Will Bachman 0:01:
Hello, and welcome to Unleashed, the show that explores how to thrive as an independent professional. I’m your host, Will Bachman. And I’m here today with Richard Steele, who is the author of Elevated Economics, How Conscious Consumers will Fuel the Future of Business. Richard has been an entrepreneur, and he is now an investor. Richard, welcome to the show.
Richard Steele 0:29:
Well, thanks for having me. Great to be here with you.
Will Bachman 0:31:
So, first of all, tell me what do you mean by conscious consumers?
Richard Steele 0:38:
Well, that’s a great question. In recent years, consumers have really been thinking hard about environmental, social and governance issues. And they’re making purchase decisions to reflect those values that they have on environmental, social and governance issues. And investors are doing the same. And it’s a really, really big shift. BlackRock actually calls it a tectonic shift in investing. And so elevated economics explores that and some other some other issues.
Will Bachman 1:18:
So how broadly is this true? So, you know, there. I mean, mentally, personally, I only have the bandwidth to sort of know about so many companies as a consumer. And there could be some that are very standout, like, you know, Nike got a lot of attention while ago about, you know, their conditions for manufacturing their sneakers, and maybe people are aware of, you know, Foxconn and Apple and iPhones and so forth. But there’s so many products that I buy every day, that, I can’t imagine actually going out and getting myself educated about each one. And also, to what degree are you you going to focus on? So there’s environmental, there’s social justice issues? Are they treating their workers well? Do they pay their workers well? And then, do they promote a diverse board and so forth? And, there’s so many different issues you could potentially focus on, at some point, like for certain high profile companies that are name brands, I can understand, but, like your utility, the telecom provider, the bic pen that I use, there’s so many different products….What are you seeing in terms of evidence of where consumers where it is making a difference?
Richard Steele 2:52:
Sure. So that’s a great question. I think that if you just look around your home, look around your kitchen and look in your fridge, you’ll start noticing more and more labels and icons that say things like Fairtrade, or ethically sourced, etc. So it’s definitely having a moment. ESG is definitely having a moment in the consumer world, as you know. I would say that if you want to look by the numbers, and you look at the trends as well, there is a huge focus on ESG in the markets. So today, the total value of ESG assets is around $30 trillion, with about 25% of the market.
Will Bachman 3:40:
What does that mean? What does that mean, ESG assets?
Richard Steele 3:46
So funds or individual stocks that have a focus on ESG. So for example, The Wall Street Journal just came out with their, their top 100 sustainable companies. This was about a week ago, Sony tops the list and you know, other companies, you know, are in there, Philips and Merck, and Cisco and HP and a whole bunch of others. So when you talk about the total value of ESG assets in 25%, of the managed assets in the market, that’s a pretty big number. And there’s a generational change that’s going to take that number even higher. So there’s a generational trade change. It’s called the great wealth migration. So, the wealth migrates to younger generations from baby boomers. It’s valued at about $68 trillion worth of wealth that’s going to transfer that’s trillion with a T. And those future generations, they consume and they invest completely differently than baby boomers. So what’s interesting now is that we and they can measure the impacts that issue-focused firms are having, right, so companies that are making a positive impact on society. Currently, they’re presenting higher returns, many investors are now looking to impact investing with environmental, social and governance ratings. So, if you go and check a stock price, there’s all the financial metrics that are there, and then there’ll be an ESG score as well. So that information is becoming much more available at investors’ fingertips. And it’s a lot easier to invest in ESG funds. Now there’s 2700, funds that meet ESG criteria, Vanguard just came out with a brand new one, about a week ago. So it’s becoming much more prevalent. And the easier it is to either, you know, buy, shop, or invest, the more people will do it. And we’re seeing that through the numbers.
