders will stop providing quarterly guidance and ask managers to focus on the real measures of success: making great products, serving customer needs, creating good jobs, and driving both cash flow and long-term profitability. The most sustainable companies will become “benefit companies” or “B Corps”, with a broader charter than just pursuing shareholder value. Seek greatness and sustainability, and the money will follow.

Resources Dedicated

Most companies give their sustainability execs woefully inadequate resources to do their stated jobs, let alone transform their companies. A truly committed organization will allocate resources equal to the challenge and will give the sustainability function real power. I suggest creating a “skunk works” team run by sustainability, along with perhaps corporate strategy and R&D, to question everything and challenge the core business model (e.g., What if the product were a service? What if we used no fossil fuels?). This is how companies can systematize heretical innovation.

Employee Engagement

Educating all employees on sustainability principles and creating green teams are good first steps. Tying all executive compensation directly, and substantially, to sustainability goals is even better. But real leaders should work to convince those hostile to change throughout the organization…or eliminate them. In the words of Jim Collins in Good to Great, “get the right people on (and off) the bus.” Leaders will also help employees pursue sustainability in their own lives and communities and provide an outlet for organizing campaigns, such as the awareness-raising “climate ride” conducted by apparel company Eileen Fisher. If the workplace is appropriate for United Way drives, why not for climate action?

In short, I’m imagining a very different kind of company. The overwhelming challenges we face demand profound shifts. Of course, much more than I’ve mentioned will need to change – on the social side of the equation for sure – so please let me know what you would add to my vision of true leadership.

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @GreenAdvantage)

November 8, 2012

The Fantasy of the "Sad Green Story"

(Note: This blog is co-authored with my colleague Jigar Shah, a partner at Inerjys and a board member of the Carbon War Room, where he served as its first CEO. Jigar also founded SunEdison, helping to create the multibillion-dollar solar services industry.)

To get back to some non-election topics...A couple weeks ago, New York Times columnist David Brooks wrote an op-ed entitled "A Sad Green Story" about the (supposed) travails of the green movement over the last 10 years. The idea that the clean technology sector is failing, or that it's a bad investment, is common enough in the business world and pundit class. But it's patently false. So what is Brooks talking about and what's really true here?

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Brooks focuses in part on whether Al Gore has made money on clean tech — a total distraction that has no bearing on the reality of climate change or the growth of clean tech. What's more important is Brooks' absurd logic that an entire sector of the economy is a "sad story" because some government-supported companies struggle, go under (Solyndra), or get acquired (battery maker A123). And how can Brooks tear down the government's involvement in promoting the deployment of American green innovation while providing no tangible idea of how he would do it better?

Most of us watching or working with the clean tech sector agree that government shouldn't try to pick winners (see Jigar's take on Solyndra's failure here), but we can propose a plausible model of how the government might play a more productive role. This ranges from providing a roadmap for remaking the multitrillion-dollar energy sector, to providing leadership by example (and scale) when purchasing new technologies.

For proof of how crazy all of this criticism of clean tech is, we need look no further than a recent Times-reported story on natural gas. Natural gas is a booming industry. But as the paper of record reports, it turns out that one key part of the natural gas value chain — that is the step of actually digging it up — is struggling financially. Small, scrappy entrepreneurs like Exxon Mobil are, according to its CEO, "losing our shirts today... Were making no money. It's all in the red."

This is exactly the same economic story that Andrew described a few weeks ago about the solar industry. The manufacturing end of the chain, experiencing a glut of supply, is losing money. But downstream users of the product, solar panels in one case or natural gas in the other, are doing very well. The financial struggle for some companies in both solar and natural gas is a sign of a boom, not a bust.

So we assume David Brooks and other green skeptics will soon write about the "sad brown tale" of the (also) highly subsidized industry of fossil fuels, which, since some people are losing money, must be shut down and mocked. We'll hold our breath.

Brooks' column is also filled with fantasies and misstatements that would be easy to correct with a simple Google search. As Andrew mentioned in his previous blog post, the percentage of our electricity coming from green energy has doubled in just four years — that doesn't seem like much of a sad story. Brooks also dismisses the idea of green jobs with no data to back up his position. Of course there are green jobs — there are 100,000 people working in solar in this country today. And, not for nothing, but the fastest growing green jobs markets are in politically red states. (We'll stop there and let climate blogger Joe Romm tear apart some of the more subtle Brooks fallacies.)

From a practical perspective, green technology is succeeding in part because we have oil prices that are stuck near $100/barrel, and water challenges that are creating deep competition between agriculture and oil and gas in places like Colorado. At some point Brooks and others will also have to acknowledge what the U.S. military, particularly the Navy, has already determined: future conflicts will arise over resources like oil and water; climate change is a security threat; and pursuing a renewable energy future is a safe, logical path.

In the end, fact-free attacks on all things green need to stop. Like in all industries, some paths are profitable and some are not. But we'll only find out what works if we invest in new growth sectors and not act like the sky is falling — or that there's some devious green investing cabal secretly making money — when some companies fail. Sad business stories become happy ones through persistence and overcoming failure. Not understanding that is Brooks' greatest fantasy.

(This post first appeared at Harvard Business Online.)

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @AndrewWinston)

February 1, 2014

The Largest Risk (and Opportunity) Investors Are Ignoring

Tackling climate change — and thus keeping the world inhabitable — is an achievable goal, but it will become prohibitively expensive if we wait to act. This is the key message from a leaked United Nations study that The New York Times reported on last week. Journalist Justin Gillis wrote about the risk of “severe economic disruption” and “wildly expensive” solutions — ones that may not even exist — if we don’t leverage existing technologies to shift the global economy away from carbon over the next 15 years.

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Talk of potential risk to humanity is not new. And we’ve seen more recently the actual devastation of record weather events like Hurricane Sandy and Typhoon Haiyan. But neither the scientific warnings nor the extreme storms have prompted enough action. However, now the risk we’re talking about is financial, which, along with the enormous economic upside of taking action, may finally get the investment community moving.

The day before the stark story in the Times appeared, I attended a related conference, the Investor Summit on Climate Risk, held at the UN and run by the NGO Ceres. Hundreds of financial executives gathered, including some heavy-hitters, from state comptrollers to executives from large pension funds to former U.S. treasury secretary Robert Rubin, who declared, “climate change is an existential risk.”

The conferencewas focused on the release of Ceres’ new report, “Investing in the Clean Trillion.” Created in conjunction with Carbon Tracker, the study lays out a plan for mobilizing much more capital toward building the clean economy. The trillion-dollar number is not random: TheInternational Energy Agency (IEA) has estimated that the world needs to pour $36 trillion of investment into the clean economy between now and 2050 in order to keep the planet below the critical warming threshold of 3.6 degrees Fahrenheit (2oC). That’s $1 trillion per year.

A key target for Ceres’ work, and the main audience at the conference, is the group of institutional investors who manage tens of trillions of dollars in assets for long-term performance. The core argument to compel institutional investors to change how they influence companies and where they invest their money is simple: as the world pivots away from carbon-based energy to avoid devastating climate change, fossil fuel assets, like coal plants or off-shore oil rigs, will be “stranded” — a wonky term for “worthless.” The value of the companies owning and managing those assets, the logic goes, will plummet. As Nick Robins from the bank HSBC described to the audience, in a scenario of global peak fossil fuel use by 2020 “implies a 44% reduction in discounted cash flow value of fossil fuel companies” — or in simpler terms, a decline in share price of 40 to 60 percent.

In another Ceres meeting last fall on this topic of stranded assets, Craig Mackenzie from the Scottish Widows Investment Partnership ($200 billion in assets) spoke about the “wake-up call” investors had gotten from recent shifts in the U.S. coal market. The 20% drop in coal demand was driven mainly by the incredible increase in natural gas production due to fracking technology, not from any concern over greenhouse gases. But the rapid shift demonstrated to Mackenzie and his firm the dangers of overexposure to a class of assets. So, he says, the fund “reduced exposure to pure play coal companies to nearly zero.”

It’s easy to point out a big flaw with the stranded assets discussion: uncertainty. I spoke with executives at a few big banks who said the big question for them is when will the assets be stranded. Nobody wants to leave profitable investments too early that gets you fired. But trying to time a bubble bursting is a dangerous game. How many investors got the timing right on the implosion of mortgage-backed security assets in 2008? Nearly none, and that systemic failure of vision contributed mightily to a global financial collapse.

Given what’s at stake now — not just financial system stability, but planetary, human-supporting system stability – it’s more than prudent to avoid the game of timing the market perfectly. The investment community should be much more proactive about using its weight to a) pressure fossil fuel companies to quickly migrate their own portfolios to new forms of energy; and b) dedicate significant funds to investing directly in new technologies.

With the chilling, “it’s going to be very costly” message of Gillis’ article, and the warnings of trillions of stranded assets in the Ceres report, it’s easy to miss the very big silver lining running underneath all the dire warnings: we have the technologies today to make the shift and do it profitably.

The Clean Trillion report cites the uplifting flip side of the IEA’s calculations — the $36 trillion of investment we need will yield $100 trillion in fuel savings between now and 2050. That’s a lot of money to leave on the table, and a very good investment.

(This post first appeared on the Harvard Business Review blog network.)

