Why Doing Good Is No Longer Bad Business
05 June 2021 - 01:28AM
Dow Jones News
By Charley Grant
It seems the modern corporate mission statement could use an
update: Do well by doing good -- or else.
Earning the perception of good corporate citizenship, in the
form of environmental, social and governance bona fides, is no
longer optional for the modern executive. That point was driven
home last month as Exxon Mobil shareholders elected two directors
nominated by an upstart activist hedge fund unhappy with the oil
giant's climate policies. A third director is likely to win
election, the company said Wednesday. The activist's victory was
especially jarring because it owns a tiny fraction of Exxon stock
and Chief Executive Officer Darren Woods had campaigned personally
against the movement.
The vote marks a high point of sorts for the multiyear ESG
movement, a framework that calls for investors to consider a
company's overall impact on the world beyond its financial returns.
The trend shows no signs of slowing down. There have been 610 news
releases mentioning environmental, social and governance principles
from current S&P 500 members so far this year through May,
according to data from financial research firm Sentieo. That is
more than double the rate of the same period last year.
Investors care a great deal about ESG harmony when stock prices
are high and times for big business are good, and boy are they
good. Interest rates have hardly ever been lower and corporate tax
rates are still favorable. Government policies on key issues such
as antitrust have been permissive. A Wall Street Journal analysis
found that median pay for the chief executives of more than 300 of
the biggest U.S. public companies reached $13.7 million last year,
up from $12.8 million for the same companies a year earlier. The
onset of a global pandemic and subsequent recession left many of
the largest companies and their bosses in an even stronger
position. But a turn in the stock market's fortunes could slow the
ESG craze on Wall Street.
As for consumers, they are bound to focus less on issues such as
clean energy if, say, traditional fuel sources become more scarce.
Don't expect motorists to appreciate a feel-good origin story for
gasoline that costs eight bucks a gallon.
The socially-minded aspirations of big corporations and their
executives seem performative to their critics and, to a
not-insignificant share of the public, veer into partisan politics.
But in this environment, such behavior in the C Suite is entirely
rational. There is real demand for good feelings among consumers
and investors.
"We're not hungry for a cause. We're starved for a cause,"
entrepreneur and former hedge-fund manager Vivek Ramaswamy told me.
Mr. Ramaswamy, the chairman of Roivant Sciences and the author of
"Woke, Inc.: Inside Corporate America's Social Justice Scam,"
argues that declining membership in organized religion and waning
faith in public institutions create a void that businesses can help
fill. "The value of a product used to be based on how well it
functions -- now it includes its origin story," he says. Tesla CEO
Elon Musk's popularity in some circles, for instance, is tied to
his persona as a maverick executive fighting climate change.
The structure of modern Wall Street feeds demand as well. The
rise of strategies such as indexing mean that large asset managers
are more powerful than ever. They also have to worry about their
image, because funds with an ESG mandate are attracting money from
investors and often command higher fees than other offerings. What
is more, large fund managers often follow the recommendations of
shareholder advisory services when voting in a proxy contest. As a
practical matter, winning the vote of millions of shares can
require convincing just a few key individuals of a proposal's
merit.
This leads to a simple question for executives. "Do you want
your company's stock to have inflows?" Nick Mazing, director of
research at Sentieo, asks rhetorically. Not being in the club can
be costly: Even before the Exxon campaign, so-called vice stocks
such as tobacco companies and fossil fuel producers have been
relative laggards compared with those of businesses perceived to be
environmentally friendly.
Don't expect this state of affairs to change soon. Large pension
funds and other Wall Street kingmakers have signed the United
Nations-backed Principles for Responsible Investment, a document
from 2006 that calls for investors to weigh ESG principles in
making investment decisions. Those who sign on may well have an
easier time accessing capital than those who don't. Companies have
begun issuing debt with special rules that tie interest rates to
whether the issuers meet self-made targets for goals such as
cutting carbon emissions or for naming more women to corporate
boards.
The shocking turnabout at Exxon offers other companies a warning
about what the future holds. About a decade ago, oil executives
would publicly play down the environmental impact of an oil spill.
Now, a descendant of Standard Oil itself must give climate
activists a say in its corporate strategy.
"You might not be interested in ESG, but ESG is interested in
you," says Mr. Mazing.
(END) Dow Jones Newswires
June 04, 2021 11:15 ET (15:15 GMT)
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