Will Bachman 5:47
So the question is, you know, does this does the ESG, funds and so forth? Does it actually make any kind of difference? So, let’s say we have just two investors, or, you know, let’s say that there’s a whole sea of investors, but let’s take think of it two in particular. So one really cares about ESG issues, and another investor doesn’t really pay any attention to it at all, it doesn’t matter. They only think about more, sort of the discounted cash flow, sort of theory of investing where the value of this price, the stock should be basically the cash flow of dividends to get through through the infinite future. So, if the ESG focused investor says, “Oh, well, I’m not I’m gonna sell this stock, or I’m gonna get rid of this stock, because I don’t like their social justice practices, or environmental or whatever,” won’t it just get bought by someone who doesn’t care about those issues quite as much. And I mean, eventually, shouldn’t the value of any stock reflect the future dividends discounted to today?
Richard Steele 7:02
So, interesting question, will that void? Or will that vacuum be filled by the next investor? Potentially, yes. You asked about return as well. So, sustainable companies actually return more to shareholders. So let’s talk about that, there’s a Barron’s study. So, they had the baron’s, 100 most sustainable companies. And those companies returned 34.3%, on average last year, beating the S&P by a few percentage points, the S&P was 31.5%, versus the 34.3. 55 outperformed the index last year. And this is all before the pandemic, and they’re beating the index again this year. So I think that sustainability, you know, once might have seemed like a hobby, now, it’s viewed by many companies as mission critical. And in addition, when you’re taking good environmental policies under consideration and making some changes, it can save you money, too, right? So, Eco Lab is a company that helps restaurants, hotels, and factories, conserve water and save on energy costs. So like reducing their hot water usage. So good sustainable practices are a magnet for customers, investors who want to align themselves with businesses that reflect their values and investments that reflect their values as well.
Will Bachman 8:34
Okay, so. So on the question of the investing, though, I guess that’s kind of a broader question of you know, I guess we don’t really know then if those sorts of investors who are motivated more for a particular cause… if it really has a long term effect on a on a company’s share price performance, right? Because there’s this displacement effect where there’s likely to be investors out there who aren’t as motivated by that, who will just buy the stock instead.
Richard Steele 9:19
So long term, I think that that won’t necessarily be the case, because you look at the generational change that happens over the next two decades. And that was buying and purchasing habits we mentioned before are very, very different. So only 22% of boomers express interest in impact investing. For Gen X, it’s 31%. And for millennials, it’s a massive 71%. So, this is in your interest in impact investing, and impact minded companies. So in Gen Z, as you would imagine, is reported to take that percentage even higher so those generations are going to be completely different types of investors. And, you know, firms have changed as well, you had 1500 firms so far this year, pledge zero carbon emissions by certain date in the future, that’s more than three times the number of firms that that issued those pledges last year. So ESG is something that is here to stay. And I think that, you know, if you look at all the issues with ESG, environmental, social and governance, and you sort of align those with the vacuum of leadership, I think we’ve seen around the world, I think it’s led a lot of people to believe that they have to take action themselves, right, especially since their elected leaders weren’t taking action. And increasingly, both consumers and investors are demanding that businesses take the lead as well. So that burden or opportunity if you want to look at it that way, is on business leaders. And, you know, there was a moment last year it was August 19 of 2019. I call it in the book The day the shareholders died. And that’s the day that the Business Roundtable came out with the new statement of the purpose of a corporation. So this is a an economic public policy group. And Doug McMillan, the CEO of Walmart is the chairman. And then you’ve also got on the board, Mary Baresi of General Motors, you’ve got Tim Cook of Apple, Jamie Diamond. I’ve got Beth for Atlanta lakes, you got Robert Smith, from this Equity Partners, as well as a whole host of other CEOs right, Johnson &Johnson, Marriott Accenture, Boston Consulting Group, the list just goes on and on. So this is the organization that just 13 months ago, overturned a 22 year old policy statement that defined a corporation’s principal purpose as maximizing returns to shareholders. And they replaced that purpose with a stakeholder centric purpose. So in fact, you’ve got to see that date as the end of shareholder primacy. Right, Milton Friedman’s long-standing theory that the only purpose for businesses is to return to shareholders at the expense of everything else. So if you think about the magnitude here, all those CEOs were members of the Business Roundtable and about 175 others, all of them getting together to announce the new purpose of business. Now, that seems like a big deal that seems like something’s here to stay.
