• assured reliance on the character, ability, strength, or truth of someone or something
• dependence on something future or contingent: hope
• reliance on future payment for property (such as merchandise) delivered
A ‘trustless’ technology
In the view of blockchain proponents, one of the technology’s major advantages is that it doesn’t require trust to conduct transactions. In today’s world, transactions require trust or, in the place of trust, intermediaries, which exist to facilitate the transaction, record the details, and serve as guarantors that each party has sufficient assets. However, intermediaries cannot always be trusted, as illustrated by the “Byzantine Generals problem,” an oft-cited analogy used to explain blockchain . Proponents argue that blockchain removes the need for trust and thus also removes the need for intermediaries.
Bitcoin, the first cryptocurrency application of blockchain technology, aimed to resolve concerns about the trustworthiness of financial intermediaries by creating a “trustless” system . Two inherent components of trust are vulnerability and expectation: there is a possibility for disappointment, but both parties accept the risk because they believe in a positive outcome . Bitcoin developers suggest that it can reduce reliance on trust by reducing the risk of disappointment.
This may be true if one takes a narrow view of the transformative quality of the blockchain. Our analysis suggests that blockchain technology may not reduce the need for trust so much as shift the burden of trust.
How does blockchain shift trust?
The focus on blockchain has been on ensuring that parties complete their transactions and that transactions are immutably recorded. However, we argue that trust is still a factor outside of the immediate transaction environment. To illustrate, we’ll use the trading of renewable energy certificates, which currently requires multiple steps.
Traditionally, a certificate-creating regulator must verify the validity of the renewable energy generator, while brokers aggregate certificates from the generators and link buyers and sellers. A simplified diagram of this process is shown below in Figure 1.
Figure 1: Current renewable energy trading (stylized)
Source: Cornerstone Capital Group
Proponents of blockchain renewable energy trading argue that no “trust” or intermediary is necessary because the technology allows parties to trade directly, and only when both parties have their assets ready. As shown in Figure 2, the renewable energy generator links sensors to a blockchain-enabled ledger. As each MWh of renewable energy is generated, the ledger updates its records with a new certificate, recorded as a digital token. Buyers can source certificates by buying tokens, and the transaction history is recorded on the blockchain ledger.
However, this argument looks at the renewable energy trading system through the narrow lens of immediate transaction mechanics. The broader “transaction ecosystem” still requires trust:
- Auditing: The blockchain-enabled transaction does not remove the need for a trusted regulator to confirm that the generator is producing renewable energy or that the sensors are operating as intended.
- Price negotiation: Direct trading between generators and buyers requires both parties to feel fully informed about prices. Thus, the generator and/or buyer may rely on a trusted price reference (oracle).
Figure 2: Blockchain-enabled trading system
Source: Rocky Mountain Institute, Cornerstone Capital Group
The ecosystem, therefore, looks more like Figure 3. In this diagram, the proposed blockchain renewable energy trading shifts the “burden of trust” from transaction intermediaries to parties outside the enclosed system. This shift might transfer responsibility to entities that are not prepared, which could be particularly dangerous as the blockchain purposefully does not allow for arbitration or the undoing of transactions. For example, a buyer who spends financial resources on a certificate from a generator who is improperly audited may have no means of recourse. Once the transaction is executed, it is recorded and unable to be undone or negotiated.
Figure 3: Cornerstone’s assessment of blockchain renewable energy tradingSource: Cornerstone Capital Group
Our assessment raises questions for investors in blockchain-enabled applications, as well as more mainstream investors assessing how to improve efficiency of trading. The ability of the technology to set the boundaries of the transaction environment may create as much complexity and risk as it resolves. At what point does it become prohibitively expensive to expand the scope of technological control to remove the need for trust? Is the need for trust such a significant drag on the economy or society?
These questions around how trust is shifted and at what cost apply beyond the current discussions of Bitcoin and blockchain bubbles. Investors across the market may benefit from assessing the relative cost versus efficiency of redistributing the responsibilities of trust outside the immediate transaction environment. A narrow view may position investors for unforeseen consequences, including negated efficiency gains or failure to deploy blockchain technology in the most valuable way.
Efficiency in shifting trust
Blockchain proponents speak of a future facilitated by trustless systems. Our assessment, currently, is that blockchain does not reduce the need for trust but rather shifts the burden of trust beyond the scope of the actual transaction. This may increase the efficiency of the immediate transaction, while moving intermediary roles to the edges of the transaction system. New responsibilities may be transferred to intermediaries who are unprepared or create bottlenecks. Investors purely focused on transaction-level trust may not be aware of the risks the might arise from such shifts.
Value in shifting trust
Investors interested in reducing the trust involved in transactions should determine whether the application is focused on the core vulnerability within the system. For renewable energy trading in particular, we view monitoring and auditing of the generators as a key vulnerability. At this point, blockchain-supported renewable energy does not address these concerns. The system still relies on trusting a third-party auditor or a set of sensors to ensure that the renewable energy is valid. Blockchain applications that address the critical issues in a trading system are likely to be more strongly positioned.
Click here to download the report and for important disclosures.
Emma Currier is a Research Associate at Cornerstone Capital Group. Emma graduated with a Bachelors of Arts degree in Economics from Brown University in May 2016. While at school, she worked with the Socially Responsible Investing Fund and as a teaching assistant for the Public Health and Economics departments. She spent her sophomore summer researching differences between American and Indian educational styles in Arunachal Pradesh, India, and completed a summer investment bank analyst position with Citi in the Media & Telecom group in 2015.
Sebastian Vanderzeil is Director, Global Thematic Research Analyst with Cornerstone Capital Group. He holds an MBA from New York University’s Stern School of Business. Previously, Sebastian was an economic consultant with global technical services group AECOM, where he advised on the development and finance of major infrastructure across Asia and Australia. Sebastian also worked with the Queensland State Government on water and climate issues prior to establishing Australia’s first government-owned carbon broker, Ecofund Queensland.
As the rapid evolution of the blockchain has captured the attention of the investment community, Cornerstone has begun to offer insight into the technology’s potential to foster positive social change and the evolving notions of governance in its application. (See our reports Governance and the Ungovernable: Implications of Blockchain Proliferation and Making Sense of Blockchain Opportunities, as well as our July webcast “Beyond Finance: Considering the Business and Social Potential of the Blockchain“.)
We’ve had the pleasure of getting to know leaders in this fast-growing field, thanks to Cornerstone Board members Ibrahim AlHusseini and Andrew Masanto. And I am particularly pleased to join the Advisory Board for AirSwap, a token exchange based on the Swap protocol, a peer-to-peer protocol for trading Ethereum tokens. AirSwap is designed “to harness the same power of blockchain as a globally accessible, friction-free value network, supporting private and secure exchange between peers.”
The Principles for Responsible Investment (PRI) and United Nations Global Compact released the first version of Coping, Shifting, Changing in 2014. The central premise of the report was that companies could be long-term even in a short-term world, offering practical recommendations on how to achieve this.
This new report, released on September 18, responds to feedback that investors could, and should, do more to support companies on those recommendations. It builds on important work done by other organisations also working to tackle this problem. It presents three main strategies, each including recommendations focused on measures that companies can adopt to address the problems caused by market short-termism, and actions that investors can take to support companies in those efforts.
Below we excerpt the report’s executive summary. You can download the full report here.
Companies that operate with a long-term outlook have consistently outperformed their industry peers since 2001 across almost every financial measure including revenue, earnings and job creation. Similarly, strong corporate performance on environmental, social and governance (ESG) factors correlates positively with improved cost of capital and financial performance. However, research shows that companies will forego efforts to create long-term value because of pressure to meet short-term objectives.
Short-term pressure is an obstacle to creating a global financial system that supports long-term value creation and benefits the environment and society. In 2015, 193 world leaders agreed upon 17 Sustainable Development Goals (SDGs), covering issues ranging from climate change to gender equality. The SDGs provide an opportunity for business leaders, investors and companies alike to re-think their approach to value creation, serving as a blueprint for action in both capital and investment markets. However, excessive short-term pressure will hamper progress unless action is taken by both companies and investors.
The perceived investor emphasis on short-term financial performance creates pressure on companies to focus on short-term financial performance and pay less attention to fundamentals. It can result in forgoing opportunities with a positive long-term net present value, including those that provide wider sustainability-related benefits. It can also affect how ESG factors are considered in strategy, capital expenditures and daily operations. Consequently, companies may miss opportunities to: drive sustainability-related innovation; develop their human capital; expand to new markets; grow their customer base; create operational efficiencies; and effectively manage social and environmental business risks.
Investors themselves are also under considerable short-term performance pressures, with the benchmarking and evaluation of investment managers often based on one- and three-month timeframes. Even those organisations with long-term investment time horizons often focus on quarterly or even monthly portfolio performance. Regulatory developments further influence short-term behaviours. Following the global financial crisis, for example, regulatory bodies began to place greater emphasis on short-term performance management and reporting, particularly in situations where pension funds have shortfalls against their liabilities.
While it is important to recognise that there are diverse external and internal pressures on companies that reinforce this emphasis on short-term performance, the relationship between companies and their investors is of fundamental importance. Encouragingly, both have become more vocal about the importance of combating the negative impacts of short-termism in recent times, such as through the Commonsense Principles of Corporate Governance, released by a group of CEOs in 2016. To create a truly sustainable financial system, which will play a role in achieving the SDGs, both investors and companies must join forces to drive meaningful change.
OVERVIEW OF RECOMMENDATIONS
Below is an overview of the recommendations, which are not comprehensive solutions, but aim to mitigate some of the most serious consequences of short-termism through changes in strategy and practice. They are framed around the belief that companies, with support from investors, can advance strategies that support long-term business growth and improve their impact on society and the environment.
- McKinsey Global Institute (2017): Measuring the Economic Impact of Short-Termism.
- Deutsche Asset Management and the University of Hamburg (2015): ESG and Corporate Financial Performance: mapping the global landscape.
- Examples include: Graham, J., Harvey, C. and Rajgopal, S. (2005): The Economic Implications of Corporate Financial Reporting, Journal of Accounting and Economics, Vol. 40, Issue 1. Graham, J., Harvey, C. and Rajgopal, S. (2006): Value Destruction and Financial Reporting Decisions, Financial Analysts Journal, Vol. 62. FCLT Global (2016): Rising to the challenge of short-termism.
- PRI (2016): Sustainable financial system: nine priority conditions to address.
- Accenture and UN Global Compact (2016): CEO Survey
- See endnote four.
- Aviva Investors (2014): A Roadmap for Sustainable Capital Markets.
- Sullivan, R. (2011): Valuing Corporate Responsibility: How Do Investors Really Use Corporate Responsibility Information?
- For example, solvency requirements, MIFID and Dodd Frank. Only in recent years (five years after the crisis) has there been growth in regulation looking at ESG integration and system purpose.
- (2016): Commonsense Principles of Corporate Governance
ABOUT THE UNITED NATIONS GLOBAL COMPACT: The United Nations Global Compact is a call to companies everywhere to align their operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption, and to take action in support of UN goals and issues embodied in the Sustainable Development Goals. The UN Global Compact is a leadership platform for the development, implementation and disclosure of responsible corporate practices. Launched in 2000, it is the largest corporate sustainability initiative in the world, with more than 9,500 companies and 3,000 non-business signatories based in over 160 countries, and more than 70 Local Networks. www.unglobalcompact.org
ABOUT THE PRINCIPLES FOR RESPONSIBLE INVESTMENT: The PRI works with its international network of signatories to put the six Principles for Responsible Investment into practice. Its goals are to understand the investment implications of environmental, social and governance (ESG) issues and to support signatories in integrating these issues into investment and ownership decisions. The PRI acts in the long-term interests of its signatories, of the financial markets and economies in which they operate and ultimately of the environment and society as a whole. The six Principles for Responsible Investment are a voluntary and aspirational set of investment principles that offer a menu of possible actions for incorporating ESG issues into investment practice. The Principles were developed by investors, for investors. In implementing them, signatories contribute to developing a more sustainable global financial system. More information: www.unpri.org
A blockchain taxonomy for investors. Blockchain technology is being used in a growing diversity of applications, offering a complex array of investment opportunities. While the technology is so new that any investment in it is speculative, patterns of use are emerging. In this report, we propose a taxonomy to enable investors to more quickly and effectively understand individual blockchain applications’ key attributes and to assess how blockchain technology will be used in the near and medium term. To illustrate use of the taxonomy, we apply the indicators to several blockchain applications that range in investment, purpose, and launch date, including Bitcoin, EOS, Tezos, Ethereum and Provenance.
