Companies have been falling over themselves to make impressive-sounding climate pledges. Last year saw some particularly bold targets, with Facebook, Apple, Walmart and even oil and gas giant BP promising to reach net zero emissions within a few decades.
Climate change cannot be tackled if businesses do not play their part, and there does seem to be new momentum to companies’ efforts to make changes. But while it’s easy to unleash bold proclamations and bask in a slew of positive media coverage, the real work is actually in fulfilling these promises and being transparent about progress.
That’s where companies often fall down, argues impact investor Michael O’Leary, who together with Warren Valdmanis co-authored the book “Accountable: The Rise of Citizen Capitalism.” The book argues that wooly definitions of “corporate social responsibility” and the voluntary nature of much corporate climate reporting have allowed companies to escape scrutiny and give the impression of acting responsibly, while in reality doing very little.
HuffPost spoke with O’Leary, who is managing director of impact investment firm Engine No. 1, about distrust in companies, what it will take to make them truly accountable, and how people can push them to take genuine action on climate change.
This interview has been edited for length and clarity.
Why is this the time to be talking about corporate accountability?
It’s an interesting time to be working in socially responsible businesses [and] socially responsible investing because in many ways we’re winning the battle of ideas.
You’d be hard-pressed today to find a CEO or a major investor who did not at least pay lip service to the idea of social responsibility beyond earning a profit, to the idea that corporations owe something to their workers and their customers and that they need to be good stewards of the environment.
There’s this huge wave of energy and enthusiasm and excitement that somehow we are turning a corner towards a different sort of capitalism than we’ve had in the past.
The problem, though, is that many of these statements, these feel-good pronouncements and glossy reports that are coming out of Fortune 500 companies, are not being backed up with substantive action.
It’s easier to fake good works than good returns. To make companies more responsible and sustainable, we need two key things. First, investors need to lead the charge. They need to recognize that companies that invest in their workers, communities and the environment are better, stronger companies.
And second, we need clear, standardized metrics that we can use to track a company’s progress. We titled our book “Accountable” because we believe that’s the only way we’ll see real progress — when we’re better able to hold companies and investors accountable for the impact they have on society.
Do you have hope that CEOs will do anything more than just pay lip service to social responsibility?
Distrust is endemic in the economy. If you look at survey data, ask people, “Do you trust big corporations?” and 3 out of 4 people don’t, and 4 out of 5 people don’t trust business leaders to be ethical or to tell the truth.
That distrust is rotting away at the core of our economy, and a lot of these responsible business practices [and] sustainable investing are meant to deal with that distrust.
Here’s the problem, if all this is meant to rebuild that trust that we once had, doing this halfway will end up causing more harm than good.
How can trust in business be be restored?
We need to have the same level of rigor and accountability that is used to report a company’s finances for measuring the other impacts that companies have on society. For instance, we can debate what’s the right social cost of carbon, but we shouldn’t have to debate whether societies deserve to know the amount of emissions companies are having. This is a core impact companies are having on the world, so we have some right to know who is responsible, who is accountable for those emissions.
For investors, understanding environmental impact is a critical element to when you’re investing in the long-term risk and growth prospects of the company. As an investor, I find it difficult to assess or evaluate a company unless I know what value it’s creating not just for shareholders but for all its stakeholders, its community, the environment.
What’s missing that allows companies to avoid being held accountable for their business practices?
Market purists bring up the idea of Adam Smith’s invisible hand. They’ll say it’s not for us to debate responsibility and sustainability, that every company should focus on maximizing its share price, its profits ― that ultimately they are accountable to the bottom line.
The problem with that argument is that if you go back and look at when Adam Smith was writing [in the latter half of the 18th century], nearly all economic activity globally was happening in small, local farms and workshops with the exception of a few large trading companies. When it happens at the local level, there is a lot of local accountability. So if you own a local small business and you hire workers, those are your neighbors you are hiring. If you fire workers, those are your neighbors you are firing. If you pollute a river, it’s your stream; if you are donating money, it’s your community that’s benefiting.
