Give “S” a chance
Picking companies that are part of that positive development cannot be done by concentrating solely on the “E” in ESG. Stefan Björkman, CEO of the Finnish cultural foundation Föreningen Konstsamfundet, argues that investors need to put more focus on the “S” in order to weed out societal polluters.
Firstly, let’s agree that the purpose of a company is to create value. Over the long term. Short term optimisation does not count. It isn’t true value – just waiting for the next sorry owner that did not do his homework.
I’m not naive. There are countless corporations with really profitable business models that benefit from broken individuals or broken societies. The same way that it has been possible to externalise the costs for environmental waste, you can still often get away with what I would call societal waste. What do I mean? For example, burnouts, obesity, addictions and broken homes. The list can obviously be made much longer. The anonymity of large cities and the infinite internet might give us an illusion that we are not in this together, and that one could avoid responsibility or consequences by simply ducking. Nevertheless, we are in this together as the recent years have demonstrated.
What has been historically profitable might turn out to be a future dud. Just like companies that have been branded as environmental polluters, there are several that could be branded as societal polluters.
But so far when it comes to polluting, the spotlight has been on the “E”. That’s good. And when it comes to ESG, the “G” is fundamental and concrete so I’m convinced that it is in good hands. But now, in the spirit of the protest song from the sixties, all I’m saying is let’s give S a chance.
It’s our own habitat. We live in “S”. It’s really as simple as that. In addition, the impact for action is more immediate than when addressing the climate or biodiversity.
It’s our business environment. Our customers, our source of revenue and our source of talent, of which the latter has become an increasingly obvious bottleneck. In order to fix it, and to attract talent, you need to take “S” seriously. In this transparent world with social media loudspeakers, any transgression, real or perceived, is increasingly costly. And those costs can realise instantly. Obviously, the customers take notice as well.
Finally, the rule of law and democracy are the foundation of value creation. Favouring social media advertising instead of the community paper might make commercial sense short term but it definitely has a societal cost: dissolving communities, erratic politics and longer term something worse. Neglecting “S” is basically to participate in eroding the investment climate. The math is simple. The markets base the valuations on assumptions on the future outlook. If the future looks increasingly risky, risk premiums go up and multiples go down. Confidence in the society at large and the future underpins every valuation of every asset.
I think we should take “S” very seriously. It is not a soft issue, quite the contrary. We are not talking about pet charity projects to gloss over reality. We have to address the very fabric of our society. This does not require any new regulations or legislation. What is required is that all of us start being smarter owners. Taking “S” too lightly carries significant risks. Risks that could be very expensive for us as investors, as citizens and as human beings. Let’s not forget that the bigger you are, the bigger your stake is.