Figure 1: Blockchain taxonomySource: Cornerstone Capital Group
What does the taxonomy tell us?
- We find that recent blockchain applications are shifting blockchain’s original structural and philosophic pillars (i.e., ex-ante rule setting and radical transparency) toward applications with flexible governance structures and private access. Many applications broadly align with the original blockchain application, Bitcoin, but deviate on one or two indicators to address some potential user need.
- Current blockchain applications are focused on expert users, which suggests that blockchain remains a product for technology innovators/developers and is yet not targeting the mass market. The wider success of blockchain does depend on adoption by amateur users.
Our view. We remain skeptical about the ability for blockchain to replace existing non-digital transaction processes without clearer demonstrations of benefits to a wide range of users. However, blockchain is gaining traction within communities and marketplaces focused on the technology-enabled.
Download the full report here.
Sebastian Vanderzeil is a Global Thematic Research Analyst with Cornerstone Capital Group. He holds an MBA from New York University’s Stern School of Business. Previously, Sebastian was an economic consultant with global technical services group AECOM, where he advised on the development and finance of major infrastructure across Asia and Australia. Sebastian also worked with the Queensland State Government on water and climate issues prior to establishing Australia’s first government-owned carbon broker, Ecofund Queensland.
Emma Currier is a Research Associate at Cornerstone Capital Group. Emma graduated with a Bachelors of Arts degree in Economics from Brown University in May 2016. While at school, she worked with the Socially Responsible Investing Fund and as a teaching assistant for the Public Health and Economics departments. She spent her sophomore summer researching differences between American and Indian educational styles in Arunachal Pradesh, India, and completed a summer investment bank analyst position with Citi in the Media & Telecom group in 2015.
Last week, national governments, business, and civil society leaders came together at the United Nations’ High-level Political Forum (HLPF) in New York. With C-Change, we were asked to address attendees to the SDG Business Forum following our report SDG Investing: Advancing A New Normal in Global Capital Markets. The report, jointly commissioned by United Nations Department of Economic and Social Affairs (UN-DESA), reviews prevalent barriers to investing in social and environmental impact and begins to describe the toolkit that the public sector can tap into, to trigger change.
At C-Change we envision a world where businesses and investors lead the way in solving the biggest problems of our time. Where a ‘new normal’ in global capital markets is achieved and these markets are wired to deliver on both profit and purpose. Our mission is not only trigger greater action within the sector, but also equip all business and investors with the tools they need to provide a strategic and meaningful contribution to the SDGs.
We did this in The Netherlands, where alongside the Dutch financial sector, we presented a national SDG investing (SDGI) agenda to Lilianne Ploumen, Dutch Minister for Foreign Trade & Development Cooperation, and Frank Elderson, Director at the Dutch Central Bank. We are doing this at a global level, through our convening, research, and innovative partnership technology, IMPACT PRO(Filer), a LinkedIn like SDG community portal – which is already used by the Dutch government to profile national SDG contributions. Our hope for this report is that it will help create a sense of urgency for the investor community to change its game and for governments to take full advantage of the ‘sticks and carrots’ it has at its disposal to advance SDGI.
The SDGI Need & Opportunity
In their excellent report, the Business & Sustainable Development Commission rightly concluded that the SDGs represent a significant $12 trillion dollar business opportunity, $13 trillion if externalities are included.
Yet, as Lise Kingo (Executive Director at UN Global Compact) flagged during the SDG Business Forum, we are far from reaching the scale and impact needed to achieve the Global Goals: A sea change is needed. Even the pioneers in this space, many of whom were present at the Forum, cannot lean back. We need to continuously hold ourselves and the markets in which we operate to a higher bar.
Earlier this year, the Financing for Development Office and the Division for Sustainable Development at UN-DESA, commissioned our team to provide an honest perspective on the role of sustainability – or lack thereof! – in markets today. The report provides a review of mainstream investor perspectives as well as concrete actions the global, regional, and local governments can take to advance what we’ve come to call ‘SDG investment’: All investments and portfolios where societal factors form a ‘material’ factor in investment decisions.
A New Term: Really?
We can already imagine the reactions among the investment community. A new term. Really? Two comments to this important concern, which we agree cannot be underestimated. Enough time is spent already trying to agree on shared definitions. First and foremost, SDGI is not trying to redefine the market. In reality, it is not more than a lumping together of the investment strategies offered by Bridges Ventures (2016) below, and which have been recognized by many.
We believe that the added value of this umbrella term is that it forces a parallel, yet distinct conversation about the two major shifts that are needed in markets today:
(1) A shift towards a world where all investments are reviewed for their societal impact, versus only 26% or ~ $23 trillion of global Assets under Management (AuM) today; and
(2) A shift whereby an ecosystem emerges where investors are triggered and equipped to maximize the positive contributions of each investment dollar while staying within their required risk and return expectations. (Strikingly, impact investing constituted only an estimated 250Bn in 2015, less than 1% of SDGI)
Figure 1: SDG Investing: Recognized Investment Strategies, Lumped Together
Source: Bridges Ventures 2016, European SRI Study 2012, C-Change analysis
Figure 2: A 2-Pronged Market Conversion Challenge
Key insights from the report are by no means all new and recognize the research and contributions of many experts and practitioners in the field. It concludes:
1) Despite Momentum, Barriers to SDGI Prevail – Despite momentum, significant practical barriers exist that cut across the demand, supply, intermediation, and infrastructural sides of markets. I would add to this a barrier related to what constitutes ‘value’ and the importance of shifting away from ‘short-termism’. I’ll cite an insurance firm investment officer who in my conversation with him noted that the word ‘impact’ is still a dirty word for many investors. Something that ultimately needs to change to build markets that are future proof.
“If I use the word “impact” with other investors, I am dead” – Investment Officer
2) The SDGs: A Powerful Silo Buster, Yet Not an Investment Framework (Yet) – The SDGs offers a powerful framework for building momentum, bringing sectors together, and putting sustainability on the radar screen of the investor community. It is not (yet) ready to be the evaluation frame of record, yet has the potential to offer a shared language and framework in future. The work of GRI, PRI, UNEP, but also by initiatives like Aviva’s benchmarking initiative may offer resolve here. See www.sdgi-nl.org for an early overview of standards and SDG reporting approaches (2016).
3) Governments Have a Powerful ‘Toolkit’ at Their Disposal – The public sector play a powerful role, not just as a policy maker, or regulator, but also as but also as co-investor or buyer, or orchestrator of cross-sectoral action agendas. The report offers a number of high-impact, or innovative solutions for unlocking value. In doing so, watching both the front door where positive change is achieved, and the backdoor – where harm is done is critical, as is ensuring stable, resilient financial systems are in place. At the risk of stating the obvious, the role of local government across developed, emerging, and developing nations is key. The report provides an extensive overview of mechanisms and innovative solutions.
4) And finally –Interim Milestones Are Needed – Bringing in place clear interim SDGI milestones, perhaps even extending Nationally Determined Contributions to cover all SDGs, can help signal a long-term commitment to sustainability and the SDGs, an important lever in minimizing the perceived risks associated to embracing the SDGs and maximizing the perceived value of doing so. Since publication, progress has been made already by groups like the Inter-Agency Taskforce on Financing for Development (www.developmentfinance.un.org)
In closing, the SDGs are everybody’s business. We are grateful to the investors we spoke with for their frank reactions, are highly committed to contribute to this agenda, and are hopeful that our research, convening, and IMPACT PRO technology can help to deepen our JOINT investment and delivery capacity.
Time for a new normal.
Carolien de Bruin is the founder and CEO of C-Change (www.c-change.io). She formerly led Deloitte’s global impact investing activities from New York, and served as interim COO at the Bertha Centre for Social Innovation & Entrepreneurship in South Africa.
Dr. Maarten Biermans is head of ESG policy and dialogue at Rabobank and co-author of the report and affiliated to Tilburg University. Mr. Biermans is a specialist in impact investing and ESG integration in private equity and an advisor to C-Change.
- This blogpost is cross-posted by Impact Alpha, Cornerstone Capital, and Responsible Investor.
- Recommendations and Working Group papers to the National SDG Investing Agenda were published on four priority topics: Blended Finance – led by PGGM and FMO, Retail Investing – led by ABN Amro and Triodos Bank, Regulatory Change – led by Aegon and Delta Lloyd; and Data & Impact Reporting – led by C-Change.
On June 23 Cornerstone hosted Jalak Jobanputra for a discussion on the blockchain’s transformative potential. Jalak is the Founding Partner of Future\Perfect Ventures, an early-stage venture capital fund focused on next-generation technology such as blockchain and machine learning. She was an early investor in the space, and is widely considered to be an expert.
Cornerstone’s Sebastian Vanderzeil, Director and Thematic Analyst at Cornerstone, led the session. In addition to recent developments in the space, Jalak and Sebastian discussed a number of ways emergent applications for blockchain technology could address social challenges, particularly in less developed regions. The two also addressed issues of governance and accountability, following on from Sebastian’s recent report Governance and the Ungovernable: Implications of Blockchain Proliferation.
Theory and politics. The blockchain and related innovations represent a new and relatively complex set of potential investment opportunities. The technology has received significant attention from a range of individuals and institutions, from computer scientists to corporations to private equity groups. We outline the theory of the technology as well as the governance implications to guide investors.
Disruptive opportunity. Advocates of the blockchain believe it has tremendous potential to enable novel ways of creating, managing, and maintaining systems of fundamental rights. It is already being used to facilitate transparency and combat corruption — for example, Kenya is piloting its use to record land ownership and transfer, historically a poorly managed and easily manipulated process1. The blockchain operates, by design, independently of traditional arbitrators and regulators. Its widespread adoption could remove courts, central banks, and government policy makers from financial and sociopolitical transactions, which in turn has governance implications for the economic, legal, and institutional relationships as we know them today.
Governance implications. Innovation spurred by blockchain technology could result in more efficient and transparent business models. For this reason, investors should be actively assessing emerging blockchain-specific opportunities. However, in addition to understanding the basics of the technology, we believe it’s important to understand the governance implications of the blockchain ecosystem. This report undertakes an assessment of the current pillars of blockchain governance and compares these pillars to current norms of corporate governance as laid out in Cornerstone Capital’s proprietary framework. We see two scenarios: “A Blockchain World” and “Our World with Blockchain,” each offering distinct advantages and disadvantages.
Download the full report here.
Sebastian Vanderzeil is Director, Global Thematic Analyst with Cornerstone Capital Group. He holds an MBA from New York University’s Stern School of Business. Previously, Sebastian was an economic consultant with global technical services group AECOM, where he advised on the development and finance of major infrastructure across Asia and Australia. Sebastian also worked with the Queensland State Government on water and climate issues prior to establishing Australia’s first government-owned carbon broker, Ecofund Queensland.
