How to Measure Corporate Performance Like People and Nature Matter

[Music]

for a quarter of a century now

we’ve been hearing declarations by

politicians business leaders thought

leaders that what we need

is a green economy a circular economy

but instead we are still hurtling into

climate breakdown increasing

intensity of storms and cyclones floods

and drought increasing wildfires

rampant deforestation why is this

happening

i think this is because we have paid too

little attention to who

actually drives the economy these are

not isolated problems that i describe

here

there’s a pattern they are driven by the

impacts of economic activity

and two-thirds of the economy is private

sector in the u.s it is actually

three-fourths

in terms of gdp and jobs the main driver

in the private sector is the large

multinational corporation so the

question that begs to be asked is

can today’s corporation deliver

tomorrow’s economy

let’s look at it what do we have today

what i call corporation 1920 the old

style corporation

which is in pursuit of size because

volumes have to be increased

for profits to be increased it’s the big

and beautiful multinational cooperation

model

they are international arbitrages for

excellence they arbitrage cheap

resources from where licenses are

easiest like africa

skilled labor where it is the cheapest

india bangladesh

manufacturing subsidies from wherever

they are available malaysia korea india

and of course consumer demand from where

it is richest usa europe

the brics countries high net worth

individuals

they are also excellent lobbyists

lobbying has been used

to obfuscate reality for decades on end

for example fossil fuels and climate

change denial

four decades of denial for example

leaded gasoline’s health impacts

six decades of denial even though this

had been researched and established

at yale and harvard in the 1920s

another feature is unlimited leverage

we have been ignoring lessons from four

major recessions which were driven by

the excessive leverage

misused leverage including the asian

debt crisis and the mortgage derivative

crisis of 2008.

a company’s ability to leverage without

limits creates companies that are too

big to fail as they call it

and today it’s not just banks that are

too big to fail you need

banks to survive for clearing and

settlement but today we have car makers

which are too big to fail like general

motors

insurance companies like aig and even

airlines which we are talking about

now thanks to the corvid crisis and and

its recession

and of course how can i forget too big

to fail hedge funds would you believe

like ltcm whatever happened to this

concept that markets are meant to punish

the misallocation of capital the fourth

feature is unethical advertising

a 24x7 barrage of persuasion half truths

and lies

which essentially convert human

insecurities into wants

wants into needs needs into demand

demand into production

and profits advertising executives will

tell you that oh

we are ethically neutral i don’t

understand what that means

you can either in my opinion be either

ethical or unethical

all of this leads to the negative

externalities of the private sector

which are huge

and we’ll talk about that but let’s

first look at what’s the alternative

there is an alternative it’s called

corporation 2020.