Will Bachman 12:43
Yeah, I don’t know what to think about that. I read that announcement last year. And I’m curious, you know, from having looked at this very closely, do you see behaviors actually changing a lot? I was a little bit cynical about that. And it felt to me like, they can come out and say that it’s sort of a politically good cover, because there’s a lot of anti big business attitudes right now. But are they actually going to really change and start making decisions that are, you know, that will sacrifice profit in order to, you know, be more environmentally friendly? So, how much do you see it actually changing behavior much being as opposed to being more window dressing, or just sort of the politically correct thing to say, but then they keep going and acting as they used to do?
Richard Steele 13:33
Yeah, so Well, I think it’s a really, really interesting question. So, it depends. But I think that the implication is that ESG becomes more and more table stakes. And if you look at what businesses are actually doing, or what they say they will do, it’s pretty interesting. It’s pretty game changing. So Walmart with that zero emissions across their global operations by 2040. They also have a goal to become a regenerative company. So they’re trying to sort of go past carbon neutral. And for them, that means restoring, renewing and replenishing, in addition to just conserving, right, so they are working to promote practices and agriculture and forest management fisheries that help give back to nature. And then they’re trying to do the same thing with their operation and in their supply chain. So that’s just one example. But Walmart’s a pretty big example. There’s, you know, PepsiCo did a similar thing with a renewal of a renewable electricity goal. General Mills, ATT, GE, Morgan Stanley. And we’ve got some of the finance firms pledging to reach net zero financed emissions, meaning that they say, “Hey, look, we’re not going to finance firms that drill for oil in the Arctic type of a thing. So your question is, you know how much of it is window dressing? Well, some of it might be window dressing or what they call green washing. But I think that with all these companies making these announcements, their shareholders and their boards, and their customers are going to hold them to account. And if that doesn’t work, you know, you’ve got governments making these changes as well. Right? So China pledged to get carbon neutral by 2016. And that is just a huge, huge pledge. California Governor Gavin Newsom is requiring all new cars in California that are bought to be zero emission by 2035. So if business doesn’t do it, government is, right. Governor Cuomo, the same thing, right? He announced regulations to reduce the use of hydro fluorocarbons in New York. So I think if you’ve got this, you know, sort of two pronged approach, both regulatory and market driven, that will have some impact, how much impact? We will only know in hindsight, but I do think we’re, we’re finally at a watershed moment.
Will Bachman 16:03
Okay. So, talk to me in practice, let’s get into ESG. A little bit, kind of more specifically, what it means inside a company. Like, you know, these companies that are that are moving in this direction, tell me some of the practical changes that are happening in terms of reporting systems, in terms of organizational structure, in terms of reports to the board. So, in terms of how they come up with scorecards to balance different things. Talk to me about that a little bit.
Richard Steele 16:40
Yeah, sure thing. So, a lot of firms, a lot of big firms will have a Sustainability Officer, Chief Sustainability Officer. And as they’re thinking about ESG, let’s break it down. Right. So, environmental refers to the protection and preservation of the environment, pretty simple. Examples of that would be air emissions, and air quality, energy use and conservation of energy, natural resources use, land use, waste management, water quality, and hazardous materials use. So, as you go through those environmental factors, you can look through the supply chain, specifically, vendors, but also plant equipment, and how your operations are affecting those factors now, and then what you can do what you can put in place to improve across those five or six areas that I just mentioned. Social, on the other hand, that’s the S in ESG, refers to relationships with employees, suppliers, clients, and then the communities in which you operate. So, you know, a Chief Sustainability Officer might say, “what are we doing today? And how can we become a leader in this area?” So examples there would include labor standards, employee relations, production, quality and safety, local community impact, and this is going beyond CSR. By the way, this isn’t just, sort of making a donation to the local Little League team. It’s a little bit more than that. Also, issues of equal employment opportunities, healthcare, education, even housing services for some of the larger corporations. So again, it’s putting in factors to measure impacts there, where you are now, where you want to go, how are you going to get there. And then the G is governance. Governance refers to the standards a company has for their leadership rights, or risk controls, shareholder rights, etc. So examples, there would be things like voting rights, board independence, and diversity is really really big as you know right now, only seven and a half percent of Fortune 500 CEOs are women at the moment. So I think there’s a lot of room to grow there. Other examples on the governance side, ethical business practices, executive pay versus employee pay, and then accounting and tax transparency as well. So, that’s really sort of the example of that digging into the E, S, and G, and how some of those CFOs or chief sustainability officers are looking.