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @AndrewWinston)

February 12, 2014

How Exactly Will We Move Away from Fossil Fuels?

Investors who have significant money tied up in the fossil fuel industry — every pension and market fund, essentially — are facing a massive risk. The logic, according to the International Energy Agency (IEA) and banks like HSBC, is this: as the world migrates away from carbon-based fuels, trillions of barrels of oil and billions of tons of coal — the assets sitting on the books of energy companies — will become “stranded,” or worthless.

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It’s a compelling argument, but only if we can answer a key question: How exactly will those assets become stranded? That is, what will prompt a fast enough migration from fossil fuels to cause their value to plummet? I see a few plausible paths: government regulation, straight economics (when cleaner energy crowds out fossil fuel investment because the returns are better), or a social movement that propels voluntary action. Let’s quickly look at each.

1. The Stick: Regulation

The organizations talking about stranded assets seem to assume that governments will price carbon at some point. As a recent report on the subject from the NGO Ceres said, “According to the IEA, more than two-thirds of the world’s proven reserves of fossil fuels will be unusable prior to 2050 if necessary carbon regulations are enacted [emphasis added].”

That’s a mighty big “if.” While some regions are experimenting with carbon taxes, and Clean Air Act regulations in the U.S. are making coal plants more expensive, regulation is not truly impeding global fossil fuel use.

Ultimately, the political will for fundamental change is lacking. In the State of the Union speech last Tuesday, President Obama said that climate change was a fact and touted the growth of solar energy in America. But he also bragged about increased production of natural gas and oil. Very few politicians will take on those powerful lobbies, so a price on carbon is likely a fantasy in the U.S. for now. And partly because of America’s intransigence, 19 years of global negotiations on binding limits on carbon have led nearly nowhere.

2. The Carrot: Money

On this path, we choose renewables because they’re cheaper, which is far more plausible every day. In significant swaths of the world, wind or solar power is more than competitive with fossil fuels. About half of the new energy capacity put on the grid globally is now renewables, and the picture going forward is even better. Bloomberg New Energy Finance has estimated that between now and 2030, around 70% of the power generation the world will add will be renewables.

This level of investment is happening because the economics work. But it doesn’t mean we’ll be stranding many assets any time soon – the installed base of carbon-based energy systems is really large. Renewable energy does provide 21% of electricity globally, but modern renewables (like solar and wind, not hydro), which would really displace coal and natural gas, only provide 5%. Renewables are a long way from dominating electricity enough to make fossil fuel energy a bad investment.

And when you look at mobile energy use (that is, cars), the story is even clearer. To strand oil assets, we’d need to drive mostly electric vehicles or use a lot more public transportation. And while the new electrified vehicles market is growing fast, it’ll be many years until those technologies dominate.

3. The Guilt or Enlightenment: Moral Suasion

We could, in theory, see a vast voluntary movement toward clean energy by companies and individuals — even faster than what they’re purchasing already where the economics do work. But it is tough for public companies in particular to spend money when they think it doesn’t pay back in traditional ROI terms.

That said, organizations could recognize that the additional benefits from a larger, quicker move to onsite renewables — including having a hedge on fuel prices, inspiring employees and customers, and building resilience to extreme weather and grid outages — adds up to real value, even if it’s hard to measure. Companies and consumers could also decide it’s cool to use clean power. The Toyota Prius sold millions of units not because it saved money on fuel, but because of what detractors noticed was a certain smugness or pride in driving it (I’m guilty as charged).

We could also see moral pressure to move away from fossil fuels. The growing divestment movement, led by the NGO 350.org, is an attempt to make investing in fossil fuel companies morally equivalent to investing in South Africa during the anti-apartheid movement. The next generation — the students leading the campaign now — may never work for or buy from the old energy industry.

But moral campaigns are highly unpredictable and we can’t count on this path to get us there.

Ultimately, the second path is clearly the most likely, and the clean economy will dominate over time on purely economic terms — a variable cost of basically zero for renewable energy will win out. But will it be fast enough to turn fossil fuels into stranded assets any time soon? I doubt it, since companies and countries aren’t even doing all the clean energy projects that pay back quickly, or don’t require any money down. It’s not just about economics.

That’s why we need all of these efforts to work in conjunction — movement on any one of them will give momentum and credibility to the others. The social and government pressures will accelerate investment and thus improve the economics. And in return, if companies start buying a lot more renewable energy, they will help build the market, improve the economics, and give cover to politicians to take action.

In short, all three paths are valid and tough, but together, they should do the trick. They’d better.

(This post first appeared on the Harvard Business Review blog network.)

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @AndrewWinston)

December 30, 2014

The 10 Most Important Sustainable Business Stories of 2014

Happy holidays and (almost) New Year.

For the 6th year now, I've taken a shot at summarizing the biggest themes in sustainable business over the last 12 months -- that is, stories about the biggest environmental and social challenges and how companies are navigating them. This year, given the incredible amount of activity on climate change, I devoted the first five themes to the biggest challenge of all -- the science, the costs and benefits (mostly the latter) of dealing with it, the deep impacts on energy and utility businesses, and so on.

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For the skimmers out there, here are the top 10 "headlines" I created...
1. The bad news — climate change is now.
2. The good news — tackling climate change is getting much cheaper.
3. The utility and energy businesses are changing fundamentally (well, some of them are).
4. Serious legislation like a carbon tax — even in the U.S. — is seeming possible again.
5. A powerful social movement on climate takes shape.
6. Strategy and mission start to gain the upper hand on short-termism.
7. Rivals embrace radical collaboration.
8. The absurd amount of food we waste gets more attention.
9. A teenager pressures Cola-Cola and Pepsi – and wins.
10. The fight against inequality finds new business allies.

The full article appears as usual on Harvard Business Review online, and began like this...

It’s been an amazing 12 months in the world of sustainable business. From climate change to inequality, the scope of humanity’s biggest environmental and social challenges came into much sharper focus this year — as did the scale and range of opportunities to do something about them. And citizens, using new social media tools and old-fashioned marches, rose up to drive change. Both in response and pre-emptively, the world’s leading companies continued to aggressively pivot their businesses toward more sustainable and innovative ways of operating.

To make sense of all of this activity, I made a list of the year’s big themes, looking for the bigger story across multiple examples. But I also ran across a few specific company stories that were just really compelling or cool. So here is my admittedly subjective look at the top 10 sustainability stories and themes of the year, with sustainability broadly defined as encompassing people, planet, and profits:

1. The bad news — climate change is now.
The subtitle of this year’s summary could be “reports, reports, reports,” with important and fascinating (no, really) studies from economists, government agencies, scientific bodies, and business coalitions — all making a compelling case for action on climate change.

Over the last two years, the Intergovernmental Panel on Climate Change issued its fifth, multi-thousand-page assessment of global climate science. But some new, more layman-friendly voices are telling the science story and explaining how costly to business a hotter world already is. The American Association for the Advancement of Science (AAAS) issued the clearest document from scientists I’ve ever seen, a pithy report telling us that “What We Know” is the following: (1) “Climate change is happening here and now,” (2) the risks of irreversible, highly damaging impacts are high, and (3) the sooner we act, the lower the cost. Another report, the U.S. National Climate Assessment, led with the statement that climate change “has moved firmly into the present.”

Adding a business perspective, a group of heavy hitters, including billionaire Michael Bloomberg and former U.S. Treasury Secretaries Hank Paulson and Robert Rubin, issued the persuasive Risky Business Report. This short paper outlines how climate is “already costing local economies billions” and describes how hundreds of billions of property are at risk...

To see the rest of the discussion, the 50 or so links to interesting stories, and my 5 themes to watch out for in 2015, check it out here...

Have a great New Year!

(Andrew's new book, The Big Pivot, was named a Best Business Book of the Year by Strategy+Business Magazine! Get your copy here. See also Andrew's TED talk on The Big Pivot. Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @AndrewWinston)

December 28, 2015

10 Sustainable Business Stories that Shaped 2015...and Some Questions for 2016

(I published the below, my annual list of the top 10 stories in sustainable business, last week in HBR. One change this year: I won't call evidence of climate change a "story." So consider the extreme weather that has devastated lives and businesses in Chennai, India. That’s not fodder for a top 10 list. It's unfortunately just part of the harsh reality of living life and doing business in the 21st century. It should be obvious that climate change is here and, as Citi calculated recently, will cost the world unfathomable amounts of money if it goes unchecked. And it's increasingly obvious that building the clean economy is good for business. So here it goes...)

The year 2015 was a pivotal time when humanity turned more decisively toward building a thriving and sustainable world. On our largest shared challenge, climate change, most of the major hurdles to action — both imagined and real – started to crumble. And an unlikely group of new voices joined the fight. From the Pope to global CEOs to almost all the world’s political leaders, the most powerful people got on board.

It was a year of amazing progress — mostly. Here are eight cross-cutting themes and stories from 2015 that are driving us toward a sustainable world (and two that are doing the opposite):

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1. The Pope reminds us that we’re all connected. The Pope’s encyclical, Laudito Si, is a manifesto asking that we reconsider how we treat each other in a threatened and divided world. He challenged the current form of capitalism and made a powerful case for tackling climate change and inequality on moral and economic grounds (I’ve summarized his paperhere and here).

