Reprinted from GreenFin Weekly, a free publication. Subscribe right here.
“Make the enterprise case” is a key aphorism in sustainability, and lots of of you pricey GreenFin Weekly readers have lengthy been preventing the nice combat as case-makers.
Underpinning this case is a canon of credible analysis, a lot of which has been delivered by George Serafeim at Harvard Enterprise College, who has been doing ESG earlier than it was cool (and even known as “ESG”).
Importantly, Serafeim has been pondering the important questions and penning equally important analysis papers to assist a core tenet of sustainability for issuers and traders alike. Goal and revenue usually are not mutually unique, he says, however are deeply intertwined and interdependent.
I’ll not have learn all that was assigned in graduate college, however Serafeim’s work was key to equipping us college students of sustainable enterprise to go forth and be efficient. Serafeim has teased out measurable and significant solutions to questions on the middle of ESG: Are objective and revenue substitutes or complementary? What are the technological, societal and market forces reshaping this relationship? What can all of us do to raised hyperlink objective and revenue as entrepreneurs, managers, customers, workers and traders?
We must always not assume that by having extra disclosure we can attain consensus on what ‘good’ ESG efficiency appears to be like like.
I not too long ago checked in with him on a few of these themes, that are additionally coated in depth in his forthcoming ebook, “Goal + Revenue: How Enterprise Can Carry Up the World.”
I like to recommend perusing Serafeim’s treasure trove of findings on sustainable administration, and I hope you take pleasure in his ideas shared right here, which have been edited for readability and size.
Grant Harrison: Your analysis has knowledgeable a lot of the muse for the enterprise case for sustainability. What mistranslations, misunderstandings or different notable mismatches do you see crop up between educational analysis and the personal sector’s implementation of sustainability practices?
George Serafeim: The largest one is that it’s straightforward for firms to drive worthwhile sustainability outcomes. A core message of my new ebook is that scaling up worthwhile sustainability outcomes for a corporation is a tough administration and governance course of that includes transformation of tradition, processes and incentives.
And, in lots of circumstances for the enterprise chief, it includes assuming private profession threat, as not all transformations succeed. So, the thought that you may rent two or three folks in a sustainability division and publish a sustainability report and that someway you may have created worth is simply not true. The identical is true for traders: Choosing up an ESG ranking that you just simply lay over your funding technique of portfolio formation is unlikely to offer a lot worth.
Harrison: Your new ebook interrogates whether or not objective and revenue are in battle, or whether or not each could be achieved concurrently with the fitting mindset and instruments. Two questions therein: First, are you able to outline objective on this context? And second, if objective and revenue usually are not in battle, what are the fitting mindsets and instruments wanted to appreciate a transition to a clear and simply financial system?
Serafeim: The way in which that my colleague Claudine Gartenberg and I’ve operationalized and measured objective in large-scale empirical evaluation is thru worker beliefs on the which means and significance of their work. So, objective is just not phrases on the partitions of the headquarters or within the speech of the CEO however really how it’s felt and subtle amongst workers inside a corporation.
Why workers? As a result of they’re arguably the closest to having details about what the group really represents and the way it behaves. So then, to your query, what’s the connection between objective and the sustainability transformation?
In a paper with my colleague Rebecca Henderson, we argue that purpose-driven organizations could be useful in a number of methods. First, they’re extra more likely to be those to imagine the varieties of market and operational dangers that might speed up the adoption and diffusion of sustainable practices and merchandise. Second, they’re extra more likely to measure the sustainability outcomes they pursue and in consequence unfold transparency available in the market, which makes detection of firms that have interaction in unsustainable practices extra possible. And third, they’re extra more likely to ask for the sorts of rules and insurance policies that may promote higher sustainability outcomes.
Harrison: In your 2015 article titled “Company Sustainability: First Proof on Materiality,” you, Mozaffar Khan and Aaron Yoon discovered that “corporations with good efficiency on materials sustainability points considerably outperform corporations with poor efficiency on these points, suggesting that investments in sustainability points are shareholder-value enhancing.” What are your ideas — constructive, constructive or in any other case — on the present state of the ESG rankings business?
Serafeim: The very first thing to know is that the majority measurements are imperfect. Credit score scores are imperfect scores of a person’s credit score profile. Credit score rankings are imperfect assessments of an organization’s creditworthiness. Most of the metrics that physicians take for us all, resembling BMI, are additionally imperfect proxies of our well being situation. Measurement is simply intrinsically laborious. If it was not then accounting requirements wouldn’t change each few years.
Within the case of ESG rankings, that is even tougher as a result of this can be a comparatively newer subject of examine. After I began working on this area there have been virtually no knowledge. So now folks get upset about ESG rankings however at the least there are some knowledge. That is good as a result of we now have a base upon which we will construct off and enhance. As I’ve mentioned many instances, in my opinion we have to deal with measuring and valuing outcomes. That is what we now have been doing on the Affect-Weighted Accounts Venture at Harvard Enterprise College.
Additionally, we should always not assume that by having extra disclosure we can attain consensus on what “good” ESG efficiency appears to be like like. In a paper of mine with my colleagues Dane Christensen and Siko Sikochi we discovered that actually ESG ranking disagreement is positively related to ESG disclosure. The conclusion we draw from that’s that as a society we nonetheless haven’t developed the foundations and norms of tips on how to assess what “attractiveness like.” Training might be a vital a part of this course of.
Harrison: An Axios ballot final 12 months discovered that 54 % of Gen Z adults within the U.S. have a “unfavorable view” of capitalism, and the variety of 18- to 34-year-olds with a “constructive view” of capitalism fell from 58 to 46 % since 2019. The variety of younger Republicans with a positive view of capitalism even dropped, from 81 % in 2019 to 66 % in 2021. Think about you may have the stage and rapt consideration of the above teams. What do you inform them?
Serafeim: I like enterprise. I like the thought that you may come along with a couple of different folks and create a tremendous product that solves anyone’s downside, small or giant. Or, that you may create jobs and supply significant change within the means of individuals to offer for his or her households. And the extra profitable your merchandise are the extra revenue you make so you find yourself scaling up the operations and merchandise permitting extra prospects to entry the product.
So, for me, enterprise is without doubt one of the most wonderful establishments in society. However the query is why we do what we do. The extra I’ve drilled into understanding some wonderful successes that folks have had in enterprise it comes again to objective. Waking up within the morning due to that objective and revenue being the result. I’d encourage everybody to search out that objective, that which means that makes them get up within the morning and go to work, and take a look at to consider fixing actual issues that folks have via the agility and progressive capability that characterizes enterprise.
Harrison: Tapping into your creativeness once more, you might be employed for the fictional position of chief sustainability officer of the S&P 500, overseeing each agency within the index. The job is on a six-month contract. What could be your priorities, and the way would you go about executing them?
Serafeim: I’d go and communicate to folks in all enterprise items and features. I’d determine what their most important issues are and what they assume could possibly be probably the most important options. I’d then create a matrix between options and issues and deal with those that I could possibly be a part of the answer from a sustainability perspective. I’d prioritize those that I might see myself, creating some fast wins to construct credibility contained in the group as somebody that creates worth after which attempt to scale up options from there. I’m a giant believer of the concept constructive momentum builds on constructive outcomes, and from there you create larger and greater options.
