Can you be a Responsible Capitalist?
The typical model of capitalism is currently being challenged by a more socially minded form where the goal is making social improvements alongside profit rather than focusing on accumulating of capital in the classic capitalist sense.
This week Unilever announced that from 2030 they will refuse to work with any supplier that does not pay a living wage to its staff. This effort is part of Unilever’s commitment to improve working conditions across its supply chain and to ensure that the benefit of Unilever’s success is spread not only across its own employees, but to every worker who contributes to their products. This is part of a change in behaviour from major global companies, with many announcing initiatives that would in theory decrease their own profit potential but at the benefit of social or environmental causes.
One of the first lessons learnt in Corporate Finance classes is that a public company main objective is always to maximise value for shareholders, with many CEO’s fired for decisions that negatively affect dividend payout. So why is a company such as Unilever making a decision that will ultimately increase the cost of making their own products?
A McKinsey report into Environmental, Social, and Governance (ESG) programs found that 83% of C-suite leaders believe that ESG programs will contribute more shareholder value in five years that today and they would be willing to pay a 10% premium to acquire a company with a positive ESG record.
71% of executives stated the main benefit for prioritising social impact within a business is the improvement to a company’s reputation. As a new generation starts to take more important positions in within business and politics, Millennials have become a societal force that looks to create a positive impact with every decision they make. 84% of millennials feel it is their duty to make the world a better place and this applies not only to the products they buy but also the career choices they make.
Ben and Jerry’s, a Unilever brand, have centred their brand messaging on supporting key social issues such as civil rights and climate change, it is also the most popular ice cream brand amongst Millennials and Gen-Z and has a loyal following who are willing to pay extra if they know their money is going towards a good cause.
Taking on social causes has also shown to help companies hire and retain top talent as many of the firms viewed as the most desirable places to work are visible in environmental and social movements. The new generations entering the workforce are more purpose-driven than those prior and these businesses are benefiting from being able to cherry pick the best and brightest, often at the expense of industries such as financial services and oil and gas.
Businesses who are finding ways to enact ESG programs are also seeing an advantage in revenue gains. Businesses that implement ESG perform 4.8% better than those who don’t, showing the actions they take are typically creating a net gain in profits. The typical model of capitalism is currently being challenged by a more socially minded form of capitalism where the goal is making social improvements alongside profit rather than focusing on accumulating of capital in the classic capitalist sense. It is a utilitarian form of capitalism with a social purpose where businesses not only take from society but to create a positive impact in return.
We are starting to see strong business cases for companies that choose projects that lead to improved social and or environmental outcomes even when it doesn’t maximise profit. Investment firms are also directing more funding to businesses with a strong ESG focus with initiatives such as the Poseidon Principles, a framework for assessing and disclosing the climate alignment of ship finance portfolios, which banks such as Citibank and Credit Suisse are using to reduce how much carbon emissions are created through their lending to shipping companies.
To be able to design projects that create a large environmental or societal impact that also generates an equal source of revenue is one of the biggest challenges to achieve a perfect ESG program, however many businesses have proven it’s possible, ensuring projects return a positive investment to shareholders while creating a net benefit to society.
Adam is an Innovation Consultant at Rainmaking, a corporate innovation and venture development firm. We create, accelerate and scale new business with the world’s leading corporations and entrepreneurs. If you would like to get in touch please email adam.butler@rainmaking.io