Emma Currier is a Research Associate at Cornerstone Capital Group. Emma graduated with a Bachelors of Arts degree in Economics from Brown University in May 2016. While at school, she worked with the Socially Responsible Investing Fund and as a teaching assistant for the Public Health and Economics departments. She spent her sophomore summer researching differences between American and Indian educational styles in Arunachal Pradesh, India, and completed a summer investment bank analyst position with Citi in the Media & Telecom group in 2015.
This is the text of a speech we prepared for the conference “Post-Carbon Finance: Fostering Low-Carbon Investment,” to be hosted by Ecologic Institute and the Consulate General of Germany in New York on June 15.
It is an auspicious time to be talking about climate finance. The US administration may be removing itself from the Paris accord, but as Cornerstone Capital wrote following the election of President Trump, we believe that the capital markets have the ability and responsibility to power the progress needed to solve the critical issues of our time, including climate change.
The US departure from the Paris Accord, together with the potential movement away from globalization in numerous countries, changes the medium-term climate investment catalysts, though will have less near-term effect. Earlier this year, we outlined three macro trends – regulatory, behavioral, and technological – whose intersection will drive climate change investing both in the near and medium term. Tonight, I want to talk through these trends, where their overlap creates the strongest catalysts, and how recent events create new climate investment risks and opportunities.
Regulatory: US sidestepping resistance, EMs linking to growth
Key US states and cities have driven policies addressing climate change, from renewable energy portfolio standards to feed-in tariffs (payments to ordinary energy users for the renewable electricity they generate), for decades. We see their role in climate action expanding further because of the current administration’s stance. The US government does not have a national energy policy, and, with the staying of the Clean Power Plan, it is not likely to adopt a plan soon. States and cities are now front and center, if they ever left, and leading states and cities have already increased climate response policies. California’s senate passed a bill mandating 100% clean energy by 2045 while Pittsburgh (not Paris) now aims to source 100% clean energy by 2035.
While states and cities will push climate change regulations in the US, national governments in emerging major emitting countries are taking a significant role. The clear co-benefits of climate action make the discussions for China and India different from even five years ago, as both countries have transitioned to incorporating climate action into other national policy goals. China sees the reduction in air pollution as well-aligned with the rollout of renewable energy, while India sees the necessary provision of electricity to all its citizens as linked to distributed energy sources, such as solar. This alignment between renewable energy, political stability, and economic growth provides significant hope for rapid progress.
Behavioral: Accelerating focus across sectors and consumer segments
We see behavioral trends becoming a more powerful force than regulatory trends. We consider behavioral trends in the broadest sense, from consumer trends to how companies are positioning themselves for changing markets. On the consumer side, we see a deeper focus on supply chain impacts. From food to beauty products to clothes, consumers are examining supply chains in a way we have not seen before. Some companies expressed their concern at the US’s shift on the Paris accord because they consider responding to climate change to be a market imperative (as well as a branding opportunity). Corporations are also acting to inspire their employees, who are increasingly demanding their organizations engage in climate action.
Technological: Relentlessly advancing
Technological advances to address climate change continue to meet and raise expectations. The question if solar and wind could reach grid parity has been answered, when it was a real concern less than nine years ago. The battery sector has also seen significant declines in price, with electric vehicle battery prices dropping by 80% from 2010 to 2016. If the decrease can continue, battery prices are poised to achieve grid parity in the coming years. This technology, which can support the decarbonization of transport and the mass storage of electricity, would be a significant boon to renewable energy.
Intersection of trends creates powerful investable opportunity
The intersection of regulatory, behavioral, and technology trends builds near- and medium-term momentum, which creates an investable opportunity that is more powerful than the sum of the individual trends. For instance, the intersection of trends has contributed to the increasing capacity of renewable energy, with solar capacity increasing from virtually zero at the turn of the millennium to 305GW in 2016. Over the same time, US regulation provided subsidies to consumers buying solar panels in the form of federal tax credits, minimizing the financial risks to buying solar panels while consumers became more interested in renewable energy sources for the climate benefits. China has also flooded the world marketplace with solar panels, rising from less than 1% of global production prior to 2000 to more than 60% in 2013. This supply growth, combined with technological advancement, has pushed solar prices to decrease 78% from 2000 to 2013, contributing to the relatively quick expansion of solar energy capacity.
These factors should cushion any near-term risks to climate investing from recent political events. In the near term, a slip in progress in one trend can be buoyed by the momentum created by other, overlapping trend. We believe that behavioral and technology trends can drive the investable thesis for renewable energy in the near term. In 2015, Kansas repealed its goal of 20% renewable energy by 2020, six years after adopting the goal. A year later, in 2016, Kansas achieved 30% of its electricity from wind power, speaking to the near-term momentum provided by the intersection of trends.
Looking to the medium term
The US departure from the Paris accord does, in my view, create medium-term implications. Regulation brings forward consumer and company action, which might take longer to manifest otherwise, and focuses technological development. Any further decrease of US regulation could weaken these trends, though there is the possibility that the retreat of leadership at the federal level will result in increasing state level regulation. California and China are already pledging to expand trade with an emphasis on renewable technologies. The potential for state action brings the possibility of companies looking to California as a leader in regulation instead of the federal government.
However, states will have difficulty filling the federal government’s role in international cooperation on climate change, which poses a risk for medium-term climate change investing. Consistent and transparent action across countries creates trust, enabling investors and companies to quickly adapt to new approaches and introduce technologies to new markets. A less trusting global marketplace hinders climate change mitigation and raises barriers to market access for investors.
We believe there are opportunities for creative investments to capitalize on and accelerate the behavioral and technological trends, which are aided by state action but not reliant on federal regulation. Given this change to medium-term regulatory momentum away from the US federal government, the areas of technological progress, behavioral trends, and the overlap of these two are becoming the more powerful catalysts.
On the behavioral side, we see companies that manage supply chain issues and integrate technological advances as well positioned to capture the increasing consumer concern around supply chain management. Specifically, an area that warrants more attention is the emissions reductions created for downstream companies by upstream companies. Coca Cola, for instance, says two-thirds of the carbon footprint of its products is caused by suppliers and is aiming to cut its carbon footprint by 25% between 2010 and 2020. While carbon emission trading schemes captures this value more explicitly, businesses that help other businesses within their supply chain be more efficient (i.e. sustainable) are well positioned.
Technologically, we are most interested in climate investing opportunities that align with broader technological trends, such as internet of things, and that respond to consumer demand for innovative energy products. While big data is mentioned in every conference on any topic, we do know that the availability of vast amounts of data, along with improvements in analytics, are likely to uncover critical insights that we would not be able to decipher through mere observation. We see the ability to gather and analyze big data as a necessary step for innovation in energy efficiency.
The public market support for large-scale energy innovation companies such as Tesla is a substantial vote of confidence for addressing climate change. Nearly 400,000 people have pre-ordered Tesla’s Model 3 car, highlighting the market demand for clean energy products. At the same time, we are looking for solutions to the sourcing of renewable energy raw materials so that the technology we use to address climate change doesn’t exacerbate environmental damage and income inequality issues in emerging markets. Technology companies that can source responsibly will be able to capture the demand for technology and benefit from the growing consumer concern around supply chain management.
The intersection of behavioral and technological trends opens creative opportunities for investors. For instance, we see a future for an ethical fish farming system that addresses the world’s protein requirements in a manner consistent with consumer supply chain concerns. Companies are starting to innovate in fish farming: a Danish company is building a high-efficiency salmon farm in the Gobi Desert in northwestern China, where there is no more rainfall than 50 to 100 millimeters a year, to address protein demand and consumer interest in sustainable protein supply chains. Companies that minimize energy use in this type of innovation are poised to satisfy consumer demand while benefiting from technological advances in efficiency.
We remain confident that technological and behavioral trends can continue to grow and catalyze climate investment, even as the US decreases its role in national and international regulation. However, there are several reasons we could be proven wrong in the future. Technology development or consumer technological demand for clean energy solutions could be more reliant on regulated subsidies than we understand, or changes in globalization could undermine the existing clean technology supply chains. We will continue to watch these trends and update our view on climate investing opportunities and risks.
In conclusion, I am buoyed by the progress over the last five years and hope that winning begets winning. As most people in the room can attest, shifting to an economy that decouples emissions and economic growth has had stops and starts before. Investors should remain focused on the bigger picture, utilize the growing global behavioral and technological trends, and nurture the capital markets to solve climate change.
Sebastian Vanderzeil is a Director and Global Thematic Analyst with Cornerstone Capital Group. Previously, Sebastian was an economic consultant with global technical services group AECOM, where he advised on the development and finance of major infrastructure across Asia and Australia. Sebastian also worked with the Queensland State Government on water and climate issues prior to establishing Australia’s first government-owned carbon broker, Ecofund Queensland.
While reactions to the US withdrawal from the Paris accord may be dominating headlines, a no less remarkable development in climate change response is occurring at the annual shareholder meetings of US corporations. In a milestone for shareholder advocacy, a majority of shareholders voted in favor of proposals at four energy companies asking for greater disclosure on climate change in recent months. The votes marked the first time that shareholders approved resolutions at US companies on the issue of climate risk in opposition to board recommendations.
For the last several years, shareholders have asked companies to disclose more information about the risks and opportunities to their businesses’ resulting from public policies designed to limit climate change. Both shareholders and companies have increasingly supported the need for this disclosure. In 2015, climate risk proposals received above 90% support at BP and Royal Dutch Shell after the boards of these companies recommended votes in favor. In 2016, 38% of Exxon Mobil shareholders supported greater disclosure about the company’s strategy to address climate risk, despite the board’s opposition.
In 2017, proposals on this topic received majority support for the first time at three companies: Occidental Petroleum, PPL Corp (an electric utility) and Exxon Mobil. A proposal at Chevron was withdrawn from the company’s ballot shortly after the Occidental vote when management and shareholders were able to come to terms. A slightly different climate change proposal at Pioneer Resources, an oil and gas company, also received majority support.
Sending a Message to Exxon Mobil
The vote at the world’s largest public energy company, Exxon Mobil, was particularly notable. The proposal received 62% approval, one of the highest-ever levels of support for an environmental proposal opposed by management. The vote at Exxon Mobil may be surprising because, unlike the other companies whose shareholders voted in support of greater disclosure, Exxon Mobil has produced multiple reports on climate change for several years, appointed a climate scientist, Susan Avery, to its board, and actively supported remaining in the Paris Accord.
Nevertheless, the vote demonstrated that these efforts were not seen as sufficient. While it is not possible to know shareholders’ rationales for their votes, concerns about Exxon Mobil’s approach to climate change likely drove voting decisions. Most prominently, several states are suing the company over reports that management knew about the dangers of climate change as early as the 1970s, but made public statements casting doubt on the science and opposing climate mitigation policies well into the 2000s. While these allegations remain unproven and Exxon Mobil disputes them, the shareholder vote suggests a widespread questioning of the credibility of the company’s communications on this issue.
Second, mainstream analysts are beginning to challenge energy company forecasts about the future of global oil demand. According to the standard narrative, oil demand will continue to grow for decades, as efforts to reduce emissions in the developed world are offset by rising living standards in the developing world that will boost energy use. However, rapid technological advances in renewable energy, energy efficiency and battery technology, combined with more aggressive environmental policies in the largest and fastest-developing economies, could “decouple” fossil fuel use from increased economic activity. For example, China is now the world’s largest market for electric cars, and India has pledged to sell only electric vehicles starting in 2030. Some independent analysts are forecasting much slower growth in demand for fossil fuels and an earlier date for “peak demand,” after which global fossil fuel use begins to decline.
While considerable uncertainties exist about the future of oil demand, Exxon Mobil reports only on one, more bullish, forecast of the future. If its forecasts prove too optimistic, the company may not be prepared to respond. Perhaps Exxon Mobil has considered more diverse scenarios internally, but shareholders have no way of knowing what those scenarios are or how they may be affecting business strategy. By supporting the proposal asking for different demand scenarios, shareholders are asking the company to demonstrate flexibility in its strategic planning.
