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Blog | Wednesday March 29, 2017

The Growing Business Risks in Fossil Fuels

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According to a new report by the International Renewable Energy Agency (IRENA), the sweeping changes affecting the energy industry could leave more than US$10 trillion in coal, oil, gas, and related assets stranded. IRENA made these reports in preparation for a G20 meeting on climate and energy, but the news underscores a growing number of reports indicating that the fossil fuel industry is on precarious economic ground—posing new risks for companies that rely on oil, gas, and coal.

Even as the fossil fuel industry loses ground, investments in renewables are on the rise, and smart companies are placing their bets on clean energy. “The economic case for the energy transition has never been stronger,” IRENA Director-General Adnan Z. Amin said, following the launch of the organization’s new research. “Today, around the world, new renewable power plants are being built that will generate electricity for less cost than fossil fuel power plants. And through 2050, the decarbonization can fuel sustainable economic growth and create more new jobs in renewables.”

Dozens of leading companies from a wide range of industries—including Apple, GM, Goldman Sachs, Pearson, P&G, Walmart, Wells Fargo, and many more—have joined the RE100 commitment to go 100 percent renewable. As companies consider where to invest in power for their operations and supply chains, they should carefully weigh three main business risks that are pushing many companies away from fossil fuels and pulling them toward the promising opportunities presented by clean energy.

Oil Markets Are Becoming Riskier

A 2016 report by the Financial Times energy editor Ed Crooks painted a stark picture of the U.S. oil industry. Since oil prices began to decline in 2014, oil industry equipment was being sold off at auctions for bargain-basement prices. The founder of one auction agency said he felt like a funeral director telling sellers about the low-priced sales. “I’m the one that has to tell them the bad news,” he said.

The industry’s future outlook is similarly bleak: Over the next 25 years, oil company revenues could fall by at least US$22 trillion, which is equal to twice the GDP of China. Even as revenues fall, the oil industry’s debt is rising. Between 2006 and 2014, the industry’s debts grew from about US$1.1 trillion to US$3 trillion. Between 2015 and early 2016, 52 of the smaller U.S. oil and gas production companies that were participating in the shale gas boom had entered bankruptcy.

Given the combination of growing debts and declining revenues, 40 percent of U.S. oil and production field service companies have earned B- or below ratings by Standard & Poor’s. In 2015, Bank of England Governor Mark Carney predicted that up to 80 percent of fossil fuel reserves could be stranded. This substantiates IRENA’s aforementioned prediction that US$10 trillion in assets will be stranded, which is significantly higher than the US$320 forecast by the International Energy Agency.

For companies purchasing energy and fuel for their operations and supply chains, the volatile prices of oil and gas have increased their interest in renewables. In its friend-of-the-court brief in support of the U.S. Clean Power Plan—the centerpiece of the U.S. climate plan, which is being dismantled under the current presidential administration—leading tech companies pointed out that, “unlike fossil-fuel-powered generation, renewable energy technologies such as wind and solar have low and stable marginal costs, and so permit energy consumers to hedge fuel price volatility and future increases in electricity rates.”

Coal Is a Shrinking Industry and Will Not Rebound

Since the coal mining boom in the 1970s, the U.S. industry has been shrinking, with nearly 200,000 jobs lost since 1979, according to the U.S. Bureau of Labor Statistics. While some political leaders have been pushing a theory that these jobs are lost because of climate-related regulation, economists believe the demand for coal has been shrinking for years. Changes in technology, such as automation, have also contributed to the decline in jobs.

In addition to the drop in jobs, more coal-fired plants are closing. In 2015, 94 plants in the United States closed, and another 41 closed in 2016. For the existing plants, the majority of Americans support regulation. According to new data from the Yale Program on Climate Change Communication, 69 percent of Americans support setting strict carbon-dioxide limits on existing coal-fired power plants, and 75 percent support regulating carbon dioxide as a pollutant more generally.

As coal declines, companies are wise to look at renewable energy. In some parts of the United States, unsubsidized solar is about half the price of coal. Clean energy also holds the promise of jobs: IRENA predicts that the jobs created by the growth in renewable energy will more than make up for the jobs lost due to the transition away from fossil fuels. In 2016, solar industry employment in the United States grew by 25 percent (to 260,000 jobs), surpassing U.S. oil and gas extraction jobs (177,000), and U.S. coal mining jobs (50,000).