The Pope is, at least nominally, the moral leader of 1.2 billion Roman Catholics around the world. His voice carries enormous heft with all leaders. By adding a weighty moral dimension to the discussions of climate and equity, and for linking them effectively, I believe his manifesto and continued vocal support for the issues make this the top story of the year.

Ideas can affect the world more deeply than even historic treaties or agreements. Consider that other power brokers, such as Jim Yong Kim, President of the World Bank, echoed themes similar to those the Pope raised. Kim said in September, “we have no hope of ending extreme poverty unless we tackle climate change.”

2. In Paris, all countries say with one voice, “We will tackle climate change.” The deal reached on December 12 might be one of the first times in history that representatives of every human being on earth agreed on, well, anything. It’s big news and a very good start, but the deal has a major flaw: the commitments will not keep the world from warming 1.5 degrees Celsius, or even 2 degrees (the stated long-term goals). That said, with 187 countries pledging collective action to cut carbon emissions, the deal will have vast repercussions for business, particularly as governments put into place policies to remake our energy, transportation, and building systems.

The lead-up to Paris gave us a taste of what’s to come. For example, China committed to implement a carbon cap and trade system, Britain said it would phase out coal plants by 2025, and President Obama vetoed the Keystone pipeline. Besides possibly saving humanity, the deal has another big upside — it signals to financial markets and businesses that the low carbon economy is worth investing in. Multi-trillion-dollar markets are in play and there will be many more winners than losers.

3. Companies line up like never before for climate action. One of the reasons the Paris talks succeeded was the clear support of the business community. CEOs from some of the world’s largest companies put out public statements backing a strong climate deal. Sectors calling for action included banking (Bank of America, Citi, Goldman, JPMorgan, Morgan Stanley, Wells Fargo), the apparel industry (including Levi, Gap, Adidas, VF), and the World Economic Forum, which brought 79 CEOs together to urge action. Even oil giants from Europe (including BP, Eni, Shell, Statoil, Total) advocated for a price on carbon.

Some big names went even further than this nudging and took direct action to lower their carbon emissions and costs by buying large amounts of renewable energy. The giants contracting for hundreds of megawatts of wind and solar included Apple, HP, Kaiser Permanente, Google, Dow, Amazon, as well as GM and Owens Corning. Many of these companies are also shooting to use only renewables.

4. Companies and global governing bodies set visionary global goals. Goals matter. Big, aggressive targets drive organizations (like the ones above) and countries forward. And we’ve seen a lot of them this year.

To start, the UN, in a parallel with the climate negotiations, released in September the ambitious Sustainable Development Goals. Also called the Global Goals, these 17 statements (and 169 targets) create a vision and destination for building a thriving world — no poverty, zero hunger, health and well-being, equity and equality, and action on climate change, just to name a few.

Many companies also set visionary goals this year, often based on science — and some achieved big targets like Coca-Cola’s 100% water replenishment goal. A few examples:

This all leads to a huge breakthrough:

5. The vision of an all-renewable energy system comes into focus. In November, two professors from Stanford and the University of California at Davis mapped out how 139 countries could rely entirely on renewable energy by 2050. As the progress countries and companies are making shows, this isn’t just science mixed with wishful thinking. The world has already begun the shift — and the numbers bear it out.

Of all the new power generation built globally over the past two years, renewable sources accounted for over half. In the U.S., in the first six months of 2015, 70% was renewable. This is in part because every clean energy technology is rapidly getting cheaper. As Bloomberg reported in August, for example, “fossil fuels [are] losing cost advantage over solar, wind.” This means that solar will reach the point where it costs the same as traditional options — what’s called “grid parity” — in 80% of the world by 2017. To keep the renewable sector humming along toward that economic watershed mark here in the U.S., the congress passed tax credits for solar and wind at the last minute this year.

6. Wall Street wakes up. For years, asset owners with longer-term horizons, like pension or sovereign wealth funds, have pressed companies to better manage environmental and social issues. This year, the shorter-term investors (shorthand: “Wall Street”) started to join in.

Blackrock, with $4.7 trillion in assets, has been pushing the investment community to get serious on climate. Larry Fink, Blackrock’s CEO, also sent a letter in April to S&P 500 CEOs suggesting that they invest more for the long-term and stop putting so much money into stock buybacks and dividends (a $1 trillion boondoggle for investors this year). And at Morgan Stanley (in what I believe was a first), an analyst raised the stock price target for companies — in this case three apparel giants (Nike, Hanesbrands, and VF) — based on how well they manage environmental, social, and governance (ESG) issues.

In other investor news, the fossil fuel divestment movement grew quickly, gathering together universities, cities, and other institutions that have more than $3 trillion in assets. And Bill Gates gathered some friends to create the largest clean energy fund in history to invest in R&D. So-called “impact investing” is moving out of the niche world and into the mainstream. Blackrock, again, created a new ESG-friendly mutual fund.

7. Consumers (finally) show interest in sustainable products. Blackrock’s new fund was specifically aimed at Millennials, the group of workers and consumers that are demanding more environmental and socially sound products. A Morgan Stanley report found that Millennials are twice as likely to buy from brands with good management of environmental and social issues, and twice as likely to check product packaging for sustainability performance. For packaged goods and food in particular, it’s the era of what many call the “clean label.” It’s a sweeping change in expectations, as people want to know how everything is sourced, made, and delivered.

There’s real money here for the good actors. Mega-retailer Target, for example, assesses thousands of products it sells and scores them on sustainability performance. For a segment of the highest-ranked products, sold under the “Made to Matter” banner, sales at Target are growing much faster than regular products (and will total $1 billion this year). And Walmart took a fascinating step, trying to help choosy customers by labeling thousands of more sustainable products online as “Made by a Sustainability Leader.”

8. Companies challenged, and were challenged by, their supply chains. For many sectors, supply chains are becoming both a major source of risk and also an opportunity for positive change. The food business is an important case study. At a UN event I moderated in Paris, the CEO of Kellogg’s talked about the risk to the company’s supply chain from climate change. It’s one reason that the food giant set a new carbon reduction goal for its whole value chainas did competitor General Mills.

Why? The previously mentioned clean label movement is a key part of what the New York Times called “a seismic shift in how people eat.” This shift in consumer demand is rippling up through supply chains as food giants race to change the food system. This year McDonalds experimented with organic beef, Subway committed to buying antibiotic-free meat (following many others in the sector as well as Perdue and Tyson), General Mills said it will drop artificial flavors and colors from cereals, as will Kraft with its mac and cheese. The list goes on, and the trend won’t stop at food and personal care products.

In addition to these steps forward, 2015, like all years, included some steps back.

9. Commodities continue their relentless plunge in price. During the 20th century, the price of nearly everything that goes into making our society – energy, metals, food, and so on – dropped steadily. Then from 2000 to 2014, everything got wildly more expensive, doubling and tripling at least. But since the end of last year, the prices of most commodities have plummeted. Oil is nearing a 14 year low.

This massive shift has many fathers, from overproduction and over-investment in capacity to a general slowdown in China’s economy. And it’s worth noting that lower costs are good for most businesses (except commodity producers) in the short-term. But the rising cost of doing business was a core driver of the move to a more circular, sustainable economy. The logic of tight resources has not vanished, and investments in renewables have not slowed as much as lower fossil fuel energy prices would’ve suggested. But making investments in dematerializing value chains, or in designing products for end-of-life, is harder to justify right now. That’s unfortunate in the long run.

10. VW cheats and Exxon’s true colors. Warren Buffet once said, “It takes 20 years to build a reputation and five minutes to ruin it.” VW quickly learned this this harsh truth when it came out that the company had cheated on emissions tests to make its diesel cars seem cleaner burning. Credit Suisse says VW’s actions could cost the company $86 billion, andsales in November in the U.S. dropped 25%.

But this story does not call into question every sustainable product claim out there. No, this was about fraud. But it does perhaps make diesel less compelling as a clean transportation technology. VW found it was difficult to achieve high fuel efficiency, power/torque, and low emissions … but not impossible. It turns out, by the way, you can get all three: just look at Tesla.

And as for Exxon, it was the least surprising “scandal” of the year that the company knew about climate change for decades and spent millions of dollars calling the science into question. At least the exposure of VW’s and Exxon’s misdeeds demonstrates that transparency is a powerful tool coming for everyone.

Looking Back — and Forward

This year will likely go down as the time we began, in earnest, to make some important and deep changes in “business as usual.” Climate change is becoming an accepted reality to address; renewable energy is starting to outcompete fossil fuels; the private sector is taking the lead in building more sustainable products and pleasing ever-more demanding customers and workers; and investors are following the money toward a cleaner economy.

The coming year will be filled with more companies facing global challenges and considering tough questions about their purpose and role in society. But of course many predictions will go out the window as reality intrudes. Some questions that we can only answer with time:

· Will commodity prices stay low or skyrocket again?

· What companies will take advantage of, or get tripped up by, the increasing demands for more information and transparency?

· Will another storm like Hurricane Sandy hit the U.S. and elevate climate to a top tier issue for the 2016 election?

· As Millennials become a larger part of the economy (half the global workforce by 2020), what will they demand?

· How will technology, big data, and sharing economies drive change in business and help make the world more sustainable?

I look forward to a fascinating and more sustainable year to come. Happy holidays and best wished for a wonderful 2016!