Finally, some Exxon Mobil shareholders have long expressed concern about the insularity of its board, which has a history of resisting calls to meet with its shareholders or with any stakeholders who hold views on climate change that differ from management’s. These shareholders wonder how the board can gain a well-informed perspective on the issue without more diverse sources of feedback.
Concerns about credibility, insularity and strategic rigidity aren’t just about the environment, but about corporate governance more generally. They raise important questions about directors’ ability to serve as an independent and objective check on management. Ensuring the effectiveness of boards in holding management accountable has been long accepted as a key shareholder role in corporate governance. Majority votes at four companies signal greater appreciation of the link between corporate climate change strategy and investor responsibility for board oversight.
Shareholder concern about climate change policy is growing at a critical time. The US administration and Congressional leadership are retreating from active efforts to mitigate climate change, most recently through President Trump’s recently announced intent to withdraw from the Paris climate agreement. Climate efforts in the US have always involved loose coordination among diverse actors including cities, states, civic organizations, investors, and companies. The absence of coordination from the central government will not negate these efforts, but will result in a further decentralizing of leadership and the exacerbation of market uncertainties.
As stakeholders with a long-term, global interest in economic outcomes, shareholders can influence private sector efforts to mitigate climate change. However, at a moment when shareholders are increasingly willing to use their power to support resolutions aimed at encouraging this kind of long-term thinking, current legislation under consideration in Congress would curtail the right to file proposals for most shareholders (see our May 11 piece “Why the Choice Act Is a Threat to Corporate Stewardship”). This year’s annual meetings show the value of this tool for exercising shareholder voice to align their interests with corporate governance.
On February 21 Cornerstone Capital Group Research published “The Art of the Possible: Investing to Address Income Inequality,” in which authors John Wilson, Craig Metrick and Sebastian Vanderzeil provided perspective on the factors fueling increasing disparities in both income and opportunity. The report identifies investment opportunities that offer competitive financial returns while helping to address concerns about increasing levels of inequality and income stagnation.
In late April Cornerstone hosted a live streaming panel discussion on the topic, inviting Brian Trelstad, Partner at Bridges Fund Management, and Beth Bafford of Calvert Foundation’s investment management team, to discuss the topic in more detail.
On March 28, Silver Leaf Partners hosted a symposium titled “Water: an Institutional Investment for the 21st Century.” A series of speakers representing fields ranging from professional services and corporate finance to law discussed water investment. The speakers noted that there is an increasing imbalance between water demand and supply. Speakers also stated that solving this imbalance requires investing in opportunities beyond technology and specifically in industries that have high water usage, including real estate. Finally, private-public partnerships have an important role in expanding water supply.
Lauren Koopman, the director of Sustainable Business Solutions at PriceWaterhouseCooper, opened the event by discussing current water demand and supply. In emerging countries, the growing middle class is set to increase demand for water through changing habits and food preferences that require higher water usage. Many developed countries, including the US, need to replace existing supply infrastructure. The current supply of water will not meet these projected demand increases, and the global demand and supply imbalance is set to worsen.
The investor perspective was offered by Marc Robert, a partner and COO at Water Asset Management. He noted that water is often mispriced due to the monopolistic relationship between utilities and customers and to municipalities’ regulation of the market to keep water prices low. This low price of water results in slow uptake of new technology as customers do not face the real price of supply. Possible opportunities that are not dependent on raising water prices include large water utilities that are well positioned for future demand and data management for high water-usage industries such as agriculture.
Additionally, there are industries other than water that can reduce water usage and offer investable opportunities. Lisa Davis, the Director of Investor Relations and Specialty Investment Originations at Pembrook Capital Management, discussed a novel way to invest in water through urban real estate. Investing in affordable housing, for instance, enables more people to stay in cities, avoiding movement into highly water-intensive suburban living. Also, developers can increase water efficiency through simple upgrades such as low-flush toilets. Savvy investors can identify innovative opportunities for water impact in a range of sectors across the economy.
However, the final speakers noted that public investment will be insufficient to meet the water infrastructure needs of the US, while private investors can benefit from public sector support to manage the risks of long-life water assets. Public-private partnerships (PPPs) enable the merging of the knowledge and capital of the private sector with the resources of the public sector. Daniel Spitzer, a partner at Hodgson Russ LLP, introduced the importance of PPPs. Historically, there has been a lack of commitment from the federal government to boost water spending. PPPs can mobilize private investment and companies to fill this public need. Bar Littlefield, CFO of Poseidon Water, offered an example, describing the company’s PPP with San Diego County Water Authority on the Carlsbad desalination plant. This plant supplies San Diego county with 50 million gallons of desalinated seawater per day. Appropriately developed PPPs can enable effective risk-sharing between private and public entities and create incentives for increased water investment.
The world faces increasing water demand, which current supplies will be unable to meet. Investors can impact the water field through both traditional investment in companies that are directly involved in water delivery as well as those that are improving water efficiency. The private sector can coordinate resources with the public sector in addition to investing privately to avoid future water scarcity. The symposium concluded with a clear message that private investment has a critical role to meet the increasing water imbalance.
Emma Currier is a Research Associate at Cornerstone Capital Group. Emma graduated with a Bachelors of Arts degree in Economics from Brown University in May 2016. While at school, she worked with the Socially Responsible Investing Fund and as a teaching assistant for the Public Health and Economics departments.
Last week at the New York Stock Exchange, Ecolab hosted an event to unveil a new version of its Water Risk Monetizer (WRM) solution. WRM, a financial modeling tool, was developed through Ecolab’s partnership with sustainability data firm Trucost and in collaboration with Microsoft. The event focused on WRM’s new operating features.
Alongside the debut of the technology updates, the event featured a panel discussion amongst corporate leaders who discussed best practices and lessons in implementing water risk management strategies for their businesses. Also present were representatives from the financial sector to discuss the investor’s perspective on water efficiency strategies. Panelist included representatives from Microsoft, Marriott International, Coca-Cola, BASF, S&P Dow Jones Indices, CERES, and Cornerstone Capital’s own Sebastian Vanderzeil.
The opportunity for the WRM arises from regulation (or lack thereof), growing public pressure, and rising demand by investors for disclosure. WRM enables companies to understand the impact of water quality and quantity in their business, turning water risk into an actionable element of their overall strategy. The upgraded WRM can now provide comprehensive monetary analysis of the incoming and outgoing water risks, including the future cost of water, pollution and water treatment costs, the potential revenue at risk, and the enterprise risk.
Several key themes emerged during the panels and concluding remarks:
Water risk management has “arrived” as a strategic issue for corporates. Firms must consider both the operational role of water and the reputational consequences of mismanagement of water strategy. Creation of a “smart water culture” requires awareness of water efficiency and risk at all levels of the organization and the embrace of water management strategy.
Water risk is a multi-stakeholder issue, with engagement of local communities a key to successful risk management. Companies must understand the social and political issues relevant to water sources and uses and align their strategies accordingly.
Water is already an investment strategy, with both passive and active approaches possible. The creation of investment indices can serve to pressure companies to adopt more proactive water risk management practices. Managers may also face a push from “dark green” investors, who want to understand the material issues and emerging technologies.
Metrics are in the early stage of development. However, existing metrics, such as Global Reporting Initiative (GRI) standards, can help companies prioritize efforts; for instance, by assessing the materiality of water relative to other environmental issues and by providing a framework on how to consider the relevant issues. Sound governance requires companies to demonstrate effective policies and outcomes to stakeholders, including investors. Technology solutions like WRM can help companies deal with the risks.
Alfonso Carrillo is an analyst with Cornerstone Capital Group. He holds an MBA from Babson College where earned the Dean’s Leadership award. Previously Alfonso worked for a family office focusing on business development opportunities in e-commerce and fin-tech. He is a member of the Guatemalan Bar Association, and prior to 2014, he worked on fraud and insolvency cases, as well as anti-corruption cases against Guatemalan authorities. Outside his professional training, Alfonso helped create, and still holds advisory positions on, various youth and social-impact organizations in Guatemala.
On March 1 Cornerstone hosted the first of in a new series of Access & Insight events, a webinar titled “Climate Investing in 2017: What Can Investors Do Now?” Our Sebastian Vanderzeil and Craig Metrick were joined by William Page, portfolio manager at Essex Investment Management, for a discussion centering on:
- Climate realities and responses
- The transition to clean power
- Infrastructure and environmental investing
- Different approaches and asset classes available for tacking the issues
Cornerstone Capital Investment Advisory (CCIA) Chief Investment Officer Phil Kirshman lent his insights into investment performance, and CCIA Managing Director Jan Morgan fielded questions from attendees.
The genesis of the webinar was a recent Cornerstone research report, “Climate Investing in 2017,” also authored by Sebastian and Craig. The report addresses the imperative for an effective response to climate change following the hottest year on record. The team writes, “Climate investing faces risks in 2017, particularly from the incoming US administration, but nuanced opportunities exist for positive environmental and social impact coupled with attractive potential returns.”
According to Professor Boaz Golany of the Technion – Israel Institute of Technology, collaborations must be SMART: Sustainable, Mutually Attractive, with Reliable, Transparent partners. This is the guiding principle of the Technion’s venture with Cornell University to form the Jacobs Technion – Cornell Institute, a blossoming technology hub on New York City’s Roosevelt Island.
On January 6, Cornerstone had the pleasure of hosting Professor Golany for a provocative lunch conversation facilitated by Dr. Derek Yach, Chief Health Officer of the Vitality Group, also a member of the Board of Cornerstone Capital Group. Professor Golany shared with us the remarkable story of the birth of the Technion – Cornell partnership, which is already becoming a vibrant and innovative addition to the applied research engine of New York.
The conversation touched on these questions and more:
- What role will the Jacobs Institute play in developing expertise for the local tech industry?
- Why did the Technion take on this project, and what role is the Institute playing to bring the Israeli innovation mindset to New York?
- Why are the applied sciences, and deep engagement with industrial partners, a major key to growing any regional economy?
In September 2015, the United Nations convened world leaders at a summit in New York City to make history. All 193 members of the United Nations agreed and committed to work together in order to fulfill 17 global goals that will serve as a roadmap for improving the entire planet. The Sustainable Development Goals (SDGs) provided the framework for humanity to join forces from 2015-30 to address the world’s most pressing challenges, such as climate change, sustainable energy, extreme poverty, health, education, gender equality, drinkable water, and economic growth.
To succeed, the SDGs must be clear, digestible, and emotionally resonant—and they must be known across every corner of the planet. To achieve this aspiration, we must not just lean on government, but also mobilize business. By harnessing the power of commerce towards achieving the goals, we will drive impact with brands, executives, corporations, employees, and ultimately consumers.
With this vision in mind, HealRWorld forged an alliance with the world’s largest activation agency and a leading global sustainable business convener of the planet’s most prominent brands to personalize the goals, drive awareness, catalyze engagement, and promote conscious capitalism in support of the SDGs.
SustainRWorld Day was launched September 8, 2016 at the United Nations by HealRWorld and our partners: Sustainable Brands, Geometry Global, and The PVBLIC Foundation. SustainRWorld Day set out to rally the private sector in support of the UN’s Sustainable Development Goals, putting a line in the sand to measure and celebrate progress annually.
The vision launched with a full marketing campaign called “The Seventeen.” Individual business leaders, influencers, academics and celebrities stepped up to be the public faces of each of the seventeen SDGs. The campaign not only personalized each of the global goals, but put a public stake in the ground for businesses to rally for change.