Investors and the Public Are Concerned about Climate Risks

The economic risks taking place in the oil and coal markets come at a time when there is increasing public and investor concern over the fossil fuel industry’s climate risks.

Earlier this month, BlackRock, the world’s largest asset manager, announced that it will be putting new pressure on companies to disclose how climate change could affect their business. Shareholders are also holding companies accountable. In 2016, shareholders filed 175 climate-related resolutions, up from 167 in 2016 and 148 in 2015, and resolutions are expected to exceed 200 this year.

Investor concern is matched by public concerns about climate change. According to the 2016 Yale survey, 70 percent of Americans believe climate change is happening, and more than half of all American adults are worried about climate change and believe it is already harming people in the United States. A Pew survey revealed that there is strong bipartisan support for expanding solar and wind energy production.

These developments all speak to a larger trend: As fossil fuels present an increasing number of economic and business risks, smart companies are investing in renewable energy to power their growth.

Blog | Tuesday March 28, 2017

BSR’s Statement on the U.S. Administration Executive Order on Climate Change

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BSR regrets today’s executive order from U.S. President Donald Trump to dismantle the Clean Power Plan, a set of U.S. Environmental Protection Agency (EPA) policies that are intended to reduce the United States’ greenhouse gas emissions by 32 percent from 2005 levels and cut carbon pollution from the power sector by 30 percent by 2030. In combination with the administration's dramatic cuts to climate programs at the EPA and U.S. State Department, this announcement undermines policies that have stimulated economic growth, consumer savings, job creation, infrastructure investment, private-sector competitiveness, and public health.

Business Supports Climate Ambition

In the past several years, many American companies have set ambitious energy efficiency and renewable energy targets. Business has taken action because it understands the economic and environmental benefits of these steps, as well as the opportunity for innovation that the shift to low-carbon prosperity represents. The Clean Power Plan (CPP) provides a platform for these companies with reliable and resilient sources of clean energy and, in turn, generates substantial economic and public health benefits. Just 18 months ago, the U.S. federal government estimated the net economic benefits of the CPP at US$26-45 billion, with consumers set to save US$155 billion from 2020 to 2030. In addition, the CPP provides regulatory support to the clean energy economy, which, according to the U.S. Department of Energy’s Energy and Employment Report, supported more than 3 million U.S. jobs in 2016. The public health benefits are also significant. Research suggests the Clean Power Plan could prevent 3,600 premature deaths and more than 300,000 missed work and school days by cutting pollutants that contribute to soot and smog.

Finally, this order comes at a time when U.S. public concern about climate change is at an eight-year high, with Gallup reporting that 64 percent of Americans are concerned a "great deal" or "fair amount" about the issue. 

Trump's executive order puts this substantial progress at risk, but two critical factors continue to suggest that the transition to a low-carbon economy remains inevitable.

1. Clean power is the energy of choice for resilient and successful businesses and investors.

During the past two years alone, more than 500 companies with US$8 trillion of revenue, and more than 180 investors with assets under management in excess of US$20 trillion have made more than 1,000 commitments to purchase renewable energy, reduce their emissions in line with the best available science, set carbon prices, and end deforestation. Walmart, the largest company by revenue and the largest private employer in the world, committed to reduce emissions by 18 percent. In making the announcement, CEO Doug McMillon said, “We want to make sure Walmart is a company that our associates and customers are proud of—and that we are always doing right by them and by the communities they live in.”

These companies are part of a growing movement in the private sector that sees profits, job creation, competitiveness, innovation, and stewardship of the environment as a virtuous circle—one that delivers for shareholders, workers, and communities across the globe.

Companies like these are committed to clean power because it makes business sense. Many of these companies are achieving an average internal rate of return of 27 percent on their low-carbon investments. And research conducted by CDP shows that decoupling growth from carbon leads on average to a 29 percent increase in revenue alongside a 26 percent drop in emissions.

These companies recognize that renewable energy technologies, such as wind and solar, have low and stable marginal costs that are generated or purchased at or below the cost of fossil-fuel-generated power sources. This allows companies to hedge fuel price volatility and future increases in electricity rates. An increasing number of these companies are using power purchase agreements to lock in electricity prices for 10-20 years, providing cost certainty. Global investment in renewable energy power capacity in 2015, worth US$265.8 billion, was more than double the dollar allocations for new coal and gas generation (estimated at US$130 billion in 2015).

