Norms and Impact: redefining capitalism
Beyond the simple measurements of ESG or CSR criteria, the multiplication of norms must encourage companies to think their roles and missions for the society differently.?
This article has been published in The Harvard Business Review France and can be found under?
The news around Corporate Social Responsibility (CSR) and ESG is particularly rich. Not a week goes by without new announcements being made, new acronyms, standards, benchmarks or reporting obligations appearing, giving any leader wishing to engage in such an approach the impression of a great confusion and a total lack of readability.
Between ESG frameworks, ISO 26000, the 17 UN Sustainable Development Goals, the B-Corp benchmark, the future CSRD for the EU preparing the ground for the next obligation of Declaration of Extra-Financial Performance of Companies, there is enough to see in it, apparently, only a source of new obligations adding to an already overloaded daily administrative activity.
Building up constraints and anxiety, often complex, there are no less than a hundred existing reference frameworks with a list of ESG criteria, bringing more confusion than clarity on objectives that are intended, at the outset, to be simple: to measure the social and environmental impacts of the company and ensure its good governance.
The implementation of a CSR approach within a company becomes synonymous with the laborious filling out of reporting tables or ESG questionnaires, the definitions or set-up of which change every year. Often, it becomes a zero-sum compensation game that invites the company to take positive initiatives, but which only marginally influences its strategy and operations. This mostly involves improving metrics incrementally to balance the negative impact of the company's activities. It does not invite a deep questioning of its operating methods, its business model or its value creation chain.
Thus, when they hear the word impact or CSR, leaders, in particular those at the head of SMEs and mid-caps, will prefer to focus their energy on developing their business in a traditional way because they do not see how to link these criteria to more virtuous practices in the operations of their companies, while the benefits they could derive from them are spectacular.
But where does this sudden normative activity come from, this motivation to measure the extra-financial performance of companies? Is it a fancy marketing trend or a sign of a real paradigm shift?
First of all, this should be seen as a consequence of the 2008 crisis, one of the effects of which was to highlight the excesses of purely speculative capitalism. The search for profit at all costs has led to the development of financial packages and products of such complexity and short-term lifespan that it has caused the bankruptcy of leading financial institutions, a collapse of the system, then a recession comparable to the great depression of the 1930s.
Generation Z, born after 1995, then constitutes the real catalyst for an in-depth transformation: more than any other confronted with the climate change, growing inequalities and the prospect of a lower standard of living than the generations who have preceded, it stands against the aberration of a system based on the search for infinite growth while the resources of the world appear every day more and more limited. This generation is eager for meaning at work, responsible consumption and investments.
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Consequently, the expectations towards companies are profoundly changed: it will be more and more unacceptable for a company to display extraordinary financial performance while it has a disastrous carbon footprint that is nowhere accounted for in the financial report. In the agri-food sector, companies that use plastic packaging do not include in their accounts the environmental cost of the oceans being filled by the waste they generate. In fast fashion ready-to-wear, the profits of global brands that sometimes resort to making children work in degrading conditions become as indecent as they are unacceptable.
We must therefore find the means to objectify all the externalities generated by the company for all of its stakeholders by creating a relevant assessment of extra-financial performance. Considered at the same level as traditional financial reports, they will have a real impact on the overall valuation of the company.
What is taking place at the moment is indeed a historical moment of capitalism that can be compared to that what companies experienced in the 1930s. At the time, there were still no accounting standards for profits. They came after the crashes of 1929 and 1933. We stand at a pivotal moment, which Sir Ronald Cohen does not hesitate to call the new Bretton Woods and a new frontier for capitalism and society. By 2024, we will have regulations on transparency of social and environmental impact and a framework to measure the impact of a company on all of its stakeholders. IFRS (International Financial Reporting Standards), which are the benchmark for European listed companies, have started to define new standards. The SEC (Securities and Exchange Commission) in the United States has taken a similar step. We are past the point where investors are asking for more information. They are now waiting for a level of standardization allowing reliable comparisons between companies.