“The Seventeen” campaign includes courageous and visionary leaders who are not afraid to leverage their personal brands to help humanity, such as actor Ted Danson for his work with Oceana, Jostein Solheim (CEO of Ben & Jerry’s), Naveen Jain (Founder and CEO of Moon Express), Eileen Fisher (Founder and CEO of Eileen Fisher), Jigar Shah (ex-CEO of the Carbon War Room and Co-Founder of Generate Capital), Paul Hawken (Environmentalist, Entrepreneur and Author) and Erika Karp, (CEO and Founder of Cornerstone Capital Group), as well as others.
The September 8 event launched with a number of speakers representing the United Nations’ Secretariat and agencies such as UNICEF, UNCTAD and the Global Compact, along with a number of private sector leaders and members of academia, including the Director of Princeton University’s Andlinger Center for Energy and the Environment. The excitement in the room was contagious and one fact became evident — that when you bring passionate leaders together around an important cause, you truly ignite change. The event immediately created momentum for further action and collaboration.
From this initial launch at the United Nations, HealRWorld has been inspired to form “The HealRWorld Foundation,” a non-profit that will be dedicated to furthering sustainability education, awareness and engagement globally and fundamentally igniting measurable actions through our work with the United Nations and other partners.
It’s time that the Sustainable Development Goals become a household name, and our vision is that every business adopts the SDG framework in some manner within their overall strategy.
In 2017, “The Seventeen” campaign will go global, with each country being offered the opportunity to participate by customizing the campaign with their local philanthropists and business leaders to further inspire the movement. From this spark we will create a global “SustainRWorld Day” event series to celebrate the collaborative successes each year. Won’t you join us?
For more information on SustainRWorld Day, “The Seventeen” Campaign or how to get involved, please contact our office at (908) 450-7315 or email me directly at email@example.com. For more information on SustainRWorld Day, go to sustainrworldday.global.
Together we can be a force for change.
Michele A. Bongiovanni is CEO of HealRWorld LLC, a social impact firm whose big data platform aggregates sustainability information (People, Planet, Profit) on global large and small & mid-sized enterprises (SMEs) to power products, drive revenues & foster positive change. For more than 20 years Michele has served in strategy, marketing and product innovation in the financial services industry.
In late September, the Clinton Global Initiative (CGI) convened top leaders from business, government and civil society for the 12th and final time. The end of the CGI Annual Meeting brings to a close not just an event, but a force that has helped change the way that companies everywhere think about social responsibility.
It’s been a decade since the Rockefeller Foundation (RF) endorsed me to advance CGI’s global health work, which at the time was new and already starting to make waves in philanthropy. President Bill Clinton’s enthusiasm for encouraging the private sector to step up as key players in the social impact space — rather than leaving such work to governments and nonprofits — was met with both curiosity and skepticism at the time. But the leadership at Rockefeller recognized that CGI’s approach to addressing global challenges represented a fresh and needed way forward.
By facilitating the development of specific and measurable corporate plans to make a positive social and environmental impact — coined as Commitments to Action — CGI bet on the idea that corporate philanthropy could become more effective by embedding societal values into companies’ core business plans.
It turns out former President Clinton’s experiment worked. Taking philanthropy beyond the traditions of corporate social responsibility — “doing well by doing good” — is now the accepted norm for business ten years later.
Its success paved the way for similar approaches, such as Michael Porter and Mark Kramer’s shared value, PepciCo CEO Indra Nooyi’s “performance with purpose,” or Novo Nordisk’s approach to the triple bottom line. All of these new approaches seek to find a new and explicit nexus between financial performance and social impact. As an advisor to CGI, I witnessed the powerful way former President Clinton’s platform stimulated, guided, cajoled and excited companies to go beyond their quarterly earnings reports and bring about positive social change through their commitments to action.
The direct benefits to society have been most obvious in the myriad global health commitments that have been carried out since 2005. Because of the collective body of commitments made by the CGI community, more than 114 million people have increased access to maternal and child health and survival programs, and more than 33 million people have increased access to safe drinking water and sanitation. Because of these commitments, more than 36 million people received treatment for neglected tropical disease, and more than $318 million in research and development funds was spent on new vaccines, medicines and diagnostics.
Due to the CGI community’s embrace of “doing well by doing good,” many companies transformed their business models to place health gains as central to their work. Traditional corporate philanthropy was soon reframed to meet market failures, including research, human capacity and humanitarian crises.
In fact, many of the United Nations Global Compact’s (UNGC) member companies are also CGI members. From the start, the CGI Annual Meeting was held during the week of the United Nations General Assembly, in the hopes of spurring synergy between goals and visions discussed on the East and West sides of New York City. CGI companies brought their experiences into the U.N. system at a time of unprecedented support for new forms of private-public partnerships to complement the role of government in addressing the newly adopted Sustainable Development Goals. This could allow for CGI’s commitments to reach the scale needed to have true global impact. Health should be a major beneficiary.
To accelerate progress on health, the UNGC is collaborating with Discovery Vitality and Novo Nordisk to elevate health within business in other areas that have become the norm, including the environment, labor, human rights, and corruption. Discovery Vitality’s CEO, Adrian Gore, pledged to work with others to advance the integration of health metrics into corporate reporting in his plenary address at CGI 2013 in the presence of the Director General of the World Health Organization, Margaret Chan, and the session chair, Chelsea Clinton. This pledge is being advanced during the UNGC in 2016.
It has been a privilege to see how seemingly intractable health and social problems are being tackled in new ways that build on the joint expertise of companies, NGOs, academia and government. While I was at PepsiCo, our CGI commitments tackled undernutrition in Ethiopia and obesity in China, India, and Mexico. We also partnered with the Alliance for a Healthier Generation, the American Beverage Association, and private-sector peers to curb the marketing and sales of unhealthy foods and beverages in the United States. All of these commitments had profound implications for the future of business models of food companies.
At Discovery Vitality, we are now expanding our CGI Commitments to Action with a very sharp focus, as outlined in our just-released 2016 Sustainable Development report. Vitality Shared Value Insurance is leading our members around the world to live longer lives while also transforming one of the oldest business models – life insurance. Our plan is having impact on health in profitable ways. CGI’s leadership in supporting and steering companies to do this will have enduring impacts on peoples’ lives and on our planet’s survival.
Few global platforms can claim to have the direct and indirect impact of the Clinton Global Initiative. Even as CGI draws to a close, the important work and impact of our commitments will continue. Doing well by doing good – and valuing the integration of both business purpose and societal gains – is now an unstoppable force in best business practices and in modern philanthropy.
Derek Yach, MBChB, MPH is Chief Health Officer at Discovery Vitality. He has been a full time employee of PepsiCo and has been on the Advisory Committee for the Clinton Global Initiative since 2006.
If you are thinking about the relationship between technology innovation and global sustainability, what comes to mind most often are rows of solar panels in the Arizona desert or offshore wind turbines off the coast of Denmark. What you don’t typically think of are companies like Feetz (feetz.com), a Tennessee-based startup that uses 3-D printing technology to make custom-fit shoes.
The convergence of online commerce, mass customization, and 3-D printing technology (or what some people refer to as additive manufacturing) is underway, with customized shoes representing the latest model of what surely will be other customized consumer products hitting the marketplace.
While Uber and Airbnb get most of the media attention worldwide in terms of business model innovation, the importance of whether manufacturing in the US and worldwide takes a sustainable business trajectory cannot be overstated. Traditionally, manufacturing is most expensive part of the retail supply chain. Shoes, toys, and many consumer products are manufactured overseas, most notably in China, and shipped as finished products to the United States.
In the case of Feetz, the ordering is done online, where customers can download an app, take smartphone snapshots of their feet and create a 3-D model to be used as a model for their customized shoes. If companies like Feetz are “changing the ways goods are ordered, made and sold,” what are the important sustainability consequences of such business models? Are they positive, negative or something else?
3-D printing or additive manufacturing technology can in theory dramatically reduce the amount of waste created in the manufacturing processes. Like stacking bricks to build a house, additive manufacturing process creates objects in layers without the limiting constraints of molding requirements or human error in welding. The result maximizes material efficiency, ensuring that no material needlessly goes from welder’s torch to junkyard. For context, a typical car wastes about 10,000 kg of raw materials during the manufacturing process.
Unlike traditional large-run manufacturing, the small scale of production typical of most 3-D printing efforts means that the cost of wasted material does not have to be ameliorated through economies of scale. Even in smaller 3-D printing projects, material use efficiency is an automatic consideration, not something to think about as an add-on consideration after the waste is produced or the environmental damage is baked into the product itself (think plastic bags).
Another example in terms of the potential sustainability benefits of 3-D technology can be seen in Shapeways (shapeways.com), a company that allows people to design custom products like furniture and household objects that might be hard to replace and encourages customers to save money by using less material. Companies like Patagonia already prompt their customers whether they truly need to ship their products overnight (since the mode of transportation has such a large impact on the overall sustainability of a product’s supply chain). But Shapeways takes this form of consumer engagement a step further by prompting its customers to actively think about the materials that go into the production of their products.
Bringing Scale to Hyperlocal
Since the business model of making as many products as cheaply as possible is still the dominant form (though this is rapidly changing), another innovative, sustainable feature of the additive manufacturing model is that it brings the possibility of scale to the emerging “hyperlocal” trend that can be seen from Northern California to Vermont. There are many emerging sustainable business enterprises that attempt to build on the growing consumer interest in all things local (e.g. food, energy, economic development, etc.) and additive manufacturing provides a market template, at least in theory, from which to scale a local business model to greater competitive advantage. 
Ultimately, the argument that the future of the US economy lies in sustainable business has been made before, and additive manufacturing cannot substitute for well-designed tax and other policy incentives for a wide assortment of clean energy and manufacturing research & development, including 3-D printing technology. While the business case for sustainability is strong in the case of additive manufacturing, it remains to be seen whether companies like Feetz are going to transform the business and ultimately how consumers purchase, use, and dispose of shoes.
The potential is there but the story is still evolving and it may be too early to predict the outcome one way or the other. Case in point: Google announced in September 2016 that its Project Ara smartphone initiative, which began in 2013 with the concept of designing a phone platform that would incorporate a wide array of camera, audio and other modules as desired by users, has been suspended.
Product modularity, the flip side of consumer customization in many ways, is the key functionality that forces people to throw away perfectly sound electronic products because one small item is not working (for instance, one letter in a keyboard). The key lesson from the Google Project Ara might be that we need to better understand what consumers truly want in terms of product customization. Perhaps Feetz will be successful with 3-D printed shoes — but what about handbags?
Moreover, it is not yet clear the type and scope of market disruption “locavore production,” as Professor Gerald Davis, University of Michigan Business School, calls it, will have on existing firms and economic systems. While many industries will be unable to adapt to the changing 3-D technology-mediated business environment, some firms will find a way to adapt by creating and hosting the tools for locavore production, using their skills to create designs suited for locavore production, or hosting a marketplace for product recipes.
As Cory Doctorow, author of Makers, suggested in a 2010 Wired magazine article: “The days of companies with names like ‘General Electric’ and ‘General Mills’ and ‘General Motors’ are over. The money on the table is like krill: a billion little entrepreneurial opportunities that can be discovered and exploited by smart, creative people.”
 Gustke, C. “With Analytics and 3-D Printers, a Faster Fashion Just for You”, New York Times, September 15, 2016, p. B3.
 “Waste and car production – Maps and Graphics at UNEP/GRID-Arendal,” Maps & Graphics, http://maps.grida.no/go/graphic/waste_and_car_production
 Riley, D. and Park, J. “Manufacturing: The Key to Sustainable Business Innovation in the U.S.”, The Sustainability Review, 2012: Issue 2 http://www.thesustainabilityreview.org/manufacturing-the-key-to-sustainable-business-innovation-in-the-u-s
 Davis, G. “Buying Furniture on iTunes: Creative Destruction in a World of “Locavore” Production” Network for Business Sustainability, November 2012 http://nbs.net/buying-furniture-on-itunes-creative-destruction-in-a-world-of-locavore-production. A longer version of this analysis can be found in Davis, G. The Vanishing American Corporation: Navigating the Hazards of a New Economy, Berrett-Kohler Publishers, 2016.
