Purpose and Profit: How Businesses Can Elevate the World. 2022. George Seraphim. HarperCollins Leadership.
In Purpose and Profit: How Businesses Can Elevate the World, George Serafeim, the Charles M. Williams Professor of Business Administration at Harvard Business School, provides a roadmap and best practices for companies to achieve the long-term competitive advantage that can come when they prioritize environmental governance , social and corporate (ESG) objectives, such as climate change mitigation, diversity and inclusion, and sustainability, alongside the pursuit of profit. The importance of ESG factors has been accelerated by the COVID-19 pandemic, making this book essential reading for all investors. Once considered “soft” and beyond the scope of what a serious investor should think about, ESG issues are now not only important in society but also critical in business. Today, asset managers must incorporate all long-term value factors, including ESG factors, as part of their fiduciary duty to investors.
Over the past decade, Serafeim has found that purpose-driven companies that improve performance on material ESG issues outperform their competitors by more than 3% per year in terms of stock returns, based on a sample of more than 2,300 companies. Additionally, based on a sample of 3,078 global companies, the author found that companies that responded to the COVID-19 pandemic with significant efforts to protect customers, employees, and suppliers outperformed their peers by 2.2% in the month covered by March. Stock market crash 2020.
Over the past five decades, since Milton Friedman argued in 1970 that “the business of business is business” and his agency theory became widely accepted, there has been an evolution in the importance of ESG issues. Stakeholder theory, which emerged in the 1980s, underpinned the ESG movement. Serafeim found that in the 1990s, companies with strong ESG performance received more pessimistic analyst recommendations than peers because their sustainability initiatives were seen as a waste of shareholder resources. By the end of 2008, however, this correlation was zero, and by the mid-2010s, companies with strong ESG performance attracted more positive analyst recommendations than other companies. The United Nations Principles for Responsible Investment (PRI) began in 2005, and by 2020, the assets under management (AUM) of PRI signatories exceeded $100 trillion. This evolution included financial education; The CFA Institute began incorporating ESG topics into its curriculum in 2018 and most recently created the CFA Institute Certificate in ESG Investing program.
ESG investing started with negative screening, which proved to have minimal positive impact. According to Serafeim, companies need to understand which ESG issues are economically important in their industry and how to focus on them. Companies that improve their performance on non-material ESG issues in their industry showed little difference in performance relative to their competitors. Financially important ESG issues for commercial banks include access to finance for underserved populations, the privacy of customer data, the incorporation of environmental risks into originated loans, and strong anti-corruption practices. For agricultural products companies, material ESG issues include greenhouse gas emissions, water management, employee physical safety and crop-related risks arising from climate change. Focusing on ESG issues that are important to a particular industry can make the difference between success and failure.
I found the most insightful example of Serafeim to be the $1.6 trillion Japanese Government Pension Investment Fund. Since this fund owns the “universe”, it has tried to make the universe more sustainable instead of trying to outdo the universe. Because pension funds have a long time horizon, they need the land to be viable 100 years from now in order to pay off their obligations. As ‘stewards of the commons’, larger investors are important for sustainability, because they hold numerous positions in sectors that face a significant number of material threats.
The final chapter is the most important for “Generating Impact”, which seeks alignment between values and work. Because alignment is not static, it may be appropriate to take a position in a currently misaligned company, as long as you have the agency to bring about the change, rather than a currently aligned company. It is the alignment slope, rather than the current alignment level, that determines the potential reward. The decision comes down to patience or your own personal discount rate.
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All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.
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