Will Bachman 19:21
Great. So, you know, your point on in the book about how conscious consumers are going to drive some of these changes, those are some pretty broad areas to be aware of. How are consumers able to judge a company across those three dimensions, and I’m guessing that a lot of consumers wouldn’t care too much about the G. I mean, if a company has like voting rights for you know, for minority shareholders or whatever, independent directors that is a little bit in the weeds compared to are they carbon neutral? Do they have a good diverse number of executives. I imagine there’s a lot of competing organizations that are giving different kinds of certificates you mentioned like Fairtrade, etc. So how can consumers kind of keep track to understand? Am I giving my business to a company that I’m comfortable with?
Richard Steele 20:27
Yeah, so that’s it? That’s a great question. And so a very motivated consumer can find this information out by looking it up. And now it is easier now than ever before, right, you can see ESG scores on any financial site for any publicly traded company. So that’s, a pretty easy one. Almost every company is going to have a CSR or ESG information page on their site. I think a lot of consumers rely on third party providers. You know, like, if your coffee is Fairtrade, I think we mentioned earlier in the show, right? That’s something that’s going to be obvious to consumers as they engage with your brand. But about the scores themselves, you asked about, you know, sort of those ratings and how all that works. And just very recently, a couple weeks ago, finally, the leaders of Deloitte PwC, Ernst and Young KPMG, announced a new reporting framework for ESG standards. So, actually, the chairman of Ernst and Young said that the time is now for companies to broaden their engagement with stakeholders. And so now that there is a framework, a standardized framework for ESG, I think it’s going to be a lot easier to measure and then report on. So I think it’s becoming much more streamlined. But when you look at the rise in importance of ESG practices, companies benefit from a ESG approach to their business, right, I mean, there’s higher employee retention, higher employee loyalty, ease of attracting and retaining talent. Now I read about this in the book, there’s a quote from the CEO of Glassdoor, a buddy of mine named Christian, Sutherland Wong. And he says, Sorry, this is a blurb for the book, not to be too self promoting here. But he says, “Elevated economics persuasively makes the case aligned with what we see the millions of reviews of companies on Glassdoor, that companies with a strong sense of mission and purpose outperform their peers and doing the right thing. And shareholder returns are not in conflict, companies that do good, attract the best talent and connect more deeply with their customers, which is ultimately good for business.” And so, you know, sustainable companies are better at retention. Studies show that employee turnover is 25 to 50%, lower among sustainable firms. So that’s a cost savings right there. We talked about them returning more to shareholders with that with a Barron’s example. And I think that the more that we’re seeing this huge shift towards ESG, that it’s not just marketing speak, or green washing, I think that leaders of these companies are really, genuinely taking ESG issues into account in meaningful ways.
Will Bachman 23:22
So what do you see companies doing organizationally structurally, to you meant you talked about this a little bit earlier, but let’s get into it more deeply. So let’s say a CEO says, “Wow, I really need to get on this ESG bandwagon here. All my peers are doing it, the Business Roundtable said I should do it.” Okay. So, our company’s hiring, you know, consulting firms come in and help me be more sustainable, or what sort of powered is this head of sustainability typically have? How are they prioritizing all the different things? Because you could say, well, we could become we could you know, if I have my last million dollars to invest, do I try to become more environmentally friendly? Do I become more socially friendly? Do I put some effort into improving my governance? So how are they kind of actually, in a practical way working to improve across a number of these different dimensions?