 Anderson, C. “In the Next Industrial Revolution, Atoms Are The New Bits”, Wired, January 25, 2010 http://www.wired.com/magazine/2010/01/ff_newrevolution/all/1
Jacob Park is Professor of Strategy, Innovation, and Entrepreneurship and Director, Sustainable MBA Program at Green Mountain College. He is also the Kevin Ruble Fellow in Conscious Capitalism, Rutgers University School of Management and Labor Relations. Professor Park specializes in the teaching and research of global environment & business strategy, corporate social responsibility, business ethics, and community-based entrepreneurship & innovation. He is a member of the Renewable Energy and Adaptation to Climate Technologies investment committee of the Nairobi, Kenya-based Africa Enterprise Challenge Fund and serves on the Board of Directors and Chair, Program Committee, of Vermont Businesses for Social Responsibility.
Corporate form has the power to effect significant and desperately needed change. The magnitude of the crises impacting our world, and particularly our country, is certainly not disputed — by liberals or conservatives, men or women, African Americans or White Anglo-Saxon Protestants, members of the 1% or the working poor. The nature of such crises is also not in doubt — the fact that the climate is changing and negatively impacting the environment, the fact that there is a wider gap between rich and poor in this country than at any time since 1929, the fact that there is a sweeping tide of gun violence and the fact that recurring overt and covert discrimination necessitates the “Black Lives Matter” movement and catalyzed the bathroom laws of my home state of North Carolina.
But I believe the contrived or real debate over the causes (e.g., is climate change man made? Does current tax policy exacerbate income disparity? Does increased violence argue for more or less access to fire arms? Is safety for children greater with birth-gender-imposed restroom legislation?) and potential solutions has stymied action. Our government is currently too divided and therefore ineffective at addressing the problems. And even if our government was more functional, the private sector can arguably be much more successful in effecting needed change.
Because I have been a corporate lawyer for 23 years, I turn to the corporate form. Sure, the term does not sound sexy or even remotely interesting to anyone outside of the world of lawyers, bankers and a few enlightened business people. But corporate form serves as the very backbone of our society, shaping the actions of the most powerful institutions of our time (corporations) and providing the functional framework for the behavior of virtually all men and women who work around the world. Therefore, I believe that corporate form can be a very effective extra‑governmental tool for solving the crises.
In describing the power of corporate form, let me start by debunking three myths from the world of corporate form perpetuated in the popular press (and even by reporters who typically check their facts at The Economist and New York Times).
- The existing primary corporate form — the corporation — is not “broken.” The corporation can serve in its current form as tool for change.
- The “B Corporation” is not a new corporate form. “B Corp” is a certification mark – and there are many others.
- The new corporate forms come in many shapes and sizes. There is no one form of “benefit corporation,” and advocates of other forms are really crap at marketing and promotion.
The Corporation Is Not “Broken”
From someone who has spent years studying and drafting new corporate forms, this smacks of sacrilege. But it is true. The current debate about form features Lynn Stout and others on one side claiming that shareholder primacy is a myth, with Adolph Berle, Merrick Dodd and others on the other side citing Milton Friedman and opining that corporations must consider shareholders’ primacy to the exclusion of almost all else. There are, of course, elements of truth to both arguments. Most corporate lawyers agree that the drive to maximize shareholder value is as much a reaction to legal and economic factors (e.g., quarterly reporting and heavy utilization of stock options in compensation for management) as it is a result of the corporate form itself. In normal operations (outside of sales, mergers or changes of control), boards and management can look to the long-term best interests of the corporation and its shareholders without enhanced risk. In general, their decisions are protected by the business judgment rules that provide an added layer of defense against liability (shifting the burden of proof in litigation) so long as they do not breach their fiduciary duties of care and loyalty.
However, I agree that the “extra-form” forces are powerful and entrenched. In fact, we all look to share price as the primary, if not sole, measure of a corporation’s worth and success. Every manager wants to “beat the Street,” and their compensation usually, in large part, depends on winning that battle. Further, board members are often correctly counseled that actions which do not yield stronger short-term profits or which are out of step with others in their industry can yield greater liability. While more corporations are at least considering environmental, social and governance (ESG) factors in decision-making, only events like the Enron debacle or the BP oil spill prompt significant shifts in corporate action.
In response to the focus on short-term profitability, prior to the advent of new corporate forms, proponents of “impact” or “double/triple/quadruple” bottom line approaches, including B Labs, advocated the use of constituency statutes for social enterprises. Many states adopted constituency statutes in the wake of the hostile takeovers in the 1980s. Such statutes stipulate that boards and management “may” or “shall” consider a laundry list of factors other than shareholder value when considering an offer by a third party to purchase the company.
While not designed for use by social enterprises, starting in the early 2000s, companies that wanted to promote mission relied on these statutes to include social and/or environmental purposes in their charters and to craft fiduciary duties of boards and management in favor of such purposes.
There are numerous flaws in this approach — but I believe that the primary concern is one of accountability. Constituency statutes provide no means of protecting shareholders from misuse by management of resources devoted to the articulated purposes. For example, I could form a corporation for the purpose of combating climate change and improving employee relations, raise money by selling shares to the students in my class at Berkeley Law, and hire Erika Karp as my CEO. If I took all of the profits and used them to pay for vacations for Erika and her team on Tahiti on an annual basis, leaving the company almost destitute, shareholders would have little way of learning about my actions until after the fact — and limited grounds to bring a claim to halt my actions or seek a refund for their investment.
Suffice it to say that the use of constituency statutes alone is a bad idea — they will not be effective in either improving shareholder profits or advancing social and environmental goals. But before examining the new corporate forms that are available, it is important to recognize and, for some companies, to adopt the low- (or no-) risk tools that traditional corporations have been employing for years to ensure a mission focus.
Tools for Impact with Traditional Forms
Both budding entrepreneurs and established enterprises can develop and retain an emphasis on positive social and environmental impact using the existing corporate forms, particularly corporations, limited liability companies and limited partnerships. For corporations in states without constituency statutes (e.g., Delaware and California), you would be ill-advised to draft social and/or environmental purposes into the charter itself given the established fiduciary duties. However, shareholders can execute agreements with management whereby the company will be contractually obligated to emphasize an agreed mission or public purpose. Classes of shareholders can require protective provisions in the charter to ensure that certain corporate actions, including change of business plan, change of mission and change of control, can’t be approved without the affirmative vote of a mission-focused class. Further, operating and partnership agreements for LLCs and LPs can include such contractual provisions in addition to waterfall rights (payouts for distributions and liquidation) that favor identified non-profits or mission-focused recipients. In fact, Delaware’s limited liability company statute allows for the possibility of an LLC where duties of the managers to contractually agreed social and/or environmental purposes are equal to — or trump — duties to generate economic returns.
It is also possible to draft limited partnership agreements where limited partners agree with fund managers to donate 1% of profits to a designated charity and/or to accept a lower financial ROI in favor of an “impact” ROI. I am encouraged by a growing trend in the fund world for carry or bonus payments to managers to be structured to pay out based on social/environmental as well as financial performance.
Tools for Impact in Change of Control
Notwithstanding these tools, there is an argument, supported by much precedent, that as enterprises scale and increase their intake of outside capital, they often, if not usually, lose their impact focus. First, this is not true for companies whose financial success is directly linked to its mission (e.g., Etsy, Revolution Foods, Sungevity or Bloom). For example, the more that Etsy provides training and support to its Etsy communities, the more members of those communities sell goods via their online platform and the greater the selection and sales to consumers. The more RevFoods educates children on the virtues of nutrition, the greater their sales of healthy, nutritious and delicious school lunches.
Second, for decades many corporations have established non-profits or “.orgs” to house their “impact first” programs and/or facilitate donations from the entity itself and its employees or partners to worthy causes. In recent years, corporations have donated or housed valuable intellectual property, not enough to impact valuation but critical for the business (e.g., a trademark, portion of software or code), in the related non-profit and then licensed the same back to the for-profit operating entity. The license agreement contains a “mission lock” such that if there is a material deviation from mission by the for-profit, the license resets with a higher royalty rate or eventually terminates. Including a mechanism to determine when there has been such a material deviation (usually involving a third-party mediator) is critical. Professor Eric Talley (formerly at Berkeley and now at Columbia Law School) refers to this as my “spurn-out” provision; however, I would argue that if there is financial value in the mission and the relationship with the “.org,” the license may not reduce valuation through sale.
The bottom line is that there are a number of mechanisms available to both public companies and private enterprises that can enable them to focus on long-term objectives as well as environmental, social and governance goals. Therefore, the need for new corporate forms arises because most of these tools are permissive for boards and management instead of mandatory. And it is not possible to underestimate the market forces which encourage, if not demand, short-term profit maximization.
A “B Corporation” Is Not a New Corporate Form
A “B Corporation” or “B Corp” is a certification mark — like a “Good Housekeeping” seal of approval or “LEED” certification. B Labs has done a very good job of creating a framework for companies to evaluate their business and operations on ESG factors and to then receive a score or ranking. To become a “B Corp,” such companies then enter into a license agreement with B Labs and pay a licensing fee of between $500 and more than $50,000 depending on the structure of the applicant.
B Labs does review the evaluations and often schedules calls for follow-up questions — but such reviews fall short of a full audit to ensure accuracy and completeness. This means that there have been — and will continue to be — companies that license the “B Corp” mark and are promoted as part of the B Corp community but whose operations do not live up to the standards espoused by B Labs. I believe that this is one of the reasons for the change in licensing requirements that I describe below.
When Should a Company Become B Certified?
Let me offer a few recommendations for companies that are deciding whether or not to become “B Corp” certified. First, you don’t need to hire a consultant or lawyer to help you fill out the questionnaire and become certified. The fact that there is now a cottage industry of “experts” willing to charge high fees to provide such assistance is a sign that B Corps are here to stay. But the B Labs folks have done a good job at making the certification process user-friendly.
The survey can be downloaded, you can use it to determine areas of improvement before submission, and their staff is available to help if and when questions arise.
Second, I strongly advise that management take and score the survey before deciding whether to pursue certification. While years of good work have gone into developing the survey and standards, one area of weakness is that the survey does not divide respondents by industry. This can yield unhelpful results — like a recycling company whose mission is to reduce waste having a lower score (because of carbon emissions among other factors associated with heavy manufacturing) than a developer of social media applications in SoMa, San Francisco (with little output of social value).
Also, the survey was not designed for public companies — so when Etsy went public, quite a bit of work had to be done (and improvements continue to be made) so that publicly listed companies can accurately respond to the questions. Further, acquired companies are not able to retain B Corp status post sale or merger unless the target remains a stand-alone subsidiary (e.g., Plum, New Chapter Vitamins, Ben & Jerry’s) or the acquiring company itself becomes B certified (e.g., Danone/WhiteWave). The issue with the former is obviously that both the survey process and compliance are in the hands of a corporate entity (e.g., Campbell’s, Procter & Gamble, Unilever) that does not have any legal requirement to retain the mission alignment associated with B certification.
Finally, as with any marketing campaign, it is very important to test with all constituents in your market to determine whether and how the B Corp brand will benefit your company.
The vast majority of B Corps are normal C Corporations or LLCs and are not legally required to advance their social and environmental goals. However, I believe that many of these companies (e.g., Etsy, Plum, RevFoods) are at least as mission-aligned as those that employ the new corporate forms (see below). Further, B Labs has, over time, changed the provisions of its license agreement and is now requiring B Corps to change (within a reasonable period of time) their underlying corporate form to the benefit corporation. Unfortunately, there appears to be a failure to recognize that there are effective mechanisms that can require corporations and LLCs to stay true to their impact goals — with enforcement measures that are just as (or more) effective as those afforded to the new corporate forms, including the benefit corporation.