(This post first appeared at Harvard Business Review online.)

(Andrew's new book, The Big Pivot, was named a Best Business Book of the Year by Strategy+Business Magazine! Get your copy here. See also Andrew's TED talk on The Big Pivot. Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @AndrewWinston)

March 9, 2016

Short-termism is Dead! Long Live Short-termism!

Two competing stories I saw recently about the relentless pressure on companies to meet short-term financial goals:

1) Larry Fink, the CEO of Blackrock, the world's largest investor ($4.6 trillion in assets) sent a new letter to S&P 500 CEOs urging them to think about long-term value creation (He also sent one last year lamenting stock buybacks and other short-term games).

A few choice phrases:

· "Today’s culture of quarterly earnings hysteria is totally contrary to the long-term approach we need."

· "We are asking that every CEO lay out for shareholders each year a strategic framework for long-term value creation."

· "Over the long-term (ESG) issues – ranging from climate change to diversity to board effectiveness – have real and quantifiable financial impacts."

Fink also commented on the macro-economic impacts of our short-term obsession: a lack of investment in infrastructure. That unfortunate political reality, I'd argue, is also due to a rise of an anti-governing coalition in the federal government.

Ok, so far so good -- so the scourge of short-termism in business is finally facing some strong, mainstream opponents. But then I saw this story...

2) "Alcoa CEO: The World is Getting More Short-Term"
Kalus Kleinfeld, Alcoa's chief executive, explains the break up of Alcoa into a core commodity business in aluminum and a "value add" business that sells to aerospace and auto. He makes the case that he needs to separate the high-value business to "have a different investor base" that would care about innovation and growth over time.

We've been hearing this argument more these days, as utilities have been splitting up to separate fossil fuels from clean energy...in part to satisfy different types of investors (although consider NRG CEO David Crane's take on whether short-termism drove his departure from the big energy company).

Kleinfeld isn't super-optimistic on this front, telling Fortune "the whole world is getting more short-term."

So which is it? The end of short-termism or the continued pressure?
Could it be both?

A short-term focus is deeply ingrained in what executives and managers have been trained to do (maximize short-term value) for the last 30+ years. So perhaps we're still heading in that direction...but we're finally slowing the ship and beginning to turn it around.

Fink suggests a solution in a way -- keep giving us quarterly reports and data as a measure of progress along the way to something larger -- like an 'electrocardiogram' of health today vs. a long-term plan for greater health. This seems like a good compromise.

But we clearly need to aggressively ramp up long-term thinking to get them even remotely in balance.

(Andrew's book, The Big Pivot, was named a Best Business Book of the Year by Strategy+Business Magazine! Get your copy here. See also Andrew's TED talk on The Big Pivot.

If you enjoyed this blog, please sign up for Andrew Winston's RSS feed, or by email. Follow Andrew on Twitter @AndrewWinston)

April 20, 2016

The Data Says Climate Change Could Cost Investors Trillions

[Last week, on HBR online, I posted the article below on an important new study that estimates the risk climate change poses to global financial assets. Yesterday I did a streaming interview with HBR on Facebook Live (on HBR's page -- sorry about the bad audio). An interesting new outlet for getting ideas out -- 25,000 views and counting for a spur of the moment video. Fyi, I'm also appearing on Bloomberg Friday at 11:45am to discuss this topic.]

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The Data Says Climate Change Could Cost Investors Trillions

An important new study, published in the journal Nature Climate Change, says that climate change will be expensive. Extremely expensive. It turns out that if you mess with the planet’s thermostat, it’s not great for the economy or investments. Forget the polar bears; your pension and retirement funds are in trouble.

It’s not the first time economists have warned us about the costs of a changing climate. Some past studies on climate economics, like the famous Stern Report a decade ago, assessed the macro-level risk to GDP as a whole. Others have drilled down to explore what worldwide action to control carbon would mean for fossil fuel investments specifically. But this new report, by estimating the risk to all financial assets and portfolios, finds a powerful middle ground that should get investor attention.

If we stay on the current emissions path, the study predicts, the value at risk in global portfolios could range from about $2 trillion to $25 trillion. In a bit of understatement, Simon Dietz of the London School of Economics, the lead author of the report, told The Guardian, “long-term investors…would be better off in a low-carbon world.”

Estimates of climate risk in the trillions are unfortunately getting more common. Last year,Citi produced a powerful study of the costs and benefits of shifting the energy system toward low-carbon technologies. Unchecked climate change, Citi said, could cost the world $72 trillion by the middle of the century. But the big surprise in Citi’s report was the cost of building the low-carbon economy: the world can spend $2 trillion less in total on energy infrastructure and ongoing fuel costs than it would in the business-as-usual scenario. So we save $2 trillion and avoid losing up to $72 trillion in economic activity.

As compelling as that sounds, the numbers in the Citi study may be too macro to get the attention of investors. When investors look at climate risk – if they do at all – they’ve focused mainly on what worldwide action to reduce carbon will do to the fossil fuel industry. Holding global warming to 2-degrees Celsius will require keeping huge quantities of fossil fuels in the ground. These so-called “stranded assets,” sitting on petro-company balance sheets, are essentially worthless. And thus those companies are massively overvalued.

The stranded assets argument sounds (financially) scary, but it hasn’t been quite enough to truly shift capital flows toward the clean economy. Dietz’s new research, by saying that climate change is a threat to all assets, could get a much broader coalition of investors moving. Some longer-term investors, mainly pension and sovereign funds, are already very concerned and taking action. Norway’s $900 billion fund divested from coal last year, for example. These funds need to think decades ahead, which is well within the time horizon of some very real – and frightening — climate impacts.

Consider another recent scientific study with enormous ramifications for anyone living in, or investing in, coastal property. Some eminent scientists concluded that the sea level rise that they thought would occur over centuries is now likely to happen in just decades. The obvious implication is that any investment tied to physical, coastal assets could be at real risk. These time frames are not theoretical for long-term asset owners. A 20-something teacher contributing to her state pension today will expect a payout 50 years from now… around the time that huge areas of Boston, New York, Miami, and New Orleans could be unlivable.

But it’s not just the investment community that should rethink where its capital goes. Any large company needs to take a hard look as well. A couple of key questions to ponder:

  • Do you, or your suppliers, have significant coastal assets? And what is the risk of devaluation? In other words, does it really make sense for a hospitality or real estate company to build a new hotel, apartment, or office complex right on the coast in Miami? Or should any company build a factory with significant water needs in a water-stressed area? Will that asset be operational or retain its value over the normal depreciation period?
  • Where are your financial assets invested and in what classes? Do you have significant exposure to coal or fossil fuels in your holdings? What about your employees’ 401Ks or pensions? If you ignored warnings a few years ago about the imminent demise of the coal industry, you may be losing your shirt now.
  • On the upside, what opportunities might arise from a popping carbon bubble? There will be winners and losers, so where will those winners be?

There aren’t easy answers to these questions, but I know very few companies that are even considering them. Thinking about systemic risk playing out over decades is out of the realm of normal business experience, particularly in today’s climate of short-termism. We have no practice dealing with issues like this.

Putting a value on the risk or opportunity is an important first step to make it all understandable to business. And the numbers these banks and academics are coming up with certainly help stir the souls (or wallets) of the investor community. But on some level they’re absurd. When you get into the tens of trillions, you might as well say infinite. The scale of the downside is so large, it’s worth significant effort and investment to avoid it. Let’s hope business leaders and policymakers heed the warning and seize the opportunity to build a more profitable and resilient low-carbon world.

(This post first appeared at HBR online.)

(Andrew's book, The Big Pivot, was named a Best Business Book of the Year by Strategy+Business Magazine! Get your copy here. See also Andrew's TED talk on The Big Pivot.

If you enjoyed this blog, please sign up for Andrew Winston's RSS feed, or by email. Follow Andrew on Twitter @AndrewWinston)

January 4, 2017

9 Sustainable Business Stories That Shaped 2016

In 2015, the world pivoted in a historic way toward sustainability. Debates about climate change melted away. Every country committed to action in the form of the Paris Agreement. Even the Pope spoke to the issue, reminding us that we’re all connected. It was a productive 12 months, to say the least.

Then came 2016.

Every year, I find big themes or specific company stories that I feel are impressive, important, or indicative of where the world is going. In 2016, two dwarf the rest: the election of Donald Trump and significant action on climate change. The context for sustainable business in 2017 may center on the competition between these two stories; that is, how will Trump and his team impact or impede progress on climate and other sustainability issues? So let’s focus on these two first, and then run quickly through seven other interesting stories.

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1. Trump Shocked the World

It’s not yet clear what Trump’s election means for issues that impact companies’ efforts to manage environmental and social issues. Climate change, building a clean economy, reducing inequality and raising wages, providing health care to support general wellbeing — all are big unknowns now. The early signs from the Trump team are not promising, in my view. He wants to appoint as head of the EPA a man who denies climate change and led legal battles against the EPA. His pick for Labor Secretary is staunchly opposed to covering overtime pay or increasing minimum wages (something many leading companies have been doing on their own since 2014. His choice for Secretary of State is the CEO of ExxonMobil, a company that has, for decades, attacked climate science when it knew better. A leaked memo from the Trump transition team shows an intention to move away from the Paris agreement and almost all climate and clean economy action.