Richard Steele 24:23
Yeah, great question. So, we talked about some specific examples. But if we’re asking the question, you know, how can companies and business leaders make sure that they stay ahead of the shift and make meaningful changes that result in all these benefits that we’ve been talking about? There are a couple of things that can be done. Number one would be do an audit to adapt right? Before a company can set out to make ESG changes, leadership, first has to take inventory of where the company stands on each of these issues, right? Success, I think in the elevated economy won’t come from the firm’s that fight ESG, but rather the ones that adapt to it, and adapt to it fairly quickly. So to do this, I think any firm should answer three vital, really vital questions, right? Where do you stand on environmental issues? Where do you stand on social issues? And where do you stand on governance issues? And how can you become a leader in this space? Having responses to those questions will help you clarify what your core beliefs are as a business, which will prepare you to act on the second key factor in leveraging ESG to your benefit, which is having a purpose and acting on it. So, as a business leader, a lot of folks are facing this brave new world that we’ve just been talking about where consumers have begun to do the one thing that sort of the capitalists of the last 150 years really feared which is, care. So not based, just on the classic four P’s of marketing, right, which product, price place and promotion, but as a friend of mine said that consumers care about this new P and that’s purpose, right, and today’s consumers are informed, connected and imperiled, and that they are making those purchases that reflect their personal value. So if you look at the issue of climate change alone, so about half of US consumers 48%, say they would definitely or probably change their consumption habits to reduce their impact on the environment. So I’ll go back to BlackRock these are the same folks that said this is a tectonic shift. Larry Fink said recently that prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. So, the purpose driven side of this is making sure that the business drives benefit for all of its stakeholders, including shareholders and employees and customers like we’ve been talking about. A renewed focus on employees is it is a third metric as well. So my research shows that there is a renewed focus on employees and their passion for ESG issues. And, you know, that increases the overall success of a business in dramatic fashion. So the SH RM society for Human Resource Management says the average cost replaces salaried employees, about six to nine months of salary for executive level employees cost much, much higher. And, you know, having a compelling mission and culture can reduce turnover as we talked about before. So, you know, it really takes the CEO to empower the leaders, if they do have a Chief Sustainability Officer to empower that person to be able to make changes across the organization. A lot of firms will set up a cross-functional task force within the organization that has real power to make real changes. And, again, looking through all those areas, environmental, social, and governance, and making those changes is huge. One of the one of the easiest, I say easiest, that’s maybe not necessarily the case, but one of the most easily measured areas is in G right, governance. And you want to talk about having a diverse board, not just from a tokenism standpoint, but you want a diverse board because you want diversity of opinion, right? When you go through SWOT analyses and things like that, all the folk at Umbrex are very familiar with like a SWOT analysis and things like that. If you’ve got a diverse board, you have people on that board with diverse opinions, diverse backgrounds, and they can identify those opportunities or threats to the business that might not otherwise be seen. You want to recruit new talent pools and really venture beyond using existing board members networks because you’re gonna get more and more of the same people, and try to get cognitively diverse board members, not just diversity for diversity sake or tokenism, like I mentioned before, anyway, very long answer to a short question. I hope that helps somewhat.
Will Bachman 29:10
No, it does. It’s fantastic. So, if people want to know more beyond buying the book itself, which is Elevated Economics, How Conscious Consumers Will Fuel the Future of Business? Is there any place online you would like to point people to Richard, either a website or follow you on Twitter. We can include any links you like in the show notes?
Richard Steele 29:35
Yeah, for sure. So the website is elevated economics.org, and if anybody wants to follow us on Twitter, it’s @elevatedecon. And yeah, look, Will I appreciate the conversation. I want to say thank you again for having me not just thanks but congrats on not only on Umbrex, but also your past. You know, three and a half years, I think 340 episodes of the podcast. I really, really appreciate you bringing this all this expertise to the world. It’s great stuff.
Will Bachman 30:08
Well, thank you very much, Richard and I should say that I was a little bit of a devil’s advocate here on the show. I’m a big fan and supporter of the sorts of initiatives, myself, and thanks for helping, you know, bring us to our attention and educate me about of what you’ve learned, love the book and definitely point people to it. So, Elevated Economics by Richard Steele will include links in the show notes Richard, thank you for joining today.
Richard Steele 30:34
Thanks so much. Appreciate it.