Other Performance Metrics
In addition to B certification, there are many other methods for rating a company’s performance based on ESG factors. According to SustainAbility, there are over 110 such rating systems and many include both a description of the ESG factors that should be measured and data to provide a benchmark for measurement. In addition to B Corps, the Global Reporting Initiative (GRI), Sustainalytics and MSCI provide evaluations across the full environmental, social and governance spectrum, while CDP and CarbonTracker focus on measuring carbon emissions and risk.
Most public companies are suffering from disclosure “overload” related to ESG as they are continuously approached by new organizations asking them to complete surveys, provide data and help rate their performance on various social and environmental metrics. Fortunately, the rise of integrated reporting with public companies should, over time, bring needed standardization and rigor to the sector. Key leaders such as the Sustainable Accounting Standards Board, GRI and the International Integrated Reporting Council are identifying the ESG factors by industry that are material to operations and should therefore be disclosed in required reporting for public companies. The Bloomberg-Carney Task Force on Climate-Related Financial Disclosures is working to harmonize standards related to climate risk. All of the standard-setters are engaged with the Big 4 accounting firms to provide a framework for disclosure that can be audited or verified. In the United States, the Nasdaq and NYSE have indicated a willingness to follow other stock exchanges from around the world whose listing standards already include — or soon will — certain ESG factors.
The movement toward reporting on material social and environmental factors in a way that can be audited and included with financial reporting to shareholders will certainly represent a big step toward improving accountability for companies around the major environmental and social issues that we face today. Such reporting is also necessary for there to be a shift of the fiduciary duties of boards and management to include ESG goals, as contemplated by the new corporate forms.
The New Corporate Forms Come in Many Shapes and Sizes
The branding genius of B Labs has most people, including ESG practitioners and press, believing that there is only one new corporate form — the benefit corporation. However, in fact, there are several different forms that have been conceived to chart a new path between non-profits (focused exclusively on mission) and for-profits (focused primarily on shareholder value). Further, the benefit corporation form itself varies greatly from state to state; only a few states follow the “model” initially developed by B Labs, and that model itself has been modified substantially and improved over time.
There are two primary elements that are universal to the new forms. First, they all require boards and management to consider social and/or environmental goals in addition to financial returns. Second, at least as of this writing, none of the new forms receive special tax treatment; investments and/or donations to the new corporate forms are not deductible, and revenue earned by the entities is taxed at normal rates.
The Low-Profit Limited Liability Company (L3C)
The first new form to arrive on the scene — the Low-Profit Limited Liability Company or L3C — was written into law in Vermont in 2008. Since the Tax Reform Act of 1969, foundations have been permitted to make program-related investments (PRIs), which are investments in for-profit entities, so long as those investments are for the primary purpose of advancing the foundation’s charitable purpose and not generating financial returns. However, the originators of the L3C noticed that utilization rates for PRIs had remained very low over the four decades since their introduction. The L3C was conceived to address this failure and help non-profits, particularly foundations, deploy greater capital and have greater impact through investment in for-profit entities as an alternative to donations. Specifically, the L3C is a form of limited liability company that requires managers and owners to articulate social and environmental goals and then prioritize such goals over financial returns.
Unfortunately, L3Cs have not garnered widespread support from entrepreneurs or funding from foundations. This is in part because more significant IRS rule changes (anticipated at the time of original conception) have not come to pass to afford special tax treatment for the L3Cs or obviate the need for tax opinion letters. However, new regulations and guidance from the IRS as recently as 2016 have served to further de-risk PRIs (if they were ever in fact risky) and may spur further adoption of PRI investments if not L3Cs. In addition, the L3C form does provide a viable alternative to “mission first” enterprises in the eight states (and two Native American tribes) with L3C legislation. Further, for those of us who practice in states without L3C legislation (particularly California and Delaware), the forms offer good exemplars and ideas for incorporating social and environmental purpose into traditional LLCs.
Social Purpose and Public Benefit Corporations
Whereas the L3C can be viewed as an extension of the non-profit corporation, social benefit and public benefit corporations (SPCs/PBCs) were intended to introduce social and environmental focus to the traditional for-profit corporation. The Flexible Purpose Corporation (renamed Social Purpose Corporation in 2015) was drafted over a two-and-a-half-year period by a non-partisan group of corporate lawyers (of which I was a member) and was first introduced in 2009 in California. In general, the SPC provides a safe harbor — in addition to the business judgement rule — that requires boards and management to emphasize shareholder-agreed social and/or environmental purposes in the charter. In addition, the SPC differs from a traditional corporation because of the fiduciary duty to the mission (and additional protection to the board and management in promoting the entity’s social and environmental goals), mission protection (two-thirds class vote to change the agreed purpose), increased accountability via reporting, and detailed provisions for conversion, merger, sale and consolidation.
The Social Purpose Corporation, introduced in 2013 and adopted in Delaware in 2015, is substantially similar to the Public Benefit Corporation with only two material exceptions. The PBC requires a broad public purpose in addition to the specified social and/or environmental goals, while the SPC only requires at least one shareholder-agreed social or environmental goal. And the SPC requires greater accountability and reporting than the PBC. B Labs initially supported the SPC before deciding to introduce a second form in California in 2011. Ironically, when B Labs rejected the SPC in favor of the California benefit corporation, it provided an open letter with objections to five provisions of the SPC — and all five provisions are now incorporated into the Delaware PBC. Specifically, the Social Purpose Corporation and the Public Benefit Corporation:
- both have shareholder-agreed social and environmental goals that must be articulated in the charter of the corporation (instead of itemizing all goals in the state statute itself);
- do not require external validation or audit of the reporting to shareholders on the public benefit (the SPC requires that such reporting be in accordance with “best practices” while the PBC allows the board/management to simply describe the standards that have been used for reporting);
- do not have an identified “benefit director” (a feature of benefit corporations in other states) with fiduciary duties that arguably conflict with pre-existing fiduciary duties;
- do not have a “special proceeding” to enforce the social/environmental mission (both provide additional protection from liability for boards and management and rely on traditional corporate enforcement mechanisms, specifically the right of shareholder action for breach of duties and the right to remove directors); and
- both offer dissenters rights on conversion from an existing corporate entity to the new form (allowing shareholders the right to object to the conversion and take action to have their shares redeemed).
Ironically, given that the SPC is often referred to as the “benefit corporation light,” the SPC has more robust reporting requirements than the PBC — with annual reporting for the SPC (as opposed to biannual for the PBC), required reporting to the public as well as shareholders for the SPC (no public reporting for the PBC) and 8-K type reporting for the SPC if there are material changes in between annual reports (no reporting other than biannual for PBC).
Both the SPC and PBC have been designed for use by both small social enterprises and by larger public companies. The first PBC (Laureate Education) filed an S-1 with the SEC to go public in October 2015 (but has yet to list its shares and start trading). A second PBC will result from the closing of the $10.4 billion merger of Danone and WhiteWave Foods.
Finally, both the SPC and the PBC can garner support from liberals and conservatives as an “extra-governmental” solution to the current crises. They can be vehicles for economic growth and job creation in addition to advancing social and environmental goals that are approved by shareholders (as opposed to legislators) and can be in the best interests of the corporation’s long-term financial well-being. When introduced in California, the SPC was the only bill that year that received 100% support from both Democrats and Republicans in the Senate.
The Benefit Corporation
The first benefit corporation was written into the Maryland statute in 2010. Since that time, various versions of benefit corporation legislation have been adopted by 30 states plus the District of Columbia (according to B Labs as of August 2016). Note that many states use different names for the new form – including Benefit Corporation, Public Benefit Corporation (e.g. CO), Social Purpose Corporation (e.g. WA, FL) and Sustainable Business Corporation (e.g. HI). Further confusing the issue is that in some states, the benefit or public benefit corporation is a form of non-profit corporation while in others it is a form of for-profit corporation (and we are obviously discussing the latter in this article).
It is also important to note that benefit corporations vary greatly state by state and have evolved significantly since first introduced and advocated by B Labs in Maryland and Vermont six years ago. In fact, many are much more similar to the SPC and PBC than to either the first legislation or to the “model” statute promoted by B Labs. However, in general, unlike the PBC and SPC, these statutes bake “goodness” into the legislation — as a benefit corporation, a company’s board and management have a fiduciary duty to a long list of social, environmental and governance goals (borrowed from the “B Corp” certification survey) in addition to financial goals. The successful lobbying efforts of B Labs have made the benefit corporation approach far more prevalent when measured by state adoption (not by company incorporation) — although not in Delaware (or CO, WA, FL). However, it remains to be seen which policy approach will have greater positive impact on the world — companies that have affirmative fiduciary duties to selected social and environmental goals or those that are required to focus on a laundry list of objectives.
In most states, the benefit corporation provisions are an “add on” to the corporations code — not creating a new and distinct legal entity but fashioning a new designation for “normal” corporations. For many states, this has resulted in unintended conflicts between corporate law and benefit corporate law that apply to the same entity. For example, most state benefit corporations have a “benefit director” responsible for oversight and accountability with respect to the public purpose and a requirement of independent verification (which either by design or by default comes courtesy of B Labs for a fee). Corporate law experts often cite a recurring issue state-by-state between the conflicting duties of a benefit director whose new duties must be viewed in light of his or her pre-existing fiduciary duties of care and loyalty to the shareholders. They also point to issues with the “enforcement proceeding,” a feature of most benefit corporation laws, which can yield increased risk and liability for boards and management. It is therefore not a surprise that many benefit corporations have difficulty securing director and officer insurance.
Provided that you have waded through the detail on corporate form above — which is likely at odds with the articles and press releases written by biased advocates of one form or another (many of whom benefit financially from promotion of a certain form) — what does all of this mean for both private social enterprises and for public companies? Should boards and management consider either incorporating as — or converting into — one of the new corporate forms?
Let me stress that I believe requiring all corporations to change form — imposing fiduciary duties on boards and management in favor of shareholder-agreed social and environmental goals — is critical as a tool to address issues ranging from social inequality to climate change. However, we do not yet have an agreed form (much less an agreed name) for the new corporate form — although most experts (myself included) agree that the Delaware Public Benefit Corporation is currently the best model. Further, the weighting of fiduciary duties has not yet been tested in court. In other words, if a company is increasingly profitable in its operations and successful in emphasizing the agreed social or environmental goals, there is little risk of litigation. If, on the other hand, a company becomes unprofitable and therefore must make choices between adherence to the public purpose and financial stability, risks will increase.
So, some concrete advice on whether to adopt a new corporate form (to “B” or not to “B”):
- If the good or service that your company produces has a positive social or environmental impact in and of itself (e.g. solar, education, healthy school lunches), there is much less risk associated with the “weighting” issue above and therefore incorporation/conversion into a new form. For these companies, there is often no trade-off between high profits and high positive social/environmental impact.
- If the good or service that you produce is output-agnostic (e.g. social media application, coffee tables, baseball bats), then you must consider the interplay between the public purpose and your profitability before you convert. This does not necessarily mean there is a trade-off. Positive focus on ESG goals could increase profitability for the maker of baseball bats that emphasizes employee relations and contributes financially to the building of little league parks in underserved communities.
- If you are a start-up and introducing an innovative new product with a new management team, the new corporate form may be one “new” too many. If you and your board really want to try one of the new forms, I suggest waiting 6-18 months after incorporation, possibly asking your investors to agree to convert to a new form (conversion is easy) after certain milestones are met.