In response to Trump’s election and his statements doubting climate change, many countries that signed the Paris climate accords in 2015 made it clear they would power on (China in particular — see story number three, below). Former French president Nicolas Sarkozy even proposed taxing U.S. goods if the country pulled out the Paris agreement. And throwing his weight in, former New York Mayor Michael Bloomberg publicly declared that cities would fight on, with or without Trump. Finally, hundreds of companies signed the latest declaration from Ceres showing their support for Paris. This is all promising. For this and many other reasons, the sustainability journey in business will continue.

But given Trump’s likely stance, any global progress on climate will happen in spite of headwinds from the U.S. federal government. In the U.S., the action will have to move to states, cities, and the private sector. Businesses in particular will need to lead in a way they never have before — and they will.

2. Public and Private Sector Action on Climate Change Increased

For most of 2016, the world moved quickly on climate. I’ve already mentioned the historic Paris agreement, but there are more positive steps worth noting. With the support of chemical companies, more than 170 countries also agreed to phase out HFCs, the high global-warming-potential chemicals used in air-conditioners and refrigerators everywhere. The UN also agreed to slash emissions from the airline industry. Norway banned deforestation and both Norway and Germany moved toward banning fossil-fuel-powered cars. This week, Canada announced it would tax carbon nationally by 2018.

In the U.S., the Obama administration started to incorporate the “social cost of carbon” in decision-making and the Pentagon made climate change a military priority. President Obama, with his counterparts in Canada and Mexico, agreed to some aggressive regional targets on renewable energy and efficiency. At the state level, New Jersey passed a big new gas tax, and Oregon, Illinois, and California developed robust energy and climate policies. All of this will affect companies of all stripes.

Business itself wasn’t quiet on the climate front either. Many invested heavily in renewable energy (see number five on this list), and some big companies dove into policy debates this year. More than 100 companies called for action on the Clean Power Plan (Obama’s big move to reduce power sector emissions), with tech giants Apple, Google, Amazon, and Microsoft even filing a legal brief in support of the policy. Nine big brands with operations in Ohio publicly pressed the state to reinstate energy efficiency and renewable energy portfolio standards. Many previously quiet companies, like food giant General Mills, spoke out about how important it was to their business to tackle climate change.

Why all this progress? First, evidence of a radically altered climate system has become crystal clear. After 2015 shattered climate records, 2016 got even hotter and more extreme, creating weather events that brought physical destruction, massive economic costs, and loss of life. Second, the financial world is getting better at evaluating what’s at stake. The World Bank estimates that $158 trillionworth of assets are at risk from increased natural disasters. The London School of Economics tells us trillions of financial assets are also vulnerable. And in the U.S. alone, floods in Louisiana and North Carolina caused $10 to $20 billion in damage.

3. China Stepped Up

While many countries accelerated their climate and clean economy work this year, China is a special case. Early in the year, China said it would halt new coal mine approvals, close 1,000 mines, increase wind and solar by 21% in 2016, and even eat less meat to control carbon emissions. But last month the country also indicated coal use would rise until 2020 (albeit at a slower rate than the growth of renewables). So it’s not totally clear where China’s emissions will head. But the country clearly wants to lead the world in the clean economy transition. Speaking from this year’s UN global climate meeting – which happened to coincide with the U.S. election — Chinese ministers sent a message to Trump that climate change is no hoax. Then China’s President Xi said he’ll be attending the annual bigwig gathering in Davos for the first time, with reports of China’s interest in filling trade gaps left by Brexit and possible leadership gaps on climate left by Trump.

4. Renewables Kept Growing and Getting Cheaper

Renewables have been trouncing fossil fuels for a few years as the costs of the newer technologies have dropped remarkably fast. The world record for cheapest solar plant was set in Mexico… and then broken within weeks in Dubai with a bid of 2.99 cents per kilowatt-hour. Countries with big investments in renewables are reaping the rewards. For four days in May, Portugal was 100% powered by renewables, and on a single windy day Denmark’s windfarms gave the country 140% of what it needed. The U.S. finally got into offshore wind near Rhode Island. In a subtle tipping point, the total global generating capacity from renewables passed coal this year.

As prices dropped, companies noticed, and corporate purchases and commitments to clean energy grew. Walmart set a 50% renewable target for 2025. In the last few weeks, Microsoft and Avery Dennison announced big purchases of clean power, and GM and Google said they’d target 100% renewable energy within a year. A growing number of companies signed the RE100 commitment to go for 100%. And in Nevada, both MGM and Caesars filed papers to stop purchasing power from their utility, NV Energy, because it doesn’t support renewables. New capital is still flowing to the clean tech — Bill Gates, Jeff Bezos, and some other business leaders just announced a $1 billion fund to invest in “next generation energy technologies.” All of this activity convinces me that Trump can’t stop the clean economy.

5. Investors Focused on Climate, Sustainability, and Short-Termism

Larry Fink, the CEO of Blackrock — the world’s largest asset owner — followed up his 2015 letter to S&P 500 CEOs with another treatise against short-term focus. He disparaged the “quarterly earnings hysteria” and asked companies to submit long-term strategy plans and address environmental, social, and governance (ESG) issues. BlackRock also issued a “climate change warning,” telling investors to adapt their portfolios to fight global warming. Many banks heeded the advice, pulling funding from coal. The London School of Economics also estimated that climate change could slash trillions from financial asset values. Because of this economic and systemic risk, a high-powered task force from the G20’s Financial Stability Board issued important guidelines for companies to make climate-related disclosures. To help investors evaluate their holdings, Morningstar launched sustainability ratings for 20,000 funds, and 21 stock exchanges introduced sustainability reporting standards. Finally, to educate the next generation of analysts, the CFA exam will now include a focus on ESG issues.

6. Business Defended Employees’ and Customers’ Human Rights

Companies are getting more vocal on human rights issues for many reasons. For some, it’s about the commercial opportunity to appeal to a new or growing market of rights-focused consumers. Others want to attract and retain diverse talent. But in general, society is expecting companies to broaden their mission. In one survey, 78% of Americans agreed that “companies should take action to address important issues facing society.” Millennials feel even stronger. A global survey this year showed that 87% of Millennials around the world believe that “the success of business should be measured in terms of more than just its financial performance.” This generation — which will be 50% of the workforce by 2020 — seeks employers that share their values.

And so, after a divisive U.S. election, many CEOs felt the need to email employees, restating their commitment to diversity and inclusion. Earlier in the year, when Gov. Pat McCrory of North Carolina passed a bizarre law to control which bathroom transgender people use, many companies spoke up. The CEOs of dozens of big brands — including Alcoa, Apple, Bank of America, Citibank, IBM, Kellogg, Marriott, PwC, and Starbucks — signed an open letter to defend “protections for LGBT people.” Paypal and Deutsche Bank canceled plans to expand and hire in the state, and the NCAA actually relocated some championship events. (In an important side note, after costing the state $600 million in business, the law is widely credited for losing McCrory his reelection bid.)

7. More Evidence Emerged That Economies Can Grow Without Increasing Carbon Emissions

So far this century, more than 20 large countries, as well as 33 U.S. states, have “decoupled” GDP growth from GHGs. One energy hog, the IT sector, has managed to level off energy use in data centers. There’s serious talk again about “peak oil” — not of supply, but of demand.

We’re seeing a fundamental shift in our relationship with energy for many reasons, including the improving economics of efficiency and clean tech (see #5). But companies are also getting more systematic, strategic, and fun — yes fun — in slashing energy. More organizations are using some old tools like “treasure hunts” and reimagining them as “energy marathons” (26.2 days of innovation). Others are competing to slash energy use — see Hilton and Whole Foods energy teams go head-to-head in a streaming reality show.

8. Levi’s Shared What It Knows about Water

Big themes are great, but periodically a specific example of leadership seems worthy of extra attention. In this case, Levi’s had spent a decade identifying great ways to cut water use in the apparel value chain. Realizing that water issues are too big to tackle alone, Levi’s celebrated World Water Day this year by open sourcing its best practices in water management. In essence, the company decided to promote system change and even invited competitors to its innovation lab for the first time in its history.

9. The Circular Economy Inched Closer

With a growing population and ever-rising demand for resources, it’s becoming necessary to find ways to eliminate waste and reuse valuable materials endlessly. We’re seeing some interesting innovation in policy and business practice. Sweden is planning to offer tax breaks for fixing things instead of throwing them away, and six EU countries started a four-year project to help small and medium-size enterprises move to circular models.

A number of companies also made moves into this space. A supermarket opened in the UK filled with only food that would’ve been thrown out. IKEA is expanding its circular offerings like reselling used furniture and creating new products from leftover textiles. More than 25 companies in Minnesota, including 3M, Aveda, and Target, launched a circular initiative to share expertise. The Ellen MacArthur Foundation and Kering both created curricula in circular thinking for fashion and design students. And finally, the Closed Loop Fund, which invests in recycling infrastructure (using funds from some large retail and CPG brands), reported on substantial progress, including launching single stream recycling across Memphis.

What’s in Store for 2017?

Given how far off pundits and prognosticators were this year, I have to proceed with caution. Who really knows what a Trump presidency will bring to the U.S. and the world, or what the corporate sustainability agenda will look like with so much uncertainty?

