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February 23, 2022updated 08 Mar 2022 10:37am

The business risks of dismissing ‘woke capitalism’

Despite a rise in recent calls for companies to prioritise profits over ESG, corporate chiefs that ignore sustainability issues in the longer term may risk a higher cost of capital, dissatisfied customers and lower competitiveness. And openness on such strategies is seen as key.

By Adrian Murdoch

Angela Hultberg of Kearney says companies that do not embrace ESG risk becoming obsolete. (Photo courtesy of Kearney)
  • There has been a swift recent rise in criticism of companies for focusing too much on sustainability, or ‘woke capitalism’.
  • ESG has moved quickly up CEOs’ agendas in recent years, but corporates still face boardroom tensions over the topic.
  • CEOs should communicate how a sustainability strategy will create long-term shareholder value rather than focusing on headline statements, say experts.

The ‘woke capitalism’ debate over whether practising sustainability is good for business has reached fever pitch in recent weeks.

In a paper published in late January by UK think tank the Adam Smith Institute, Matthew Lesh, head of public policy at the Institute of Economic Affairs, argued that businesses were acting “outside their fields of competence” by becoming increasingly involved with social and environmental affairs.

The report adds to a growing chorus of voices from finance to politics calling for a return to shareholder capitalism and an end to stakeholder capitalism – or, as the latter has been derisorily dubbed, woke capitalism.

Last month, influential fund manager Terry Smith slammed consumer goods company Unilever – in which his firm, Fundsmith, is a major shareholder – for overly focusing on sustainability. For different but similarly self-interested reasons, US senator Mitch McConnell last year warned corporate America against voicing opinions on political issues. (He has nonetheless urged them to continue to make donations to political parties.)

Woke capitalism backlash

As memories of November’s Cop26 climate talks in Glasgow fade, there appears to be a growing backlash against ESG, even among retail investors. In mid-February, London-based investment product platform Hargreaves Lansdown said net flows into ESG funds were down 115% year-on-year on its platform in January.

“Investors have shown they now have a short fuse, and any deterioration in performance is likely to add to the clamour for a change at the top,” says Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

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A case in point is Emmanuel Faber, the long-standing chairman and CEO of French food multinational Danone. He was pushed out in March last year, effectively for practising stakeholder capitalism. Activist investors had argued he was focusing too much on sustainability while paying too little attention to his company’s sluggish share price, which is now at a similar level to a year ago (see below).

But the world has changed in the year since then, says Michael Ryan, CEO of Edinburgh-based £5.2bn fund manager Dalmore Capital. CEOs are as accountable to the public as they are to shareholders.

Many large UK pension schemes agree. A group of top executives from 18 British retirement funds, with combined assets of £675bn ($917.4bn), wrote in a letter to the Financial Times on 16 February thatthe growing emphasis being placed by companies on sustainability, and the drive to net zero, needs to intensify”.

They also stressed – like Paul Polman, former chairman of Unilever in an article, also in the FT – that corporate chiefs should be transparent in engaging with consumers, employees and shareholders and explaining difficult decisions and trade-offs.

“These are the building blocks of stakeholder capitalism,” the letter continued. “It is not woke. Rather, it is a powerful form of capitalism that unleashes mutually beneficial relationships to create long-term value.”

Following fiduciary responsibilities

Larry Fink, the head of the world’s biggest asset manager BlackRock, made a similar point in his annual letter to CEOs on 18 January. “We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients,” he wrote.

“Very few businesses are doing ESG and sustainability from the goodness of their hearts,” confirms Angela Hultberg, global director in the sustainability team at Chicago-based management consultancy Kearney. They are doing it for compliance reasons, because it is expected of them or because they realise that it is better business or a combination of any or all of those things, she adds.

The growing emphasis being placed by companies on sustainability, and the drive to net zero, needs to intensify. Letter from a group of top UK pension funds

The fact remains, however, that there are pressures in boardrooms over what emphasis should be placed on sustainability versus profit.

“There are, of course, tensions around what’s the appropriate balance of that focus against the core ambitions of the company fundamentally to create value and make money,” says Phillippa O’Connor, London-based reward and employment leader at PwC.

But there has been a shift in favour of taking a longer-term view, she says. PwC’s global investor survey published in December found that 39% of investors would be prepared to take a hit on returns from companies if there were environmental or societal benefits.

“It’s a minority, but it’s a much bigger minority than we have seen over the past two or three years,” O’Connor says.

Communication breakdowns

Where tensions have emerged between company bosses and stakeholders, it has been down to a failure of communication, says Andrea Guerzoni, global vice-chair of strategy and transactions at EY in Milan. “Sustainability is more complex than just stating you want to do something."

The point is echoed by Steve Gray, CEO of Nuffield Health, Britain’s largest healthcare charity. He says a company cannot simply “pluck out a date and a target” for achieving an ESG goal.

“We’ve worked through exactly what needs to happen [in terms of Nuffield’s emission reduction plan],” he says, explaining that all key performance indicators are independently audited and then published.

What is needed, Guerzoni agrees, is an “articulated and systematic approach” to long-term value creation, with detailed strategy and action plans, along with a narrative that takes into account the financial elements.

In respect of climate change, for instance, the most polluting sectors have had to move the fastest. Guerzoni cites plans by FTSE-listed oil major BP to be net zero by 2050, incorporating interim targets, as “a clear example of business transformation” that infuses ESG and sustainability.

However, the work that companies need to do to ensure long-term sustainability appears unglamorous, say both Guerzoni and Hultberg. Woke capitalism involves an attention to detail around things like affordability analysis and tax implications.

Hultberg cites the example of a company’s energy-efficiency strategy: spending five years cutting power consumption by installing new heating and cooling systems does not tend to garner big headlines.

But this is precisely the type of action that one must take as a company leader “before you can get on a stage at Climate Week, Davos or Cop26 and talk about your urban farming or second-hand clothing initiatives”, Hultberg says.

Sustainability advances

What is also clear is that while there may be boardroom battles over profitability versus sustainability, the latter has made clear advances.

In PwC’s CEO survey, released in January, bosses ranked sustainability issues below business goals (see chart below). Globally, 37% of companies now have targets for reducing greenhouse gas emissions, whereas 60% of CEOs had not factored climate change into their strategic risk at all the year before, and 87% of companies said in 2010 that climate change would have little impact on their business.

“You can’t just kick the ESG can down the road any more,” says Hultberg. And a net-zero 2050 target should not be described as a business strategy, she adds, but rather as “a high-level goal” given that it is something that “the CEO after the next CEO will have to deliver on – maybe”.

Ultimately, companies that do not embrace ESG are “at risk of becoming the next Kodak”, says Hultberg. The iconic US photographic film company – full name: Eastman Kodak – no longer exists in any meaningful form because it failed to prepare for a time when digital images would become the norm.

Guerzoni echoes this view. If companies do not take action to change their business models to incorporate sustainable practices, he says, they will see their cost of capital rise, their customers become dissatisfied and their competitiveness fall.

In short, longer-term thinking should now become the norm.

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