Many leading businesses have stated their clear desire to see the CPP survive. In April 2016, Amazon, Apple, Google, and Microsoft jointly submitted a brief to the U.S. Court of Appeals for the District of Columbia Circuit in defense of the Clean Power Plan. By the third quarter of 2016, these companies were the top four most valuable publicly traded companies in the world by market capitalization, accounting for more than 7 percent of U.S. GDP. The four companies have all stated clearly that the Clean Power Plan incentivized renewable energy and enabled business to reconcile duty to shareholders with care for community and planet.

Business has set a course for a low-carbon economy fueled by clean power and intends to continue that journey, irrespective of changes to U.S. federal policy.

2. The political will to act is resolute across the globe and deep within the United States.

The historic Paris Agreement on climate change brought together 196 governments to commit to deep decarbonization well before the end of this century. This commitment is already being translated into national climate policies in the form of 189 national climate action plans. Collectively, these plans provide business with the direction, confidence, and certainty it needs to make long-term investments in innovation and infrastructure.

Importantly, the plans represent more than US$13 trillion in clean energy investments over the next 15 years. This global multistakeholder consensus remains intact, despite today’s announcement, and will survive policy volatility in Washington in the coming four years. Meeting in Marrakech, Morocco, days after the U.S. presidential election, nearly 200 nations adopted the Marrakech Action Proclamation, reaffirming their commitment to the full implementation of the Paris Agreement. They have been resolute in their belief that “momentum is irreversible,” as it is “driven not only by governments, but by science, business, and global action of all types at all levels.”

In addition, other countries are increasingly assuming a leadership role in the transition to a low-carbon economy. China issued a statement that U.S. political changes would not affect its commitment to realize the ambition of the Paris Agreement. More importantly, China is moving ahead with increasing its non-fossil-fuel share of energy use to around 20 percent by 2030, reducing the carbon intensity of its economy by 65 percent, and launching a national emissions-trading system. Each year, China adds roughly the total existing electricity capacity of a large U.S. state and is the largest investor in renewable energy, spending over US$54 billion in 2013 alone.

We encourage the president to rethink today’s decision. Retreating from the Clean Power Plan injects business uncertainty where it is not needed, turns away from an innovative approach to clean energy that will create valuable new business opportunities, and is out of step with the clearly stated objectives of the most dynamic businesses in the United States and the world. 

Blog | Monday March 27, 2017

The Five Levels of Building an Ethical Culture

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How to build and sustain an organization whose employees are happy, motivated, and ethical remains one of the most complex, elusive questions confronting business leaders. Organizational culture is determined by the interaction of systems, norms, and values, all of which influence behavior. 

Much discussion of organizational culture still focuses on structural changes to corporate governance and compliance systems, along with drives to identify “bad apples.” Alternatively, we find glossy brochures, chief happiness officers, bonding exercises, and free beer. Still, public trust in business keeps falling and corporate scandals persist.

In a new BSR working paper, “The Five Levels of an Ethical Culture,” we argue that companies seeking to understand and build an ethical culture should consider systems thinking and group dynamics theory. In the paper, we define what a successful approach looks like, drawing on our experience helping companies create cultures of sustainability, reviewing a broad range of academic theories, and interviewing 23 ethics experts.

Our findings suggest that companies often overlook relationships among and within groups in the organization. Organizations are open systems: Their properties are greater than the sum of their parts, and these properties nest within other systems, forming a network of relationships. Efforts to change culture must therefore focus on every level in the system. These efforts should target individual engagement and motivation, interpersonal interactions, group dynamics, relationships among groups, and interactions with external organizations, including suppliers, customers, competitors, and civil society. Without a comprehensive, multilevel approach, employees will notice any mismatches in the signals an organization gives, and this will undermine efforts to build an ethical culture.

The paper explores five levels at which companies should build an ethical culture.