Because the heart of the matter is there: employees who are also consumers, investors and responsible citizens call on the company to be an experience of life that gives meaning and that has a positive social and environmental impact. Active and increasingly militant, they are not satisfied with an x% drop in the company's carbon footprint and its further improvement by a few percentages year after year. They expect the company itself to be a global contributor of positive impact, to make sense and to actively contribute to the common good.
They are extremely vigilant to opportunism and washing of all kinds, whether it is "green" or "purpose" ... They are right because already, we can see excesses: for instance, 70% of new investment funds in France are declared to be Socially Responsible Investors (SRI) because they understand that it has become an essential means of draining the savings of subscribers who want their money to be housed in committed funds. This proportion is not credible: more and more reports show that there are no notable differences between many SRI-labeled funds and others. This fuels confusion, misunderstanding, skepticism and obviously does not serve the cause they are meant to promote. There may therefore be a significant gap between statements of intent and facts, which the establishment of higher standards and oversight bodies will help to resolve over time.
From this point of view, the Covid-19 crisis was the opportunity for companies to demonstrate that they are capable of working for the common good, ignoring their traditional constraints of competition, cost and search for profit. We have seen Air Liquide, PSA, Valeo and Schneider Electric pool their industrial tools and their staff to speed up the manufacture of artificial respirators that were lacking in hospitals in France. The LVMH Group has taken the initiative to make its perfume packaging units available for the manufacture of hydro-alcoholic gel. Even more spectacularly, the players in the pharmaceutical industry have mobilized by collaborating with governments, their competitors and suppliers in unprecedented ways, sharing knowledge and tools, data and analyzes, investing colossal sums without taking the time to measure the return of the investments made, breaking with traditional decision-making processes, with the sole objective of making a vaccine available to humanity as quickly as possible. The result, as we have experienced, is eloquent: only eight months were enough to develop a vaccine where more than four years are usually needed, and it took less than a year after the discovery of the first cases in Wuhan to launch a global vaccination campaign.
In the laboratories that worked on this unprecedented performance, the employees demonstrated extraordinary engagement: at all hierarchical levels, thousands of employees voluntarily sacrificed many evenings, worked during the weekends, postponed their holidays because they were driven by a mission that goes beyond them: freeing humanity from the grip of this virus which will have put the world under cover for more than a year.
One of the most amazing lessons that Albert Bourla, CEO of Pfizer took away from this epic story is that "putting a goal first pays off. The positive financial impact for Pfizer was only possible because return on investment was never considered. We went ahead with a mission in mind. " In other words, when all of the company's stakeholders mobilize to participate in the common good, positive results become a natural consequence and no longer an end in itself. All indicators, financial as well as CSR, are improving naturally.
Far from being an isolated case, the examples are multiplying:
Emery Jacquillat by transforming CAMIF did not rely on a list of ESG indicators to launch and monitor his project, but wanted to make his company the French champion of a sector that favors its territory and regional know-how. He relocated jobs to Niort which were until then in Madagascar, involved local suppliers in the design of furniture taking into account their constraints and their cost structures. By deciding to reimburse its members € 100 million in insurance premiums following the fall in automobile claims during the first lockdown, Pascal Demurger, the President of MAIF justified his gesture by saying: "we do not want to take advantage of this crisis ”. By distributing back all of its net income in this way, the negative impact on its financial indicators is extremely significant. But the one on its employees, its customers, its prospects, on the image of MAIF is so obvious that we must be able to equip ourselves with the instruments to measure and value it.
While many companies around the world have long embarked on this path, the Covid-19 crisis will have served as a transformation accelerator and a revealer for many companies of their potential for mobilization and impact. To leaders and employees, it will have shown that together, in the service of the common good, the collective to which they belong can make a difference. Establishing a universal standard to value what the company does for the common good is a necessity and a historic opportunity. It is obvious that this will help the company that will work on them to go beyond the stage of constraint or compensation to question why this business organization really exists, the meaning of its actions, without always keeping an eye on the established KPIs, because as Albert Einstein said: “What counts cannot always be counted and what can be counted does not necessarily count”.