I do believe companies will expand their horizons, looking more at systems, not just their operations and value chains. They will increasingly partner to tackle big global targets like the UN’s Sustainable Development goals. Demands for more transparency about how everything is made — from consumers, employees, investors, and other stakeholders — are unlikely to slow down. The food and agriculture sectors in particular will feel even more pressure to cut carbon and food waste and simplify ingredients.

And no matter who’s in charge politically, macro trends are hard to stop — a changing climate; increasing challenges around water and other resources; higher expectations of companies; rising concern about inequality and wages; and technological disruption from AI, machine learning, and autonomous everything. These trends will continue and companies will need to adapt — fast.

(This post first appeared at Harvard Business Review online.)

If you enjoyed this article, please sign up for Andrew Winston's RSS feed, or by email. Follow Andrew on Twitter @AndrewWinston)

(Andrew's book, The Big Pivot, was named a Best Business Book of the Year by Strategy+Business Magazine! Get your copy here. See also Andrew's TED talk on The Big Pivot.

September 25, 2017

The Same, But Different: Some Thoughts on Japanese Business

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I recently visited Tokyo on a business trip and had the chance to meet with a number of Japanese companies. At the end of a three-hour meeting with sustainability professionals from a dozen or so multinationals, the host asked me for my impressions of Japanese organizations and their sustainability efforts. My honest answer: “I’m confused.”

My perspective is limited, but I can compare what I know about corporate sustainability in general to how these execs described the way things work in Japan. I left with the impression that these big companies were both leading and lagging. The core tension seems to be between, on the one hand, their unusual ability to take a broad, long-term, systemic view of business and its role in society; while, on the other, approaching sustainability tactically in narrow, somewhat dated terms.

Consider how many Japanese companies have set ambitious, long-reaching sustainability goals, with many focused on what they can accomplish by 2050 (decades further out than most Western companies are comfortable thinking about). Look at Sony’s Road to Zero goal of leaving no environmental footprint by 2050. Or Toyota’s Environmental Challenge 2050, which lays out a similar vision for its vehicles and plants, but then adds expansive statements about building a recycling-based society in harmony with nature.

While I was there, I also learned about some companies I hadn’t been familiar with. An executive from Kao, a $12.5-billion consumer products company, told us about its solid performance on energy, waste, product redesign, and more. But what surprised me was Kao's corporate mission, “The Kao Way,” which begins: “Our mission is to strive for the wholehearted satisfaction and enrichment of the lives of people globally and to contribute to the sustainability of the world.”

Besides Unilever’s Sustainable Living Plan, very few companies have put sustainability at the center of their corporate vison and strategy. For most, the sustainability mission, if there is one, is in a silo.

So, thinking big and long term seems more comfortable for Japanese companies. As one specific proof point, anecdotally I’d say that more Japanese companies (and those in the EU) have embraced the Sustainable Development Goals as a blueprint for their targets. Companies in the U.S. seem to lag on this front.

And yet, there was one really important area where Japanese corporate sustainability was behind. The sustainability and top executives are still talking only in terms of “corporate social responsibility,” not the broader more impactful sustainability-style language we see in the U.S. and EU. It’s about the common good and philanthropy. It’s not like U.S. companies have all made sustainability into core strategic issues, but the language still felt dated in Japan.

For all of those differences, a lot seemed eerily familiar, even when many people I met with insisted that “things are different” in Japan. Part of that perception gap is based on some misperceptions about stakeholder pressure in the West. For example, they told me that consumers in Japan don’t really care much about the environmental or social aspects of products, unlike, they thought, those Western consumers that are forcing the hand of sustainability leaders such as Unilever. Or, they’d tell me, investors don’t care and just want short-term performance.

Sure, there may be some differences in stakeholder pressure – e.g., the people from consumer products companies said the “clean label” movement I described was not big in Japan, and I don’t have regional data to argue the point one way or the other. But I had to break it to them that consumers in the West, outside of a few product categories such as organics and some personal care, are not really driving the agenda, either. In fact, I hear the samecomplaints about consumers from the big CPG companies here.

And the mantra “Wall Street doesn’t get it” is getting less true in Western sustainability circles, but I still hear it a great deal. The institutional investors around the world are asking more questions about long-term issues, but the analysts and hedge fund guys? Not so much.

In total, the conversations I had while sitting down with 20 sustainability execs in Japan to share my Big Pivot story – a saga of mega-trends, a growing clean economy, Millennial attitude shifts, big risks and opportunities, and corporate heroes – felt incredibly familiar.

They face similar hurdles in the marketplace and perhaps more so internally, where they’re not taken as seriously as they should be. Again, that CSR-only languagesidelines them. It likely explains, along with Japanese culture in general, the self-effacing approach I witnessed: It’s really hard to get them to brag about anything they’ve done.

These companies are likely doing more than we realize, and more than they give themselves credit for. But they need to advocate for their importance in their enterprises.

So, in essence, corporate sustainability in Japan is the same as … but also different from ... everywhere else.

On a lighter note, here are some random impressions from an outsider coming to Japan:

  • Business is formal and hierarchy in meetings reigns. But the dress is more casual than you’d think (few ties, short-sleeve business shirts), primarily because the 12-year-old “cool biz” program – which keeps office temps warmer in the summer to save energy – is clearly working.
  • Everyone was unfailingly polite and incredibly helpful as I navigated culture and food (I’m pescatarian) with non-existent Japanese language skills outside of the helpful Styx lyric from the ‘80s, “Domo arigato, Mr. Roboto,” which doesn’t get you as far as you’d think.
  • They follow the rules. Nobody crosses the street until the walk sign is green, no matter how empty the streets. I lived in New York for 12 years, where you walk if there’s any semblance of daylight between cars, so this one felt like torture.
  • Tokyo is the cleanest city I’ve ever seen by far. Many streets looked like Disney’s version of a Japanese city.
  • And they take their personal hygiene seriously. People wear masks, presumably to keep their germs from rudely spreading to others. Also, for no reason I can discern, the urinals flush as you approach them and when you leave (perhaps not the best use of resources). And the toilet in my hotel had more computing power than the Apollo mission.

In total, it was a fascinating and eye-opening trip, from bathrooms to boardrooms.

(This post first appeared at Sustainable Brands online.)

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Andrew's book, The Big Pivot, was named a Best Business Book of the Year by Strategy+Business Magazine! Get your copy here. See also Andrew's TED talk on The Big Pivot.



December 31, 2017

The Top 10 Sustainable Business Stories of 2017

(I recently published my 9th annual roundup of top themes/stories impacting how business navigates environmental and social issues. See original at HBR. I've reposted it here with a couple smaller "honorable mention" stories at the end that got edited out of the HBR version. A few social media comments pointed out my list is perhaps too U.S. focused -- fair enough, I am U.S. based. And one big thing I definitely should've included here was Brexit. I was probably too focused on our own dysfunction in the U.S. Oops. But overall, readers have said they thought I was balanced and, surprisingly, fairly optimistic. See what you think and enjoy the New Year!)

The year 2017 has been a long, strange trip. The definition of sustainability in business evolved quickly — the topic in executive suites now covers a wide range of issues that address how a company navigates environmental and social challenges. From carbon footprint to taking a stand on human rights or immigration, companies need a position and strategy on all of this and more.

We saw big leaps both backward and forward this year, some of which weren’t especially surprising. In my year-end wrap up for 2016, for instance, I predicted that “the context for sustainable business in 2017 may center on the competition between two stories, the election of Donald Trump and significant action on climate change.” That’s pretty much what happened. Trump pulled the U.S. out of the Paris climate accord, the hard-won global agreement to tackle the greatest threat to humanity and the economy, becoming the only country in the world on the sidelines.

But the Newtonian equal-and-opposite reaction from business, states, and cities was nothing short of amazing. Their pushback on policy decisions is my #1 story of 2017. Here’s more on that, plus nine additional developments business leaders need to pay attention to.

Climate, Clean Tech, and the Environment

1. U.S. leaders from the public and private sectors rejected Trump’s decision on the Paris accord and committed to climate action.
On the day of the president’s announcement about the Paris climate accord, 25 multinationals — including Apple, Facebook, Google, HPE, Ingersoll Rand, Intel, Microsoft, PG&E, Tiffany, and Unilever — ran a full page ad in the Wall Street Journal asking Trump to stay committed to the agreement. By that weekend, dozens of big companies declared, We Are Still In. This public statement includes thousands of signatories — not just companies, but states, cities, and universities.

On the governmental side, the states of California, Washington, New York, and others representing a third of the U.S. population and GDP announced the formation of the U.S. Climate Alliance. California Governor Jerry Brown emerged as the de facto climate leader for the United States, holding his own meetings in China and headlining a delegation to the global climate talks in Bonn. A growing list of 385 local leaders have joined the U.S. Climate Mayors pact as well. A group of high -profile business leaders offered their thoughts on the sustainability agenda right here at HBR (I am also an adviser to that effort). In total, the message to the rest of the world has been clear: “sub-national” support for climate action is very strong in the United States.