1. Individual: How individual employees are measured and rewarded is a key factor that sustains or undermines ethical culture. In the face of pressure to meet growth targets by any means necessary—a belief that the ends justify the means—unethical behavior is to be expected. Therefore, the rewards system is an excellent place to start. And diversity and inclusion initiatives enable individual employees to bring their whole selves to work: Employees who feel it unnecessary to hide aspects of their social identity to fit into the dominant culture will experience less conflict between personal and organizational values and will express themselves more confidently—making them more inclined to raise concerns about ethics.
2. Interpersonal: Organizations can also focus on how employees interact across the hierarchy. Abuse of power and authority is a key factor that degrades organizational culture. When decisions around promotions and rewards seem unfair and political, employees disregard organizational statements about values and begin pursuing their own agendas. Building an ethical culture from an interpersonal perspective requires meaningful protections that empower all employees and stakeholders, even the least powerful, to raise concerns and express grievances. Meanwhile, leaders must recognize the outsized role they play in setting culture and driving adherence to ethics, and they must learn to exercise influence carefully.
3. Group: Socialization into group memberships and relationships is a core aspect of human culture. At work, the key determinant tends to be an employee’s group or team. As organizations become more geographically diffuse and loosely aligned, it becomes harder to set and define consistent organizational culture. Focusing on team conditions can empower middle managers to feel responsible for changing culture and group dynamics to foster more effective ways of working. While clarity in roles and tasks is key to a successful team, so is psychological safety. If employees feel secure in taking risks and expressing themselves, teams will be more creative, successful, and ethical.
4. Intergroup: The quality of relationships among groups is critical to consider in any attempt to build an ethical culture. Celebrating a team whose high performance may stem from questionable conduct gives it power and a mystique that is difficult to challenge, and this can undermine values across the organization. Teams working in sustainability or compliance often need to scrape for power and resources; when members are attached to matrixed working groups, accountability can get watered down.
5. Inter-organizational: Most discussions of organizational culture focus on internal relationships. Still, employees are keenly conscious of how a company treats suppliers, customers, competitors, and civil society stakeholders, so building and maintaining stakeholder trust will improve organizational culture. Moreover, companies need to ensure that their values and mission statements amount to more than words on a website. Business success and core values are not contradictory concepts. That said, building an ethical culture sometimes means walking away from lucrative opportunities. Companies can be sure their employees will notice.

However enormous the long-term rewards, there is no single, simple formula for building an ethical culture. We at BSR hope to gather ideas and continue this discussion. We’ll be grateful if you download this working paper and send us comments, criticisms, and real-world examples of approaches that you have found successful—or not.

Join BSR’s Alison Taylor at the OECD Integrity Forum, in Paris March 30-31, where she will speak on the plenary panel “Equality, Inclusion, Trust: The Real Value of Integrity.” Download BSR’s new working paper, “Five Levels of an Ethical Culture.” 

Blog | Thursday March 23, 2017

Lessons in Technology and Convergence from SXSW 2017

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Healthcare and social media platforms, dogs and tech wearables, environmental conservation and virtual reality—to many, these topics seem dramatically divergent. But while attending this year’s South by Southwest (SXSW) Interactive conference in Austin, Texas, I found that they are anything but.

SXSW brings together global professionals from across industries to network and explore diverse topics in the worlds of tech, entertainment, and culture. Tracks ranged from brands and marketing to health, and from web development and coding to government. And while these tracks attracted participants working in completely different arenas, one underlying theme ran throughout the event: convergence.

As Kevin Clark of the Center for Digital Media Innovation and Diversity at George Mason University put forth in a session on addressing gender norms in entertainment media, the world of technology and media is an ecosystem; it doesn’t operate in isolation. More and more, companies, particularly in the technology sector, are partnering with other companies, foundations, governments, and nonprofits to collaborate on global issues and use emerging technologies to drive social and environmental progress. In our increasingly connected world, businesses and others are finding that they, too, must find ways to come together.

Under the overarching theme of convergence, here are four trends from SXSW for companies in all sectors to keep an eye on.

1. The emergence of augmented and virtual reality (AR/VR) 

These terms were everywhere, and you couldn’t walk more than a city block without an opportunity to play around with the latest gadgets. While AR and VR technologies are still nascent, many conversations revolved around the question of how they will be used—including as a tool for generating empathy and driving and scaling societal change. I put on VR goggles to go “under the canopy” in the Amazon rainforest as part of an effort led by Conservation International with support from HP Inc., Jaunt, Johnson & Johnson, the MacArthur Foundation, and the Tiffany & Co. Foundation to raise awareness of the region and its value to human well-being. In a session on VR as a tool for accelerating global policy change, I also learned about Merck For Mothers’ work using VR to immerse policymakers in maternal health issues in their countries and remind government officials of the healthcare for which they are responsible.

