The Business of Business is Business- Really?
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The Business of Business is Business- Really?
Karen Wendt, SFTL President & expert in responsible, impact and sustainable investing
https://swissfintechladies.ch/sftl-authors/
The Business of Business is Business- Really?
At the World Economic Forum in Davos in 2011, Berrie Wilkinson, an analyst with the consulting firm Oliver Wyman, presented a report that said, "Despite all the rhetoric about the new financial order and all the improvements that have been made, the old risks remain.
Shareholders, bondholders and bank management still have incentives that drive them to extensive risk-taking." "The business of business is business", Milton Friedman once replied when asked what business can contribute to the welfare of a society (Friedman 1972). In his view, businesses contribute much to the welfare of society through the production of goods and services and the creation of jobs.
But finite resources, climate change, loss or reduction of biodiversity, decline in ecosystem services, drilling in the Arctic, poor working conditions in many markets, violations of human rights in corporate activities, social unrest in the implementation of infrastructure projects, commodity speculation and the issue of access to public goods such as drinking water, forests, recreational areas have redefined the question of corporate responsibility. Financial institutions are particularly challenged here as intermediaries, especially when it comes to the core of Milton Friedman's theory. Principle - agent theory falls short.
It needs to be extended and complemented by a broader more comprehensive multi-stakeholder approach with a focus on creating positive impacts. Thus ESG emerged as an attempt to complement existing business models with governance and environmental and social questionnaires. Today, at the latest since Aggegrate Confusion, we know that this approach has failed. The ratings of the two largest ESG rating providers have a correlation of 0.2, i.e. they arrive at completely different assessments of the ESG risks and impacts of a company.
Ideally, these rating models could only assess the quality of a company's ESG risk management anyway, if at all. As we can see, not even this works in a consistent way. For the approach also falls short. Coca Cola has been in the Dow Jones Sustainability Indices for decades, as one of the most responsible companies. But they still produce far too sweet lemonade, which they sell in plastic bottles.
The situation is different when it comes to impact investing. Here, a social problem has to be solved with market-based methods. This means that the business strategy, the products and the entire company are geared towards solving this problem. You can't just take sustainability out of the product or supply chain again, because then the mission and the strategy of the company has failed. The problem with many of these impact approaches for investors, however, is that impact has to be measured. Investors want to know if the company is generating the risk-adjusted return that is par to the market return and delivers a measurable quantifiable impact contribution. And this is precisely where measurability often fails.
The data situation is still quite thin. Impact is sometimes easily comparable (tonnes of CO2 saved), sometimes not, and the effects, e.g. in urban development, may only appear in measurable form after 10 years. This is why many high net worth individuals, some family offices, crwodfunders and platforms are currently involved in impact investing, but institutional investors are still holding back. This is also the problem with the many social stock exchanges and impact exchanges that are springing up. Building the platforms is technically possible, but the liquidity is lacking without the institutional investors.
https://www.springer.com/series/15807/books
https://link.springer.com/book/10.1007/978-3-031-31297-7
https://link.springer.com/book/10.1007/978-3-030-99720-5
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Karen Wendt
President of SwissFinTechLadies