From ESG to IRG, from the lost primacy of politics to the expectations now weighing on companies.
by Fernando Napolitano, President and CEO of Newest
Originally published in italian in the Sole24Ore, on Novembre 7th, 2023 https://www.ilsole24ore.com/art/oltre-l-esg-perche-aziende-hanno-bisogno-nuovi-parametri-AFGfR1WB
The loss of political primacy is a factor common to Western democracies. Among the varying nuances and consequences, perhaps the most significant is the growing inability to mediate effectively between the interests of capital and the needs of various sets of people. These range from shareholders to customers and the citizenry, all now seen as stakeholders. This phenomenon has increased the pressure on companies, especially on their leaders. It confronts them with rising expectations from stakeholders which often go beyond their core business.
A precise snapshot of this phenomenon can be found in the latest edition of the Edelman Trust Barometer. For two decades it has analyzed the level of trust placed in the four entities that contribute to the correct functioning of a democratic system: governments, businesses, NGOs (Non-Government Organizations), and the media, in 28 countries. The Trust Barometer indicates whether these entities are in balance or out of sync. Currently it shows that it is companies, not governments, that enjoy the greatest trust from those surveyed. This distrust in governments manifests with lower participation in the electoral process, yet greater activism. Companies are increasingly called upon to act and intervene where legislators are absent or ineffective.
The democratic system is, in short, in a state of imbalance. The cause can be found in one of the less positive and tangible elements of globalization. Over the last three decades the well-resourced private sector has almost monopolized the recruitment of talent, leaving the public sector, and politics with it, under-resourced and under-served. The value creation chains of any industry today are very complex, requiring a deep and constantly updating understanding of evolving corporate phenomena. Because of this, the solutions that legislators need to propose are also complex, and cannot be simplified.
This phenomenon is more evident than elsewhere in the United States, so that the leaders of American companies openly declare that governments need help. It began in 2019, Jamie Dimon, CEO of J.P. Morgan, in his letter to shareholders, unusually dedicated a chapter to politics: "American politics... is one of the main concerns: businesses, governments, and communities must work as partners, collaboratively and constructively, to analyze and solve problems and help strengthen the economy for the benefit of all. The American dream is alive, but for many, it is fraying." He concluded: "Governments must be better and more effective: we cannot succeed without their help." The Business Roundtable he chaired, which brings together 181 CEOs of American multinationals, signed the "Statement on the Purpose of a Corporation" on August 19th 2019 as an early response to this problem.
Absent or underperforming politics is anathema for business. Legislators are largely responsible for the stability and predictability of markets, conditions that are indispensable for attracting capital and planning profitability. From that arises the concept of "stakeholder capitalism," which made its debut in the wake of the Great Depression of 1929. It is again coming to the fore of the collective mind as an approach that seeks to curb the excesses of capitalism. In that context the corporation inevitably becomes subject to more demands, such as transparency, responsibility, and sustainability, and ESG (Environmental, Social, and Governance). ESG offers a set of standards by which investors concerned about environmental and other issues can select potential investments. Today it is a fundamental measurement parameter appreciated by consumers and the general public.
However, this tool has been improperly used to respond to the decline in the primacy of politics. In the United States it has been pulled into the political meat grinder of "Red vs Blue," Republicans against Democrats. Early in 2022 the Republican state legislator of Idaho passed a law preventing ESG criteria from prevailing over state requirements, stipulating that investments must be made following the rule of the prudent investor. In March 2023, following a vote by House Republicans, the U.S. Senate overturned a Department of Labor rule that allowed pension plans to consider ESG criteria for investment decisions. "ESG is truly antithetical to our American way of life, to our constitution," said Republican Representative Barbara Ehardt. This political polarization over ESG has not spared even the asset management giant BlackRock, which has been accused by the Republican attorneys general of 19 states of abusing its influence and power by boycotting fossil fuel companies. BlackRock rejects the accusations, and at the same time is the subject of complaints from New York's regulatory bodies in that Democratic state which do not consider it sufficiently green.
In a landscape where politics clearly can no longer provide clear direction, companies are forced to change their approach, seeking to anticipate and compensate for the voids left by politics through a new positioning. What is recognized is a need to innovate within the current processes of communication, lobbying, and social responsibility that were conceived in a past characterized by the primacy of politics. One aspect of that is a conscious process of transferring know-how in favor of the legislator and society at large. It is not suggested that companies and their leaders should engage in active politics. They must remain focused on their core business. However, they will increasingly need to provide necessary support for the legislator, in varying forms, to keep markets stable and predictable. Companies remain the best vehicle for producing innovation, jobs, and economic growth. For this reason today, in this scenario, they must contribute to facilitating the work of the legislator and contribute to the understanding of complex issues by the broader audience that is the community in general.
There are many pressing issues that require the legislator to have substantial know-how that can only be found in companies, such as Artificial Intelligence and its implications, regenerative medicine, alternative energy sources, immigration, population aging, workplace safety, and the future of young people. All these complex issues require legislative intervention and a better understanding by the public. ESG parameters were not conceived to respond to these new and urgent needs. For this reason, it is necessary to engage another method, called IRG (Influence, Relevance, Growth), based on a series of quantitative assessments that gauge whether a company is ready and able to exercise this role or not. It facilitates companies in a smooth adjustment of culture and processes under the focus of this wider stakeholder community.
The debate on current problems and solutions should be shared not only among holders of know-how, but among all stakeholder communities. In this, the role of the media becomes crucial. Where in the past they were solely observers of phenomena, they now become real facilitators of this transfer of knowledge. In the United States CNBC, with about 500 million viewers worldwide every month, has taken on this task. It leads through its president KC Sullivan, who participated in the recent "International Business Exchange Conference" in New York, which also saw the engagement of important representatives of Italian companies from the CEO of Banco BMP Giuseppe Castagna, Dean of SDA Bocconi School of Management Stefano Caselli, and Luigi Ferraris, CEO of Gruppo Ferrovie dello Stato. Such leadership will inspire more.