2. Connections between technology and journalism, activism, and politics

Following 2016’s Brexit vote and U.S. presidential election, much of SXSW was focused on what the current political climate means for big data tracking, communications and journalism, and the relationship between government and technology. As U.S. Senator Cory Booker stated in the Interactive opening keynote, “If we are silent in the face of injustice, we are complicit in that injustice.” Booker was joined on stage by Google’s Senior Counsel on Civil and Human Rights Malika Saada Sar, and they discussed the role technology played and will continue to play in politics and how it can be an essential tool for “re-stitching our fractured society.” Other sessions also focused on fake news and “alternative facts”—one speaker offered potential solutions for social media platforms to fix algorithms so that they eliminate echo chambers and show users more diverse views, with the aim of reducing political polarization. She also suggested that, as artificial intelligence (AI) expands, those companies will have more responsibility for their influence on users.  

3. Partnerships between tech and other sectors

Innovation and disruption reign at SXSW, and this year emphasized how tech intersects with other sectors, particularly health and medicine. For example, David Karp, the CEO of Tumblr, is leading an initiative to create tech community support for Planned Parenthood—using #TechStandsWithPP as the rallying hashtag to generate support for access to healthcare in the United States. In his keynote, former U.S. Vice President Joe Biden celebrated the technology sector for its dedication to cancer research. He urged innovators to help with electronic data-sharing and to connect and empower cancer patients. Other notable discussions included lessons that healthcare can borrow from tech, including using rideshare apps to connect patients with medical services, using VR to alleviate pain after surgery, and even how technology can enhance veterinary medicine and the relationship between humans and dogs.

4. Machine learning and AI

Nearly every day, the SXSW program featured multiple sessions on the future of AI and its societal implications. While AI and automation will benefit society in many ways, they are also already negatively affecting jobs and changing the nature of work. With ubiquity of AI on the horizon, conversations throughout the week focused on everything from the ethical use of AI therapists to chat bots and other AI innovations in marketing to governance, policy, and transparency issues.

Innovation is everywhere, and SXSW showcased how previously separate worlds are converging to connect people to information and services, increase empathy for global societal issues, and affect policy change.

And now, thanks to the countless innovations exhibited at SXSW, I’m also one step closer to finally being able to “speak dog.”

Blog | Wednesday March 22, 2017

Investors, Consumers, and Markets Demand Climate Action: Four Trends for Your Business to Know

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On March 13, 2017, BlackRock announced that it would expect companies to provide assessments of how climate change would affect their business. BlackRock is the largest asset owner in the world—its US$5.1 trillion under management is equivalent to 4.3 percent of the world’s GDP—and this announcement confirmed an already strong trend of investor pressure around climate issues. When it comes to key business drivers, which include investors, consumers, employees, and markets, it’s clear that climate ambition is a growing requirement for companies.

Here are four business driver trends that you should know as you explore how to implement climate strategies that support a low-carbon economy.

Investors Are Demanding Information about Your Climate Strategy

In 2016, shareholders filed 175 climate-related resolutions, up from 167 in 2016 and 148 in 2015, and resolutions are expected to exceed 200 this year. This trend is especially strong in the oil and gas sector, where shareholders at Exxon and Chevron, for instance, are formally recognizing climate change as a major risk. These resolutions, when accepted, demand that climate risk assessments are made available to investors. Since 2015, when 99 percent of shareholders voted for a special resolution, Shell has been required to report on operational emissions management and low-carbon energy R&D as part of its regular reporting. That same year, 98 percent of BP’s shareholders voted to have the company publish more information on a number of climate issues, including: whether the value of its oil and gas reserves would be damaged by limits on carbon emissions, its investments in low-carbon technology, the scale of carbon dioxide emissions from its operations, the linking of executive pay to greenhouse gas reduction, and its lobbying on climate change.

