Ten years after a global financial crisis prompted a deep-seated distrust of corporate actors — and particularly those in banking and finance — many company leaders are today seeking to recast themselves as constructive social actors, and business groups across the globe are working to amplify the message that business can, and must, be a force for social good. For example, the UK’s Institute of Directors is now calling for more exploration of “new ways to combine the profit motive with social responsibility,” while Washington’s Business Roundtable has also ditched its allegiance to Friedman-style shareholder primacy.

“That was a profoundly significant moment in the debate,” says Colin Mayer, a professor at Saïd Business School. “I don’t think you should underestimate the extent to which the corporate community feels under threat,” he said. “There is a real sense that unless they grasp the initiative it’s going to be grasped by somebody else who’s going to do much more damage.”

A clear financial incentive for this change has come from the growth in environmental, social and governance (ESG) investing. According to the Global Sustainable Investment Alliance’s calculations — funds managing $31tn — apply an ESG screen to their investments. Further, there is growing evidence that companies scoring well on ESG standards outperform financially. As a result, there’s been a 29 percent rise in the number of executives referring to ESG on earnings calls between the second and third quarters of 2019.

While we expect this trend to continue into the new year, and well beyond, we agree with Saker Nusseibeh, chief executive of Hermes Investment Management. “We need to have a conversation on specifics,” he said. “The motherhood and apple pie conversation is nice but doesn’t get you there.”

At Starling, we believe that expectations will go unmet, and likely produce further broad disillusionment among aggrieved customers and stakeholders, unless we see the adoption of credible and industry-standard metrics around what “good” looks like. And this is especially critical, we believe, when it comes to governance metrics.

In discussions of ESG, the governance component often appears to be an afterthought: it is the environmental and social considerations that tend to win the lion’s share of attention in the media. Perhaps this is because there are some established means by which to measure things like a firm’s “carbon footprint,” or a reduction in the number of the “unbanked” following a corporate undertaking in that direction. But, as a spate of misconduct-driven scandals over the past year makes clear, without good governance mechanisms, shareholder and stakeholder damage is inevitable, with likely implications for a firm’s environmental and social efforts as well.

“Citizens’ expectations have risen around the world,” says Daryl Brewster, chief of the business coalition Chief Executives for Corporate Purpose. His question for 2020 is: “How can companies actualise this?” Now more than ever we need a means by which to assess the efficacy of a firm’s governance, the real drivers behind that, and what this means for its exposure to non-financial risks and likely financial performance outcomes.

Keep reading