a goal aligned business a business

who’s a part of a stakeholder capitalist

world and not just a shareholder

capitalist world

it was henry ford himself who said that

a business that makes nothing but money

is a poor business

recently the us business roundtable a

group of leading

corporate executives at its last summit

redefined its purpose of the corporation

to be

as pushing an economy that serves all

citizens

and this theme was mirrored also at the

world economic forum in davos this year

so we can have corporations which are

also custodians of natural capital

they exercise care they measure and

reduce negative environmental impacts

they minimize damage to natural capital

we can have corporations which are

builders of community

communities of employees suppliers

customers and even competitors

and once one such community has been

built 1.5 million housewives

by a company called matura in brazil

basically a leading cosmetics and

personal products maker

which sells through these housewives we

can have companies which are

builders of human capital institutes

like infosys hiring and training 30 000

young people every year in this campus

in mysore

it’s an example of a human capital

factory there are many like this in

india

generating billions of dollars of

positive externalities

skilled professionals taking their new

skills learning and their brand

and basically adding value to themselves

into society around the world

how do we get from corporation 1920 to

cooperation 2020

i have a theory of change that’s been

developed and worked upon by my

colleagues that just myself and many

others

it’s a complex problem so it will need

complex solutions

there are actually four layers to the

problem excessive demand

under price supply resource depletion

and losses in public capital and these

are all at the macro level

at the economy wide level but if you

notice these are being driven

by the micro level in other words the

cooperation level because it is the

marketing and advertising of

corporations that is driving excessive

demand

the leverage without limits of

corporations and also

the lack of pricing of resources

properly which is driving under price

supply

and of course underpriced resources also

lead to resource depletion

then we have externalized costs leading

to underpriced supply as well as public

capital losses

all of these micro level problems

however do have micro level solutions as

well

for instance in terms of marketing and

advertising

advertising accountability can be

achieved look at the european cosmetics

association which has

rules and regulations against the use of

sex or children

in its advertising leverage can be

contained through capital limits and

indeed through consortium limits as

we’ve had in india

resource taxations can be used look at

norway they’ve had a resource tax on

oil extraction basically a 79 resource

tax

and despite that oil companies still use

their their oily fields

and finally we can measure and disclose

externalities and that’s

what i’m going to describe to you how

this is a big problem

corporate externalities are the biggest

free lunch in human history

people like truecast and my company just

have measured and valued them and the

answer is in trillions of dollars

seven to 11 trillion dollars for primary

sector and for the entire corporate

sectors however

today’s externalities are tomorrow’s

risks and day after tomorrow’s losses

and this is why i’m optimistic

corporate c-suite executives should

realize this and investors are beginning

to realize this

however everyone is searching for

information searching for impact

information

and they don’t have it you cannot manage

what you do not measure

the c-suite should care about this

intensely not just because it’s the

right thing to do but because it’s good

for the company

because if you manage your supplies

carefully

and reduce energy use and reduce

resource use you will reduce

costs if you source your resources and

supplies from where it’s safe for

society

where you’re not going to get bans

imposed or or carbon taxes or pollution

taxes imposed

then you will reduce risk today’s risk

is tomorrow’s cost

if you develop sustainability as a core

theme in your company you will create a

culture of innovation as young people

will

step up and they will try to find

innovative solutions

for products and for processes and

finally you will improve brand value

and all of this will lead to you being

listed amongst the potential

equities and and which can be purchased

by esg funds and by sri funds socially

responsible investments

so there are benefits to being

sustainable and getting there

is something that investors do care

about if we look at this graph out here

you’ll see that the volume of debt and

equity assets

that have been examined and filtered

through some lens of sustainability or

the other

over the last decade has increased from

13 trillion in 2012 all the way to 30

trillion

in 2018 and i believe now the number is

going to be 45 trillion

we do need to start however measuring

corporate impacts to be able to inform

the corporation and to inform the

investor and this is also possible

it’s a question of broadening the

landscape which we measure today we just

measure produced capital basically

factories buildings

cash and the value of those assets to

our shareholders

and we report ifrs style year by year

but we are just measuring produced

capital in private ownership we are not

even measuring produced capital owned by

communities

which we help create through csr

programs or produce capital which we use

which is public

roads and bridges and we are certainly

not measuring human capital

that can be created and used and we are

definitely not measuring natural capital

impacts

and what binds it all together social

capital the rules and regulations the

institutions in society our impact on

those

no measurement this is the problem we

need to start measuring the entire

landscape of capitals

for performance to be measured properly

and this can be done here’s an example

done by my company

a so-called impact weighted account or

an integrated profit not account

showing the impacts along the four

capital classes aggregating them

and then also showing how it compares

with their competitors

essentially doing a survey of

competitors and also breaking up these

impacts

into the 17 sdts showing to what extent

which sdg is going to be hurt

or aided by the actions of your company

if all this is possible and it’s

happening

why doesn’t it scale why can’t we speed

this up

my friends that’s because we need a

movement for this we need you and

companies and executives

to band up and basically push for change

and the change will have to be in

regulations and awareness both

this change will enable cooperation 2020

to be seen as the greater value

generator

to society to be seen as a company that

truly performs

cooperation 2020 then will become the

dominant model not the old-style

cooperation 1920

and that in turn will give us the green

and equitable economy of permanence