Meanwhile, the Financial Stability Board will soon submit recommendations for climate-related financial disclosures to the G20 after a two-year consultative process. The aim is for companies across sectors and geographies to adopt the recommendations, which would allow investors to make better-informed investment decisions.

Markets will continue to evolve in this direction as well, since, according to Morgan Stanley, 86 percent of millennials—broadly defined as those born between the early 1980s and 2000—say they are interested in socially responsible investing and are twice as likely to invest in a stock or a fund if social responsibility is part of the value-creation thesis.

Consumers Are Willing to Pay a Premium for Your Products and Services

Pressure is coming from another key constituency: customers. As consumers seek to align their values with how they spend their money, brands can benefit from this growing trend. The Energy Star brand—represented by a logo on appliances that meet the program’s energy efficiency requirements—does wonders for participating companies. According to a survey, brand recognition of Energy Star is around 90 percent, and more than 45 percent of respondents said they had knowingly purchased an Energy Star product. The program, which was created by the U.S. government, is under threat in the current U.S. administration, but it seems that globally, the trend will continue: Consumers across sectors are willing to pay more for responsible products. According to Nielsen, 58 percent of consumers would pay a premium to an environmentally friendly brand, and this figure climbs to 72 percent among the consumers of tomorrow, who are currently between the ages of 15 and 20. 

Talent Is More Likely to Come—and Stay—if You Serve a Cause They Value

One of the world’s most influential business leaders, Carlos Ghosn, who is Chairman and CEO of Renault, Nissan, and Mitsubishi Motors, famously stated that “employees are [a company’s] most valuable assets.”

More than half of the workforce will consist of millennials in 2020, 3 out of 4 millennials accept that climate change is a fact, and 87 percent of them measure the success of a company based on standards that extend beyond financial measures to include social and environmental performance. Therefore, it’s a simple fact that companies that wish to attract and retain top talent will need to make sure they are addressing climate change appropriately. What is more, one-fifth of students from top business schools in the United States refuse to work for a company that has bad environmental practices, which means the talent pool for companies that do not address climate change is not only shrinking—its quality is lessening.

New Demand for Climate-Compatible Products Is an Opportunity for Innovation

Some companies have taken proactive measures to respond to external pressures from markets through low-carbon innovation. Automakers are significantly investing in green technologies in their R&D budgets, and the electric vehicle market has grown by more than 50 percent in the past 4 years globally. Ford has committed to invest US$4.5 billion in electric vehicles by 2020, and Daimler has committed US$11 billion until 2025, when it aims to come out with 10 electric passenger vehicles. In parallel, companies investing in energy storage are bringing down the cost of batteries. Since 2008, the cost of batteries has already fallen 80 percent, and Tesla and partners’ multibillion-dollar research investment aims for batteries in 2020 that are 35-50 percent cheaper than current ones. Not only are these companies accelerating the shift to a climate-compatible economy, they are disrupting markets, taking the lead in innovation, and responding to growing demand from consumers.

Combined, these key drivers make a strong business case for climate action. Companies that integrate these trends into strategic decision-making are likely to capture opportunities with investors, consumers, and employees, while reaping the benefits of innovation. No longer an add-on to business strategy, climate action is rapidly becoming one of its pillars.  

Blog | Friday March 17, 2017

Evolution in Private Equity ESG: From Policies and Efficiency to Impact

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The evidence and impetus are powerful for integrating environmental, social, and governance (ESG) factors in private equity investing. In response, the sector is doing important work to protect against risk, enhance value, and improve sustainability. But it’s also time for a reality check: Swapping in energy-efficient light bulbs is important and necessary, but it is not sufficient to address the most pressing challenges facing the sector’s business and societal impacts. To address those challenges and stakeholder concerns—including from asset owners, media, employees, and regulators—the sector is evolving toward a more integrated and strategic approach to addressing sustainability impacts, such as good jobs, inclusive economy, sustainable solutions, and transparency.

ESG management practices are increasingly the norm among top U.S. firms and are spreading to the middle market. At BSR alone, we’ve seen an explosion in the number of advisory projects we conduct to support ESG integration, including projects to develop policies and strategies, conduct ESG diligence, and implement ESG at the portfolio level. This growth reflects several factors; chiefly, attention from limited partners (LPs) that invest in private equity firms, requests to portfolio companies’ customers, and the recognition that ESG factors are linked to effective long-term management and value creation.

