Companies that fail to heed community attitudes face real challenges

Corporates ignore the push for ESG behaviour at their peril.

The burger choice of the future? A plant-based Whopper

In 2018, clean-tech darling Nikola posted a video of its new electric truck driving down a remote stretch of road, framed by dramatic music and a setting sun. The caption read: “Behold, the 1000 HP, zero-emission Nikola One semitruck in motion.”

The video promised something with the potential to up-end an industry. Investors shared the enthusiasm. In June last year Nikola was briefly more valuable than Ford, despite yielding zero revenue. But the video was fake. The company towed the truck to the top of a hill and filmed as it rolled down.

Nikola’s goal is “to revolu­tionise the economic and environmental impact of commerce as we know it today”. It’s a lofty ambition, one shared by a growing number of entrepreneurs, business leaders and investors hoping to make companies more sustainable, inclusive and socially responsible.

The movement to reform capitalism has seen a wave of converts in recent years. The Business Roundtable, which represents chief executives of the US’s largest companies — from Comcast to Coca-Cola, Walmart to Wells Fargo — issued its Statement on the Purpose of a Corporation in 2019. In so doing, it joined a broad coalition that wants capitalism to serve workers, customers and the environment in addition to shareholders. Investors with $US100 trillion ($129 trillion) of assets under management have signed on to the UN Principles for Responsible Investment, which advocates for a greater focus on environmental, social and governance issues in investing.

As investors who helped launch Bain Capital’s social impact fund, we applaud the commitment to reorient business towards the greater good. But we should approach the latest commitments to ESG with scepticism.

What actually happens when investors with $US100 trillion of assets commit to investing more responsibly? The answer is not much — at least so far.

According to research last year, investors who signed on to the UN principles did not improve the social and environmental performance of their investments. Similarly, signatories to the Business Roundtable statement have performed no better than other companies in protecting jobs and worker safety during the pandemic.

When companies offer insincere commitments or over-promise transformation, they risk undermining the real work being done by others. Most people struggle to differentiate bad-faith recycling claims from substantive actions to eliminate waste, such as Unilever’s commitment to cut its plastic use in half or Philips’s to repurpose all of its used medical systems. Or to differentiate temporary payments for workers during the pandemic from permanent improvements, such as Costco’s announcement it would raise baseline pay to $US16 an hour, more than double the US national minimum wage.

Token programs and philanthropic side projects erode the public’s trust and invite backlash against the reform movement itself. How do we ensure that these companies follow through on their commitments?

We suggest three ways to align the work of corporations with creating a more sustainable, inclusive and prosperous economy.

First, companies should be required to report publicly on their social and environmental impact with clear, standardised, easy-to-understand metrics, such as carbon emissions, investments in training programs and proportion of workers earning a living wage. Currently, companies can decide what — if any — social and environmental data to report. And what they do report is often self-serving. Companies publish their diversity policy but decline to release the actual makeup of their workforce. Or they’ll report on their workforce but not the pay disparity between groups.

A century ago, financial reporting underwent a process to become transparent, standard, mandatory and audited. This created a sense of accountability that social and environmental commitments desperately require today.

There was progress on this front in September last year, when the world’s four largest accounting firms recommended a common set of environmental, social and corporate governance metrics for all companies to use as part of their financial reporting processes. Sixty-one companies have committed to these metrics, including Unilever, PayPal and Sony.

Second, we all need to hold corporations accountable. The latest commitments from business leaders to “do well by doing good” have centred on supporting workers, responding to racial injustice and fighting climate change. We have the power in our roles as consumers, employees and investors to hold them to these commitments and demand more.

Consumers now expect companies to take a stand on social and environmental issues. And companies respond. Following the success of Burger King’s Impossible Whopper, which features a vegan patty with a tenth of beef’s carbon footprint, McDonald’s announced its own “McPlant” burger last November. In January, General Motors pledged to sell only zero-emission vehicles by 2035. United Airlines has committed to reducing 100 per cent of its greenhouse gas emissions by 2050. These are consumer companies that increasingly rely on matching the values of their customers to survive.

Employees are making similar demands. Tech companies are seeing workers organising, with early unionisation pushes at Amazon and Alphabet. This follows employee protests and walkouts in recent years against sexual harassment, migrant detention and discrimination. Companies seeking top talent need to understand what that talent values. For younger generations, that’s often work with a deeper purpose than just profit.

Investors have some of the greatest power to hold companies accountable, especially as ESG investing has grown in popularity. Despite delivering impressive financial performance, the chief executive of Rio Tinto was forced out by shareholders last year after the public discovered the mining company had destroyed an ancient Aboriginal site in Australia.

Third, companies should consider putting their purpose into their charter and becoming benefit corporations. This new breed of companies is explicitly balancing profit with a stated public benefit, such as improving its customers’ health, creating good jobs or restoring ecosystems.

There are more than 3500 certified “B Corps”, including consumer brands such as Patagonia and Seventh Generation, along with many smaller companies funded by social-impact investors. In 2019, shareholders at French food giant Danone voted to convert into the French equivalent — an enterprise a mission — with the stated purpose to “bring health through food to as many people as possible”. As evidence of the connection between a company’s social and environmental impact and its financial performance continues to grow, companies ignore these trends at their peril. The American public is already distrustful of big business and only half of American adults under 40 view capitalism favourably — down from two-thirds in 2010. Companies that don’t adapt will find themselves at odds with their customers, employees, investors and regulators.

Nikola, the electric truck manufacturer, presented its latest technology at an industry conference in October. It now has to prove to a sceptical public that early optimism in the company was justified. As the risk of backlash grows, this time — for ESG and for Nikola — the fight will be uphill.

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Michael O’Leary and Warren Valdmanis are the authors of Accountable: The Rise of Citizen Capitalism. Copyright 2021 Harvard Business Review/Distributed by New York Times Syndicate