But once you get to these big, global, financialized corporations, local accountability falls apart.
People are starting to recognize that if they care about something ... then they should care about it enough that it factors into their economic decisions — where they work, what they buy, how they save and invest. Michael O’Leary
For the last 50 years, ever since Milton Friedman wrote that the social responsibility of a business is to increase its profits, everything has been about shareholders winning at the expense of stakeholders like workers, communities and customers.
Here’s what gives me hope. There’s a traditional bifurcation in peoples’ lives where they separate themselves into one part moral and one part economic. In other words, traditionally we are in a society of “let me maximize my income during the week and then I’ll give it away during the weekend,” which is best embodied by the Warren Buffett giving pledge [where ultrawealthy people commit to giving away at least half their fortunes].
What gives me hope is that this traditional bifurcation is starting to break down. People are starting to recognize that if they care about something, if they care about it enough that they donate money to the cause, they vote around the cause, they donate their time, then they should care about it enough that it factors into their economic decisions — where they work, what they buy, how they save and invest. We’re still in the early stages with such investment products, but we’re getting there.
Are there any companies that have made meaningful moves toward better accountability?
This past summer, French food giant Danone took a somewhat radical step to put a deeper purpose in their corporate charter and adopted the French legal framework of “entreprise à mission” [a model created by French law, which requires companies to factor in environmental and social impacts] to lead the way to create and share sustainable value for all stakeholders.
The risk in business is that most corporations get a lot of conflicting demands ― demands to make a profit, demands to do good for society, demands to be good stewards of the environment ― and when faced with all these conflicting demands (some of them are conflicting at least on a short-term basis), the rational response is hypocrisy. They say one thing to shareholders, they say something else to stakeholders. They’ll have an annual report for shareholders and a separate corporate social responsibility report. In one they’ll talk about the good things they’re doing for the world and in the other they’ll talk about dollars and cents and profits.
Many companies are pushing towards this idea that if we care about a given purpose, it shouldn’t be sidelined to a social responsibility report, it should be in our founding documents, it should dictate how we organize our business, how we compensate our executives, the products we choose to sell.
Purpose is the most distilled form of strategy. Once you can figure out what purpose your company is meant to serve, that should dictate the products you choose to sell, the processes you choose to create those products, with what supply chains, who you hire, the culture you choose to build, all of which should be rooted in purpose.
You have in the past spoken about the fight to “reform capitalism.” What do you think reforming capitalism looks like and how can it be achieved?
It requires that companies become accountable to more than short-term profit, that they become accountable to the values of all their stakeholders. Poet-philosopher Wendell Berry talks about the idea of a “local economy,” how beautiful would it be if we had an entire economy where everything consumed in a given area is produced in that area?
But that idea is totally at odds with the structure of a modern economy, of the benefits of economies of scale, the benefits of trade. We have to take the economy we have and the corporations we have and make them more accountable rather than try and turn back the clock to a time that won’t return.
What can people do to keep the pressure on?
We were misled in economics back in university with the concept of an invisible hand, the unseen forces that move the free-market economy. In reality, the economy is just a reflection of all our individual decisions.
For instance, in the U.S. the largest retailer of organic food is Walmart. As people started to consume organic food and demand organic food, companies competed to provide it, and Walmart is the biggest one out there. In many ways, it’s empowering to recognize that ultimately the economy reflects our decisions and our choices, and that can be small choices like what milk you buy or major choices of where you choose to work and how we choose to save and invest. That’s the power we have as consumers, investors and as voters.
HuffPost’s “Work In Progress” series focuses on the impact of business on society and the environment and is funded by Porticus. It is part of the “This New World” series. All content is editorially independent, with no influence or input from Porticus. If you have an idea or tip for the editorial series, send an email to email@example.com.