Most U.S. private equity firms’ efforts focus on management of ESG basics at individual companies—and that makes sense. Efficiency and risk management projects on topics like water use and health and safety offer enormous opportunities to protect and create value while creating tangible sustainability benefits and demonstrating the “business case.”

As important as the focus on ESG basics is, though, it risks missing the forest for the trees. As the U.S. presidential election demonstrated, the public is deeply concerned—even angry—about the relationship among capital, business, and society. Gallup ranks confidence in big business at 6 percent, second-to-last on a list of American institutions; on a subsequent poll on attitudes toward business, the “banking” sector ranked 19 out of 25.

Whether or not it’s fair, private equity often gets the brunt of that negative perception and press due to a number of factors, including full ownership of portfolio companies, a history of limited transparency, complex remuneration structures, and headline-ready examples; it seems not a month goes by without a major media article on the negative impacts of a private equity deal.

These perceptions affect private equity firms in three particular ways. First, asset owners are increasingly concerned about ESG management and reputational risks. Major public pensions, such as in California, France, and Sweden, have adopted policies mandating attention to topics like climate change and human rights. The California State Teachers’ Retirement System (CalSTRS) notably divested from a private equity investment in firearms following a school shooting. University endowments are increasingly taking action in response to student concerns over climate and social impacts.

Second, the sector and its portfolio companies are in a fierce fight for talent, especially as more professionals with MBAs are drawn to Silicon Valley. Dustin Clinard, managing director at Universum Global, a firm that tracks employer popularity, noted: “MBA grads are placing an increasing amount of importance on companies that have an inspiring purpose. They do more than simply make money. They make money with a purpose of greater good to it.”

Finally, regulators and politicians at the U.S. federal and state level have put heavy scrutiny on the industry. In a rare moment of agreement in the 2016 U.S. presidential debates, both candidates expressed a desire to eschew the favorable tax treatment of “carried interest.”

Stakeholder concerns are not focused on whether private equity portfolio companies have health and safety policies or use water-efficient toilets. They are focused on more fundamental concerns about what types of companies private equity invests in, what they do with those companies, and what the impacts are on stakeholders. As a result, the sector’s challenges require more fundamental and strategic ESG thinking. While some firms are already making strides, the sector needs to become more broad, consistent, and bold in asking tough questions, such as:

• Which stakeholders are affected by our investment in a company and how?
• How do we create better jobs that benefit employees, communities, and investors?
• When we feel we must perform layoffs, how can we lessen the negative impacts? (To start, companies can learn from my colleague Susan Winterberg’s research on Nokia’s Bridge program.)
• How can we be more transparent and provide public information on our impacts and efforts, like Apax Partners, The Carlyle Group, Oak Hill Capital Partners, and others?
• How can we harness private capital to tackle some of the world’s greatest challenges, which firms like Bain Capital, KKR & Co., and TPG and are exploring?

In many ways, the evolution from efficiency and policy-driven approaches to more strategic, holistic sustainability integration parallels shifts in the broader corporate sustainability field. Other sectors like technology and consumer products began shifting from strategic philanthropy to sustainability efficiency to integrated approaches years ago. The private equity sector is on a similar path, with a lot of opportunities to advance.

The private equity sector has a powerful and positive role to play in deploying capital toward a sustainable, inclusive economy. While ESG professionals in private equity should remain focused on direct value creation, it is imperative to begin asking broader questions and developing strategic answers. If the investment sector wishes to talk the talk of fueling innovation, growth, good business, and societal benefits, it must also walk the walk—to employees, investors, communities, regulators, and the public.

Blog | Thursday March 16, 2017

Yes, It’s Your Business: The Private Sector Must Address Gender-Based Violence

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While progress on gender equality continues to advance too slowly, we are encouraged by signs that the private sector is taking an increasing role in making women’s empowerment a priority. For instance, more than 1,440 companies have signed the Women’s Empowerment Principles, suggesting that more and more companies are making women’s empowerment a strategic priority, with CEO-level support. In parallel, through our own work developing guidance on how to embed a gender lens in supply chain sustainability programs, we see more companies recognizing that resilient supply chains are intricately linked to the well-being and empowerment of women. And BSR’s HERproject has nearly 50 global active companies enhancing the lives of women working in their supply chains.