- In all of the cases above, it is critical that you not only get your board to embrace the new form, fully understanding the risks and rewards (not just the latest PR spin), but that your investors are fully comfortable as well. In the early stages, commitment to convert ahead of investor support can significantly increase the likelihood that your venture will fail.
- Your board and investors will need to understand not only the impact of the new fiduciary duties on daily operations but also exits — IPOs and sale transactions (although there are more alternative forms of exits being utilized by social enterprises). We do not yet know how the market will price these new entities (although we are waiting for two concrete examples — Laureate Education and Danone/WhiteWave). There is some evidence that the market will view the public purpose as a net positive, specifically for companies where the product or service produced is good for the environment, community or society. However, this belief faces strong headwinds from mainstream capital markets that have long held that “impact” or focus on social/environmental purpose will necessarily generate lower returns.
- Finally, if your company — with board and shareholder support — is serious about embracing a public purpose and having a positive impact, there are many very effective tools to implement such goals for traditional corporations.
The Power of the Corporate Form
So how can corporate form be such an effective tool for change? And why do we need the new forms? If you believe the statements that I made at the start of this article, then why can’t we just rely on existing forms of corporation, limited partnership and limited liability companies to solve the world’s problems? The short answer is that we can and should. Arguing that all corporations have to convert into new corporate forms in the short-term is essentially letting Corporate America off the hook. If we continue to stress that boards and management have a fiduciary duty solely to maximize short-term shareholder profits, we will miss out on enlisting the most powerful force (multinational corporations) to address the crises that are crippling our country and world. More importantly, we will be doing them a disservice. The combination of climate change, challenges with energy, water and other natural resources and population growth is leading to a world that in 10 or 20 years will be vastly different than it is today. Corporations will have to transform their operations to remain competitive. Ignoring these ESG factors — particularly the risks associated with climate change — is just plain bad business.
I often cite Bob Litterman, formerly of Goldman Sachs and now of Kepos Capital (who does not know that I am a groupie), in describing the intersection between climate risk and business. He explains that we are all in a car headed for a cliff. Most people recognize that the (or “a”) cliff is coming, but no one can confirm with certainty exactly when we will reach it or how precipitous the drop will be. The economic models underlying the operations of all of our corporations (and government policy) are premised on the theory that, if such cliff exists, we will be able to gradually apply the brakes before we commit suicide. However, in fact, because of the unknown variables, it is probable (if not a certainty) that we will need to slam on the brakes. The companies that start modeling the risk associated with the cliff will have a much better chance of avoiding or surviving the fall and thriving through the next several decades.
Unfortunately, for many reasons — including the difficulties associated with assessing the risk, the desire to maintain the status quo, compensation and tax structures — it is taking longer for corporations to appreciate how ESG factors will impact operations. And some of the issues that we are facing today, particularly those borne of climate change and social inequality, require solutions that can generate more immediate results.
We need the new corporate forms (and particularly agreement and promotion of one preferred form) so that we can require the major multinational corporations to identify and actively pursue social and environmental goals instead of merely considering material non-financial factors. We need the new forms so that the next BP oil spill is not just around the corner. We need the new forms so that shareholders can bring actions against large drug companies if they raise the prices of EpiPens, denying access to the general population.
We need the new forms so that “Black Lives Matter” can translate into educational opportunities for the underserved in our society. We need the new forms so that we can increase the number of women and minorities on boards and in management — and thereby improve productivity — of corporations (and law firms). We need the new forms so that we can hold the managers of privately owned prisons accountable for recidivism rates.And most of all, we need the new forms so that the managers of our corporations are required to look further into the future and take actions to plan for climate change and cybersecurity breaches and artificial intelligence and changes in the labor force — even if such actions are at the expense of short-term shareholder profitability.
Corporate form rocks. And, more importantly, it has the power to effect the change that we desperately need.
 Formerly named the Carbon Disclosure Project.
Susan Mac Cormac is a partner in the Corporate Department of Morrison & Foerster’s San Francisco office. She serves as co-chair of the Clean Technology + Alternative Energy Group and Private Equity and Venture Investment Practice. Susan has extensive experience representing start-up to late-stage private companies primarily in the clean technology or sustainable space.
In recent weeks, investors have considered everything from a relatively uninspiring earnings reporting season and the dominance of polarizing forces in the political economy, to growth differentials in developing vs. developed markets and the “responsible” use of Pokémon Go. In this month’s edition of Cornerstone Journal of Sustainable Finance and Banking (JSFB), we consider “Explorations and Aspirations” with an array of subjects ranging from “smart contracts” in the blockchain to empowering investors with sharper measurement tools. And ultimately, we hope to go beyond “sustainability,” and move towards value creation and regeneration through capitalism.
• Our global sector research team methodically looks at ways to quantify the risks and opportunities of ESG issues for specific industries, sectors and regions, along with two reports on food safety, investigating the state of regulation and technology throughout the supply chain.
• We also offer an excerpt from our new guide to voting proxies by John Wilson, Head of Corporate Governance, Engagement and Research, intended to aid investors who want to explore how they can become “A Voice in the Boardroom.”
• Drawing from industry voices: Brent Bergeron of Goldcorp offers a materiality analysis mapping key issues and strategies in gold mining to the UN Sustainable Development Goals; David Lepper of IPSA Capital explores the challenges ahead for maritime finance; Karla Canavan of Bunge discusses enzyme supplementation to enhance the nutritional value of animal feed, and the potential for combating human malnutrition, while Gugu McLaren of Discovery Ltd. takes a shared-value approach on using behavioral assessments to shape the insurance industry.
Finally, Jon Lukomnik of the IRRC Institute wonders “Why is everyone angry at Wall Street?” as he ponders the misalignments between the financial system and the needs of the real economy. He brightly concludes: “Finance provides neither food nor shelter, but without it, we could have neither, at least not at a scale appropriate for the modern world.”
Highlights from the Summer issue:
Regional and Sector Strategy: June / July Updates
By Michael Geraghty
An Atypical Analysis of Industry Risks
By Michael Geraghty
Brexit Fallout: Global Uncertainty to Weigh on Multiples
By Michael Geraghty
A Voice in the Boardroom
By John K.S. Wilson, Caleb Ballou
Our Response to the SEC on Sustainability Disclosures
By John Wilson & Cornerstone Capital Research Team
Food Safety: In a State of Transformation
By Michael Shavel, Sebastian Vanderzeil
Tracking Our Thesis on Food Safety Opportunities: A Look at Neogen
By Michael Shavel, Sebastian Vanderzeil
Exploring the Challenges in Maritime Financing
By David Lepper, IPSA Capital
Bitcoin & Ethereum: Exploring How Smart Contracts Work
By Chris Burniske, ARK Invest
Enhancing Food and Feed to Boost Nutrition Efficiency
By Karla Canavan, CAIA, Bunge
Decision-Making in a Context of Uncertainty
By Felicitas Weber, KnowTheChain
Materiality Fuels Aspirations for Future Generations
By Michael Kinstlick, SASB
Exploring Ways to Close the ESG Info Gap: Perspective from Canada
By Catherine Gordon, SimpleLogic Inc
Corporate Sustainability Through Shared Value and Innovation
By Gugu McLaren, Discovery Ltd.
Aspiring to the Gold Standard in Mining Management
By Brent Bergeron, Goldcorp
Why Is Everyone Angry at Wall Street?
By Jon Lukomnik, IRRC Institute
Forest Ecosystems and Climate Uncertainty: Investment Implications
By Sebastian Vanderzeil & Dr. Bruce Kahn, Sustainable Insight Capital Management
Access the full edition here.
Human ingenuity has, over the centuries, created our extraordinary global economy. Technological progress affords the average citizen of highly developed (i.e., G7) economies a standard of comfort unavailable to even the wealthiest mere decades ago. And the market satisfies evolving consumer wants and needs with supply chains that move people, capital, goods, and services across borders at ever-quickening paces. People around the world are now clamoring to join the middle class. But academics, policy makers, and leaders in the business and investment communities are increasingly realizing that enabling those lifestyles without significant changes in our production systems could risk our planet’s ability to support us.
As those billions express their aspirations to join the integrated global economy, we who have already enjoyed the fruits of progress must set our sights higher still: ensuring that future economic growth is sustainable and meets “the needs of the present without compromising the ability of future generations to meet their own needs.” Delivering the sustainable economic growth necessary to enable those global citizens to participate fully in a stable, middle-class lifestyle is not a pipe dream, but it will require long-term vision from the economic leaders of today.
Fortunately, both asset owners (that is, providers of investment capital), investment managers, and corporate decision makers have realized that sustainability is a critical consideration in planning for the future.
Asset owners, particularly Millennials, aspire to invest their savings in a way that fulfills their values while earning the return that will enable them to achieve the things all savers want: to pay for their children’s education, fund their retirement, and build a nest-egg for their other needs. Responding to this demand, investors have begun shifting considerable assets into sustainably driven strategies. In 2014 more than one out of six (18%) of investment dollars in US equities were devoted to sustainable strategies, doubling the percentage from only a few years prior.
Corporate leaders also aspire to devote resources to those aspects of their business that will build long-term value. They increasingly recognize that sustainability is not an afterthought, but rather is integral to their business. In McKinsey’s 2014 Global Survey on Sustainability, the percentage of CEOs who made sustainability their #1 priority has gone from 3% to 13% since 2010. Further, 43% of responding organizations address sustainability because it “Aligns with company business goals, mission, or values,” more than double the percentage from 2010 (21%).
However, investors and senior management still lack the tools to fully integrate sustainability into their investing and management activities. Business leaders properly have the sense that capital investments in sustainability issues may not yield results and investors have seen mixed outcomes from values-driven investing. Recent work at Harvard Business School used SASB’s industry-specific methodology to reveal that the materiality of those sustainability efforts provides the missing piece of the puzzle.
In HBS working paper 15-073 “Corporate Sustainability: First Evidence on Materiality (2015),” Mozaffar Kahn, George Serafeim, and Aaron Yoon applied the SASB methodology (controlling for Fama-French and industry effects) to 45 industries across 6 sectors and showed significant outperformance, in both market returns, and revenue and income growth, to companies that properly distinguish between material and immaterial issues and invest only in the former. In a forthcoming follow-up paper, “Shareholder Activism on Sustainability Issues,” Jody Grewal, Serafeim and Yoon suggest that shareholder proposals on material issues lead to improved performance while those related to immaterial issues may actually be value-destroying to the extent that they push management to devote resources (capital, etc.) inefficiently to sustainability projects that don’t impact business outcomes.
SASB, the Sustainability Accounting Standards Board, has developed standards and metrics for companies to report on only those sustainability issues that are material to investors, and for investors to get the decision-useful information they need to draw meaningful conclusions around performance on these critical issues. Focusing on materiality aligns the aspirations of investors to allocate capital to organizations that meet their criteria for sustainability with those of business leaders to build companies that create long-term value, thereby maximizing the chances of fulfilling the aspirations of emerging consumers to participate fully in global wealth.
Michael Kinstlick is the Head of Standards Setting Organization for the Sustainability Accounting Standards Board. He oversees research, analytics, consultation, and codification and maintenance of the SASB standards.
 82% of HNW Millennials (vs 45% HNW overall) are interested in sustainable investing. (“Investing in the Future: Sustainable, Responsible and Impact Investing Trends,” Morgan Stanley Wealth Management, April 2016: http://www.morganstanley.com/ideas/sustainable-investing-trends] See also: “Rise of the Millennials (and the impact on values-based investing)” from Standard Life, October 2015: http://www.standardlifeinvestments.com/WP_Rise_of_the_Millennials/getLatest.pdf
 Forum for Sustainable Investing.
 McKinsey Global Survey on Sustainability 2014: http://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/sustainabilitys-strategic-worth-mckinsey-global-survey-results