The drivers this time around, we argued, include the obsolescence of an increasingly global economic model that has served us fairly well since World War II, coupled with an accelerating shift of at least some parts of the global economy to Asia, and particularly to China. But we also spotlighted a growing interest in what some call “sustainable capitalism” – an appetite for change that is so far very poorly represented in the UN-led climate conferences in places like Copenhagen and Durban.
For an idea of what this might mean in practice, it will be well worth taking a look at the “Manifesto for Sustainable Capitalism”, due for launch shortly by Generation Investment Management—and which has already been spotlighted in The Wall Street Journal by Generation’s founders, former US vice-president Al Gore and former Goldman Sachs investment banker David Blood.
Unfortunately, as we noted in 2009, history suggests that a prolonged downturn is needed if we genuinely want to burn out the old economic mindsets, business models and technologies, and open up the space for new ones better adapted to the conditions of the twenty-first century. Now, as we enter 2012, it is worth taking stock and considering whether there is much evidence, either way, of progress towards the Phoenix Economy.
“We are once again facing one of those rare turning points in history when dangerous challenges and limitless opportunities cry out for clear, long-term thinking,” Blood and Gore argue in their Wall Street Journal article. “The disruptive threats now facing the planet are extraordinary: climate change, water scarcity, poverty, disease, growing income inequality, urbanisation, massive economic volatility and more. Businesses cannot be asked to do the job of governments, but companies and investors will ultimately mobilise most of the capital needed to overcome the unprecedented challenges we now face.”
But what do they suggest business leaders – what we might call the Global C-Suite – do next? They recommend “five key actions for immediate adoption by companies, investors and others to accelerate the current incremental pace of change to one that matches the urgency of the situation.”
First, they encourage CEOs and other senior business leaders to identify and account for the growing risk from “stranded assets”. These are risks “whose value would dramatically change, either positively or negatively, when large externalities are taken into account – for example, by attributing a reasonable price to carbon or water. So long as their true value is ignored, stranded assets have the potential to trigger significant reductions in the long-term value of not just particular companies but entire sectors.” We have been here before, they note. The true value of subprime mortgages was recognised very late in the day and mortgage-backed assets had to be repriced in short order.
Second, they call for mandatory integrated reporting, something that is now being pushed by the International Integrated Reporting Committee. “Despite an increase in the volume and frequency of information made available by companies,” they say, “access to more data for public equity investors has not necessarily translated into more comprehensive insight into companies. Integrated reporting addresses this problem by encouraging companies to integrate both their financial and ESG [environmental, social and governance] performance into one report that includes only the most salient or material metrics.”
Third, they call for an end to the practice of issuing quarterly earnings guidance. “The quarterly calendar frequently incentivises executives to manage for the short-term,” they conclude. “It also encourages some investors to overemphasise the significance of these measures at the expense of longer-term, more meaningful measures of sustainable value creation. Ending this practice in favor of companies' issuing guidance only as they deem appropriate (if at all) would encourage a longer-term view of the business.”
Fourth, and a strongly linked point, they see a critical step to be the better alignment of senior executive compensation structures with long-term sustainable performance. “Most existing compensation schemes,” they warn, “emphasise short-term actions and fail to hold asset managers and corporate executives accountable for the ramifications of their decisions over the long-term. Instead, financial rewards should be paid out over the period during which these results are realised and compensation should be linked to fundamental drivers of long-term value, employing rolling, multiyear milestones for performance evaluation.”
And, fifth, there is a growing need to incentivise and reward long-term investing with “loyalty-driven securities”. The logic here is that “the dominance of short-termism in the market fosters general market instability and undermines the efforts of executives seeking long-term value creation. The common argument that more liquidity is always better for markets is based on long-discredited elements of the now-obsolete ‘standard model’ of economics, including the illusion of perfect information and the assumption that markets tend toward equilibrium.” To counter such short-termism “companies could issue securities that offer investors financial rewards for holding onto shares for a certain number of years.”
An immensely turbulent 2011 is being followed by a year marked by an extraordinary number of sustainability milestones. Most obviously, we have the UN’s Rio+20 Earth Summit. Then there will be the twenty-fifth anniversaries of the Brundtland Commission report, Our Common Future, and of SustainAbility, the company I co-founded in 1987. But there’s more. Many will celebrate the fortieth anniversary of 1972’s The Limits to Growth study which first laid out the “Peak Resources” agenda, and the fiftieth of 1962’s Silent Spring, Rachel Carson’s book that sparked the Environmental Revolution.
Some will find it strange that businesses like Generation Investment Management are now signalling the next round of the sustainability agenda, but as the focus shifts to the large-scale remodelling of capitalism for the new century, this feels like the logical trajectory for the next 20, 25, 40 or 50 years.
John Elkington is executive chairman at Volans and non-executive director at SustainAbility. He blogs at www.johnelkington.com and tweets at @volansjohn.
Homepage image by Ihuiz