2. The deadly costs of climate change became even more obvious.
This year, the science got clearer about the connection between extreme weather and human-caused climate change. And that extreme weather was horrifying. Record-setting storms, floods, and drought-driven fires wreaked havoc around the world. Flooding in South Asia killed more than 1,200 people. Asia also experienced shocking heat, including a day in Pakistan that hit nearly 130 degrees Fahrenheit. Hurricane Harvey hit Houston hard (the before-and-after flooding pictures are mind-boggling), and the national weather service added colors to flood maps to reflect the record 30 inches of rain that fell. Hurricane Irma demolished Caribbean islands, and Hurricane Maria created an economic and humanitarian disaster in Puerto Rico. As of this writing, months after the storm, a third of the island is still without power, and 10% of these U.S. citizens have no water. On the U.S. mainland, unprecedented wildfires ripped through Napa and central California, as well as Los Angeles County.

These extreme weather events are primarily human tragedies, but they’re economic and business disasters as well. When entire regions are under water or lose power for months, it’s not good for local and national economies. In fact, the economic cost of extreme weather is vast and rising. In the 1980s, 27 weather events cost the U.S. more than $1 billion each (in today’s dollars). A little more than halfway through the current decade, we’ve already experienced 89 billion-dollar events, and they’re much, much larger. Hurricane Sandy in 2012 and the big trio of Hurricanes Harvey, Irma, and Maria this year are all $50 billion to $100 billion storms.

3. The Trump administration started dismantling environmental protections.
In the U.S., the new administration’s policy goes beyond pulling out of Paris. We’re seeing an all-out assault on our air, water, climate, and land. The EPA head, Scott Pruitt, spent years suing the agency and essentially intends on dismantling it. Pruitt and Trump, with assists from Interior Secretary Ryan Zinke and Energy Secretary Rick Perry, are working to, for example:

Bi-partisan groups of former energy commissioners and EPA heads have spoken out against every move. And while many companies may hope to save money in the short run with fewer regulatory hurdles, it’s also clear that an unhealthier environment is not great for businesses, its customers, its communities, or its employees in the long term.

4. Investors woke up about climate risk and benefits of sustainability.
I know, I know, Wall Street only cares about short-term earnings performance. And yet there’s something brewing among big institutional players, the economy’s risk assessors, and even some Wall Street types. For example, Larry Fink, the CEO of BlackRock (with $6 trillion in assets under its management) asked business leaders to focus on “long-term value creation” in his third annual letterto S&P 500 CEOs. BlackRock also said its “engagement priorities” for talking to CEOs would include climate risk and boardroom diversity.

Shareholder resolutions on climate disclosure and strategies succeeded for the first time at Occidental Petroleum and ExxonMobil as well. Fund giant Vanguard, which led the charge at Exxon, also declared climate risk and gender diversity “defining themes” of its investment strategy. Institutional investors continued to drive climate action also, with hundreds signing a statement of support for the Paris agreement. And Norway’s $1 trillion Wealth Fund is forcing banks to disclose the carbon footprint of loans and will divest from fossil fuels. In late-breaking news, the World Bank will stop financing upstream oil and gas projects after 2019.

Finally, a few big developing stories could create long-term ripples. First, the Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosures (or TCFD) — chaired and led by financial giant and former New York City mayor Michael Bloomberg — issued a critical set of guidelines for investors and insurers to understand climate risks. On the heels of TCFD, a group of 225 global investors with $26 trillion under management launched “Climate Action 100+” to “engage” with large emitters on their management and disclosure of climate risks. And in fascinatings new on the debt financing front, Moody’s told cities to address climate risks or face downgrades on their bonds. Could shifting rates on company debt be far behind?

5. China accelerated its clean tech advantage.
On the fifth day of 2017, China announced it would spend $360 billion on renewable energy by 2020. The rest of the year brought even more leadership: China cancelled 103 coal plants, committed to cut coal by 30%, made big moves in electric vehicles (see #9, below), erected the world’s largest land-basedand floating solar farms (becoming the world’s largest solar producer in the process), and – in one of the most fun stories of the year — built a solar farm in the shape of a giant panda just for the heck of it. Essentially, in 2017, China took over the role of global climate leader and then, to top it off, committed nearly a trillion dollars in infrastructure spending to connect China to the rest of the world.

6. Clean tech continued its relentless march (and coal continued to die).
As a whole, the economics of every major green technology got radically better. (Morgan Stanley predicted an “inflection point” in 2020, when renewables become the cheapest energy source globally.) But to focus on two intertwined areas, look at what happened with electric vehicles (EVs) and battery storage.

On the former, some large economies, including France, India, Britain, Norway, and China, committed to ban diesel and gas vehicles. Automakers moved quickly as well, with GM and Ford announcing major investments in EVs and Volvo phasing out conventional engines starting as soon as 2019. A group of multinationals with big logistics operations launched EV100, an initiative to speed up the switch to EVs. One big city, Shenzhen, China, moved its entire bus fleet to EV. In total, EV sales were up 63% globally.

The economics of batteries (needed for EVs and, critically, the grid so we can store clean energy) continued to get much better—50% cheaper since 2014. Tesla built grid-scale storage for Southern California and quickly erected the world’s largest lithium ion battery storage in Australia. The end result is going to be the end of coal, bolstered by commitments from states like Michigan to go coal-free—and the entire EU, which will build no new coal plants after 2020.

The Role of Business in Society

7. Famous CEOs took moral stands.
One group of business leaders faced a tough decision this year: stay in the president’s CEO advisory councils or protest his policies by pulling out. A few, like Tesla’s Elon Musk and Disney’s Robert Iger, left in the spring after the Paris climate decision. But most stayed on — that is, until the Charlottesville, Virginia white nationalist marches. When the president said there were “some very fine people” among the white supremacists, the CEO Advisory Councils disbanded quickly, with the leaders of Pepsi, IBM, GM, BCG, Merck, 3M, and others walking away (a few wanted to stay, but the momentum was clear).

One CEO in particular, Apple’s Tim Cook (who was not formally on the councils) denounced the “moral equivalence” of white supremacists and human rights protesters, but he also went on to say something more important about business: “We have a moral responsibility to help grow the economy, to help grow jobs, to contribute to this country and to other countries that we do business in.” In essence, Cook made a blended argument for sustainability that isn’t about philanthropy and the polar bears, but about the core business and its role in society. And yet, Apple had its own challenges. Proving that no company’s actions are black and white, the world discovered that Apple has stashed a quarter of a trillion dollars in cash outside the U.S. to avoid taxes. Yes, it’s legal, but is it right? Given Cook’s own argument, it’s an uncomfortable disconnect.

8. Companies went to court.
This year large companies dove into legal battles on social hot-button issues to an unusual degree. Tech companies big and small filed an “amicus brief” to fight the president’s first executive order on immigration (biotech firms spoke out as well). Fifty big companies asked a New York federal appeals court to fight discrimination based on sexual orientation. Companies also lobbied for pro-environmental and social policies. Companies went local as well, with seven big guns — Procter & Gamble, Walmart, Unilever, General Mills, Target, General Motors, and Nestle — pushing the state of Missouri to pass a bill to make it easier for them to buy renewable energy.

9. The super bowl of sustainability advertising was… the actual Super Bowl.
A surprising number of big brands used the most expensive, most viewed advertising time in the world to do something different this year: Instead of pitching products the old-fashioned way, focusing on how great it tastes or will make you feel, they chose to say something about an important aspect of social sustainability. And they took risky stands, in often not-so-veiled ways, against the policies of the new U.S. president.

Budweiser’s ad told the story of their founder and proudly pointed out his immigrant status. Little-known 84 Lumber went viral with a five-minute video about the journey of a family from central America. Coca-Cola focused on diversity and inclusion with its multi-lingual ad. And Audi’s ad “Daughter” lamented the lack of pay equity for women (though Audi then took heat for its own record on pay and women in leadership, showing that sustainability-focused ads can be risky).

10. Unilever fights off a hostile takeover bid.
Unilever is the consensus corporate leader on managing sustainability for business and societal value. That’s why I consider the attempted takeover of Unilever by Kraft Heinz and 3G Capital an important sustainability story.

It is unlikely that a firm like 3G would continue supporting the sustainability strategy at the heart of Unilever, even though the strategy has been wildly successful (the company’s market cap was at an all-time high — and then went up another 20% after the takeover attempt). As Unilever’s CEO, Paul Polman told the Financial Times, it was “clearly a clash between a long-term, sustainable business model for multiple stakeholders and a model that is entirely focused on shareholder primacy.” Everyone interested in seeing companies lead the charge to a thriving world breathed a sigh of relief. (Full disclosure: I’ve been an advisor to Unilever North America, but I had zero involvement on this issue.)

Honorable mentions
- Big new sustainability goals. Kudos to Mars, Inc. for committing $1 billion toward becoming “sustainable in a generation” and to HPE and H&M for setting science-based and carbon neutral goals for their suppliers.
- More transparency and accountability. New technologies (hello, blockchain) are capturing more information about products. Transparency is increasing. Panera went 100% “clean label”, Target and Walmart leaned into chemical management, and Unilever set a for transparency on fragrances.
- Citizen action on a grand scale. The women’s march and #metoo revealed a lot of pent up frustration with the world’s businesses and institutions (and with men).

So what’s next?

