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Using the pandemic to re-set the world economy

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View of skyscrapers from below. Image credit: Samson/Unsplash

On February 21, 60 major companies announced that they will be adopting a new economic framework, in partnership with the World Economic Forum.

"Executives from Bank of America, Mastercard, KPMG, and about 60 other large companies announced [...] they'll be adopting a new reporting framework for environmental, social, and governance (ESG) standards in partnership with the World Economic Forum (WEF)," Business Insider reported. "Other companies that have signed on to this reporting framework include Salesforce, Unilever, Dell, and Sony." The new standard will be called "stakeholder capitalism metrics."

Milton Friedman's 1980s economic dictum that profit is the purest motive is about to meet its strongest challenge ever -- stakeholder capitalism, represented by corporate and financial institutions' adoption of annual ESG audits, to measure and report how much risk a commercial entity faces on three fronts: environmental, social, and governance.

Following Friedman's analysis, politicians conducted decades of campaigns to reduce the size of government. Now 69 of the world's largest 100 economies are corporations. When countries went into lockdown, most of those corporate empires went into crisis.

An important survey published shortly before COVID-19 hit, found that more than half the 36,000 respondents (56 per cent) believed that capitalism was doing more harm than good globally. Citing this dismal news, international business consulting firm McKinsey urged business leaders to take a wider view: "... and make the choice to demonstrate that they see their mission as serving not only shareholders but also customers, suppliers, workers, and communities." That is -- "stakeholder capitalism."

The World Economic Forum has called for an economic "great reset" because of the pandemic. After a year of people staying home, the WEF warns, "There is good reason to worry: a sharp economic downturn has already begun, and we could be facing the worst depression since the 1930s.

"To achieve a better outcome," continues the article by Klaus Schwab, founder and executive chairman of the World Economic Forum, "the world must act jointly and swiftly to revamp all aspects of our societies and economies, from education to social contracts and working conditions. Every country, from the United States to China, must participate, and every industry, from oil and gas to tech, must be transformed. In short, we need a 'great reset' of capitalism."

Without swift attention, he warned, decades of social and economic progress would be lost as the economy sank. "Some countries have already used the COVID-19 crisis as an excuse to weaken environmental protections and enforcement," he said. Inequality is rising again, everywhere. This, although the pandemic has reminded us all of our social responsibilities.

"ESG investing grew out of investment philosophies such as socially responsible investing (SRI)," according to the Chartered Financial Planners of Canada, "but there are key differences. Earlier models typically use value judgments and negative screening to decide which companies to invest in. ESG investing and analysis, on the other hand, looks at finding value in companies -- not just at supporting a set of values."

"Topics such as climate change and social inequity are transforming the business environment," reports international accounting firm KMPG, "and driving the evolution of ESG risks and opportunities for organizations. Stakeholders -- including investors, regulators, customers and employees -- increasingly expect organizations to manage the impacts of these issues."            

"There was a time when a public stance on ESG issues was a public-relations tactic," says a recent NASDAQ report. "However, in today's rapidly changing business climate, attention to ESG issues is becoming critical to long-term competitive success. In fact, according to the U.S. SIF Foundation, total U.S.-domiciled investments using sustainable, responsible and impact (SRI) strategies, reached $8.72 trillion, an increase of 33 per cent from 2014 and a 14-fold increase since 1995.

"That represents about one of every 6 dollars under management."      

The trend toward ESGs is very compatible with recent trends towards exchange-traded funds (ETFs or "index funds"). A management team chooses the top earners in a certain area (construction, agriculture, retail) and sells shares in a  fund that owns equities in (usually) the top 10 industry leaders.

The Organization for Economic Co-operation and Development (OECD) has noted that:

"The finance industry is creating more products and services related to ESG ratings, indices, and funds. Firms calling themselves ESG ratings providers have multiplied. The number of  ESG indexes, equity and fixed income funds and ETFs are now in the many hundreds, and are continuing to expand...."

However, the 2020 OECD report, "ESG Investing: Practices, Progress and Challenges," starts with a caveat about the lack of standards for reporting ESGs. "While the mainstreaming of forms of sustainable finance is a welcome development, the terminology and practices associated with ESG investing vary considerably." Definitions and applications vary widely, the report says, and "... returns have shown mixed results over the past decade, raising questions as to the true extent to which ESG drives performance."  The OECD concluded that, "Global guidance may be needed to ensure market efficiency, resilience and integrity."  

Since that OECD report, the World Economic Forum has acted. Business Insider reported that, "In September, the World Economic Forum and the International Business Council (IBC), run by Bank of America CEO Brian Moynihan, partnered with 'the Big Four' accounting firms to create the reporting framework of 21 ESG standards. The big four -- Deloitte, PwC, EY, and KPMG -- provide financial auditing and other professional services." 

At the very least, "stakeholder capitalism" and ESGs mark important milestones in the world economy. For those with money to invest -- or consumers who want to know more about the products they buy -- ESG reports are usually in the very front of a company's annual report, which can usually be found on their website. Consumers can compare companies according to their commitments and annual progress (or not) -- and use their purchases to encourage products and vendors according to the ESG. 

The World Economic Forum is pushing for ESGs to be a turning point. As Klaus Schwab noted, "The COVID-19 crisis is affecting every facet of people's lives in every corner of the world. But tragedy need not be its only legacy. On the contrary, the pandemic represents a rare but narrow window of opportunity to reflect, reimagine, and reset our world to create a healthier, more equitable, and more prosperous future."

Award-winning author and journalist Penney Kome has published six non-fiction books and hundreds of periodical articles, as well as writing a national column for 12 years and a local column in Calgary for four years. She was editor of Straightgoods.com from 2004-2013.

Image credit: Samson/Unsplash

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