New attitudes, policies and ESG commitments are needed to correct imperfections in the economic system
Friday, September 27, 2019
By Bertrand Piccard
The version of capitalism that has dominated global markets for the last half century is being rightfully questioned as never before. Whilst over a billion people have been pulled out of poverty over the last generation, our economic system has also contributed to skyrocketing inequalities, social unrest, political instability, and put us on the verge of a climate catastrophe which will exacerbate all the rest.
As I told heads of state at the recent G7 Summit in Biarritz, something has gone wrong in our economic system. Capitalism is meant to increase capital, but what we are doing today is exactly the opposite: We are eroding the foundations upon which our prosperity is built. We are wrecking our natural capital through inefficient use of our natural resources, polluting the air and oceans, destroying our land. And we are ruining our human capital by squeezing salaries, making it ever more difficult for people to make ends meet.
Since the 1970s, we have embraced a form of capitalism that has made growing financial returns the best way that a company could contribute to the betterment of society. This has made for an economic system that focuses on its next step and not on what is coming over the horizon. This is clearly an imperfect model, and we are seeing a shift.
In August, 181 CEOs of the largest U.S. companies chose to change the definition of the role of their companies, declaring that they no longer exist for the sole purpose of generating profit for shareholders (a concept known as shareholder primacy), but rather to benefit all its stakeholders, including employees, customers, and society at large.
Following their American counterparts, 99 French companies, representing a total turnover of €1,650 billion and employing 6 million people worldwide, signed the French Business Climate Pledge at an annual gathering of major French businesses, committing to investing €73 billion in low-carbon technology to reduce their GHG emissions.
The G7 also saw the announcement of a coalition of international companies pushing for inclusive growth, and a second seeking to reduce the environmental impact of the fashion industry.
Similar initiatives exist in other sectors, and some companies are making ambitious pledges on their own: Maersk, the Mahindra Group, IKEA, NestlÉ are further examples of companies that have committed to become carbon neutral, or even “climate positive,” seemingly putting short-term growth second to a vision that integrates sustainability into their business models.
Politicians must see these signs and seize this opportunity, to consolidate this movement and introduce ambitious regulations that can support these companies to achieve their targets.
That is why we must rework fiduciary duty - a legal obligation to ensure that those who manage other people's money act solely in the interests of beneficiaries. Fiduciary duty as it is currently defined has juridically institutionalized greed. It has locked even the most environmentally and socially conscious CEOs and investors into a spiral of profits-first and short-term decision-making. By updating it to include environmental, social and governance (ESG) criteria, it would give CEOs the tools and flexibility to consider their societal and environmental impacts, and take decisions that will benefit the company beyond the next investor call.
A 21st century company or investor should only be able to prosper if it respects environmental and social duty. Updating fiduciary duty to take this into account is central to our long-term prosperity and to avoid the worst of the climate crisis. It is a major example of a rule that needs to be adapted to our current context.
We need regulation that can push us beyond our old ways of thinking and doing things. That forces us to move into the future. This is why we need policies to evolve in order to support corporations that are willing to adopt sustainable business models, and force those who are reluctant to change.
Leaving pioneering companies to take spontaneous commitments without regulation that follows will introduce distortion of competitiveness, which is a disaster for all industry. If governments fail to follow up, the risk is high that companies could go back to doing business as usual when they face difficulties.
There is no doubt that the road to a decarbonized economy will be full of challenges. But with the right measures in place, we can make it so that turning back will no longer be an option.
If they succeed, we might finally get capitalism right.
Bertrand Piccard is founder and chairman of the Solar Impulse Foundation. BNP Paribas is a partner and supports the foundation in its mission of selecting 1,000 “clean, profitable and efficient solutions.”