It’s risky to say anything definitive about the future. But I do believe that some mega-trends have too much inertia for any one stakeholder to completely disrupt. So some light predictions for 2018:

  • The climate will continue to get more volatile. Any remaining business leaders who don’t understand climate as a systemic risk and opportunity will have to get on board.

  • Millennials and Gen Z will continue to push for purpose and meaning in work and life.

  • AI, big data, blockchain, and other tech will change how we understand companies, products, and services, leading even more to embrace “clean labels”.

  • To meet ever-rising expectations, and drive business value, companies will set more and more aggressive sustainability goals.

  • Clean tech will be under attack by the U.S. administration, but it will continue to prevail globally.

  • Finally, the #metoo movement against sexual harassment, which is sweeping through politics and media, will hit big business. We may see some senior Fortune 500 execs fall.
  • Onward to 2018. Have a happy, healthy, and sustainable New Year!

    *******

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    February 5, 2018

    Does Wall Street Finally Care About Sustainability?

    (This re-post is a bit delayed after some technical difficulties. It's about a letter
    that the CEO of Blackrock, Larry Fink, sent to the CEOs of the S&P 500 companies. In short, he pressed them to think long-term and "serve a social purpose." Of course there was backlash -- an op-ed in the Wall Street Journal accused Fink of wanting "lower returns" for the sake of corporate social responsibility...which was pretty much exactly backwards. Fink is saying that purpose and sustainability drive value, not destroy it. And the only thing he said about "responsibility" was about his fiduciary responsibility and boards' responsibility to understand long-term value. Anyway, the debate rages on over whether Milton Friedman was right 40 years ago to tell companies to focus only on today's shareholders. I think you know where I stand. And apparently I'm joined by a guy with $6 trillion behind him.)

    Stock%20market%2C%20pexels%2C%20cropped.jpg

    I’ve been attending conferences on green or sustainable business for more than 15 years, and I’ve worked closely with senior executives at multinationals on sustainability strategy. Through it all, I hear a common refrain: Even though climate change is already creating material risks and opportunities for companies, and expectations from stakeholders about social responsibility are clearly rising, investors aren’t asking CEOs about their sustainability performance.

    But could that finally be changing?

    Last year there was significant movement by the financial community to push companies to look harder at climate change in particular, but also at other factors that matter to long-term performance, such as LGBT rights, economic inequality, and boardroom diversity. Then 2018 started with a bang — one that could indicate a further shift in investor priorities.

    In his annual letter to S&P 500 CEOs, Larry Fink, CEO of BlackRock, made a full-throated defense of both long-term value creation and corporate purpose. And it’s powerful stuff, especially coming from the world’s largest asset owner. Fink points out that governments seem to be failing to prepare for long-term issues and that “society is increasingly turning to the private sector” to step up on societal challenges. (Interestingly, Apple CEO Tim Cook used remarkably similar language about the role of business in society last summer).

    But the money quote from Fink was this:

    Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.

    Andrew Ross Sorkin, financial reporter for the New York Times, wrote a glowing reportand summed up Fink’s message as “contribute to society, or risk losing our support.”

    It’s good news. But before I get too excited, I pause to remind myself that we’ve been here before. This is the fourth straight year that Fink’s letter has made the pitch for long-term thinking and sustainability. The language this year is even broader, but he’s been hitting these themes for a while:

    • The 2017 letter: “[are you] attuned to the key factors that contribute to long-term growth…attention to external and environmental factors…and recognition of the company’s role as a member of the communities in which it operates.”
    • The 2016 letter: “Today’s culture of quarterly earnings hysteria is totally contrary to the long-term approach we need…ESG issues, from climate change to diversity, have real and quantifiable financial impacts.”
    • The 2015 letter: We see “acute pressure…for companies to meet short-term financial goals at the expense of building long-term value.”

    Fink has used the phrase “long-term” 20 or more times every one of these years. Throughout these letters, and other pronouncements, BlackRock has made clear that managing issues like climate change and diversity creates business value. But have the letters made much of a difference? It’s not clear.

    I’m not remotely suggesting that Fink isn’t serious. But there’s a critical structural problem here. Most of BlackRock’s trillions are “passive” investments, sitting peacefully in index funds (and even BlackRock points out that passive funds have limited impact on equity prices). So, BlackRock can’t move capital around based on its assessment of how well companies do at managing long-term value, even though it owns a chunk of every large company and hold assets “on par with Japan’s GDP.” In essence, the company is a bizarre, oxymoronic blend of unprecedented clout and powerlessness.

    It’s also not clear how much attention CEOs pay to these letters. On the day that this year’s letter came out, I spoke to a client of mine, an S&P 500 CEO. He gave me a kind of shrug. As he saw it, leaders that get the value of sustainability to their core business are already doing what BlackRock wants, so it’s moot. And those that don’t buy it may not be rushing to change, since the capital won’t leave their stock.

    So, what can BlackRock do to step up the pressure? I asked Ross Sorkin this question on Twitter. After he pointed out that index funds can’t move capital, he said, “They can vote directors off of boards.”

    And here’s where it perhaps gets more interesting. The idea of shifting board composition used to be a fairly weak threat, but the rise of activist investors has made companies much more nervous. That said, could low-risk, index investor BlackRock really get more aggressive? Well, Fink did say in this year’s letter, “We must be active, engaged agents on behalf of the clients invested with BlackRock, who are the true owners of your company.” That sounds like it could be read as a veiled threat. After all, “active” is pretty darn close to “activist.”

    And last year BlackRock did vote against two ExxonMobil directors while supporting a shareholder resolution to force the oil giant to “report on the impact of global measures designed to keep climate change to 2 degrees centigrade.” BlackRock, Vanguard, and State Street Global Advisors helped swing the resolution with their combined 18% of the company’s shares. These once “passive” voices became a lot more active.

    It’s worth pausing to note the financial logic of supporting a resolution like this. The U.S. may have, in essence, pulled out of Paris climate accord, but every other country in the world is still in. And the prospects for oil are dimming. Big countries are banning gas and diesel vehicles, and Ford just announced an $11 billion investment in electric vehicles. So, yeah, global measures to slash carbon emissions will have a direct impact on ExxonMobil’s value. Stranded assets are not worth much.

    BlackRock and other investors are in this for the money, as always. They are serving their fiduciary responsibility well. And thus I’m optimistic that action will continue, as the social responsibility argument increasingly lines up perfectly with the financial one.

    Fink’s intentions and his letters do matter. But votes matter more.

    (This article first appeared in Harvard Business Review.)

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    February 9, 2018

    Milton Friedman Was Wrong (Or, The Blackrock Letter, Part II)

    (My latest is posted here on Medium...)

    The debate over the purpose of a corporation rages on. For decades, we've been told that the only real goal of a company should be profit and shareholder value. Any other benefits to society, Milton Friedman and the like told us, will come from pursuing the first goal.

    But now, some big investors are challenging the idea. They're asking companies to think about the long-term, to consider their role in society, and embrace the idea of purpose.

    My last post posed the question, "Does Wall Street Finally Care About Sustainability?", focusing on a recent letter from the CEO of Blackrock (world's largest asset owner) to global CEOs. Then Vanguard and other big investors came forward with their own letter.

    And yet, some executives don't quite buy it.

    So after some debates I've witnessed and taken part in, I wrote part 2 of the discussion on the Blackrock letter and posted it on Medium here.

    Please check it out.


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    July 6, 2018

    There Is No Trump Economic “Record”

    Re: My new article on Medium...

    I know I mainly write about corporate sustainability here, but the world has changed. The sustainability agenda will struggle in the U.S. if we don't change who's in power so my focus is increasingly on the upcoming election and making the case against Trump and his enablers.

    But the myths about Trump and his "leadership" abound. As someone with an economics degree and MBA, I find one particular strand of Trump support to be frustrating: the false idea that he's responsible for a historic economy and stock market.

    It should be obvious that no president even remotely controls the economy or the market -- there are billions of decisions and influences on both. But Trump supporters (and the man himself) keep pointing to the market, in part to excuse all of his failures of character. So if that's the metric supporters want to operate on, let's see if they're even right.

    I pulled lots of numbers on stock performance, unemployment, and GDP growth and posted my analysis on medium.com here. The core chart that has been going around Twitter and getting some people upset is this one...

    Stock%20performance%201.jpg

    Many people, including Fox Business News, have repeatedly pointed to Trump's performance since Inauguration. I think that's already an absurd standard since a president's policies can't possibly interact with the economy for many months. But ok -- by that metric, Obama did better. But some on Twitter are complaining that Inauguration day is an 'unfair' starting point and we should use election day. By that measure the market under trump has grown faster than it did under Obama -- so far -- but the market was in freefall at that point in 2008, so I'm not sure how "fair" that is. But for comparison, here's the same chart starting from election day...

    Stock%20performance%204%20%28from%20election%29.jpg

    ...and one with all 4 of the last presidents over their full terms (election day to election day).

    Stock%20performance%205%20%28from%20election%29.jpg

    I'm quite sure that most people don't realize how well the market did under Obama and Clinton since there's a common (but wildly incorrect) narrative that Democratic leaders are somehow bad for the economy.

    I don't hold out much hope that facts will sway Trump supporters, but maybe they'll engage Dems and moderates who need good information. Anyway, all that said, please check out the full article on medium and have a happy week of the 4th...

    ***

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