Despite these signs of progress, companies remain uncertain of how to grapple with the complex issue of gender-based violence. Without adequate attention and action, this issue will undermine any serious efforts to achieve gender equality.

Gender-based violence, which includes any act that results in, or is likely to result in, the physical, sexual, or psychological harm or suffering of women, is deeply rooted in gender power imbalances and adverse social norms that condone violence. When violence against women is perpetrated by intimate partners or happens in the workplace (whether in direct operations or global supply chains), it is an issue that concerns business. And the two are often linked: Intimate partner violence in the home may manifest as power imbalances in the workplace that facilitate sexual harassment. A staggering one in three women will experience some form of physical or sexual violence in her lifetime, usually by an intimate partner. That means most of us will have a close colleague who is a victim of physical or sexual violence.

For business, addressing gender-based violence in the workplace is a moral and business imperative; however, the damaging impacts of gender-based violence extend far beyond the workplace, affecting individuals, families, and communities. Given the complex origins of the problem and the far-reaching social consequences, many companies ask: “Is it our business?” We think it is. And we want to work with business on a global scale to address the problem.

The Cost to Business of Gender-Based Violence

The cost of gender-based violence to business is both direct and indirect. Violence against women prevents an economy from attaining its full potential, resulting in lower growth, lower taxe revenue, and greater expenses to healthcare, education, the justice system, and social services. For instance, one source estimates that globally, the costs of female homicide and violence by an intimate partner and sexual violence against women at more than US$110 billion per year. A Canadian study estimated the annual cost of domestic violence to the Canadian economy to $7.4 billion (Canadian dollars). It also affects business more directly through increased absenteeism, higher prevalence of presenteeism, and higher administrative and operating costs to compliance, training, and other programs. One research estimate puts the annual productivity loss of sexual harassment in a typical Fortune 500 company at US$6.7 million. Another study suggests that the Peruvian economy annually registers more than 70 million days of missed work because of violence against women.

In addition to the direct impacts, many businesses must also consider the risks—and costs—stemming from gender-based violence in their supply chains. While many global and international companies seek to mitigate the risks of human rights violations in their supply chains (through codes of conduct and associated assurance systems), our work on women’s empowerment shows that the absence of a gender lens means that such efforts are not effective at identifying, mitigating, or redressing gender-based violations. This exposes companies to risk of complicity in human rights violations, as well as risks to supply chain resilience and business continuity.

What Business Can Do

Effective business action to eliminate gender-based violence requires companies to consider the different ways they can prevent violence from occurring in their own operations, as well as how they can use their brands and reach to challenge the norms and stereotypes causing the problem in the first place. We believe companies can take action in three fundamental ways:

• Act to prevent gender-based violence within the company walls through HR-led policies, systems, training, communication, and dialogue, as well as by ensuring adequate complaint mechanisms are in place. Companies should also ensure market-facing business practices in marketing, communications, sales, and other units do not contribute to gender stereotyping and perceptions that influence societal values, norms, and attitudes that condone violence against women.
• Enable and support business and civil society partners throughout supply chains to eliminate gender-based violence in the workplace. For example, companies are partnering with their suppliers through BSR’s HERrespect program to address sexual harassment and violence in factories and on farms. And global facility services company, Sodexo, seeks to connect survivors of gender-based violence to employment opportunities within the company and with partners.
• Influence consumers, customers, business partners, community leaders, politicians, and regulators to raise awareness; influence attitudes and norms; mobilize collective action; and change laws, regulations, and administrative practices to prevent violence from occurring and to provide proper redress and support to survivors when violations do happen.

The basic premise of our act, enable, and influence framework is that effective, lasting solutions require a comprehensive and holistic approach. In this, influence must be viewed as an essential element—even as we recognize that some businesses may see this as going beyond their realm of responsibility. We believe that business has a tremendous role and opportunity—as well as a business case—to go further. In our view, business wields formidable powers through marketing and communications to influence consumer norms and attitudes as intimate partners, as community members, and as colleagues.

We are encouraged that more companies have started to address gender-based violence within and outside company walls. We need this. We also need more discussion and dialogue on the role of business, we need to know what works and what doesn’t, and we need find ways for collective action that involves collaboration among business leaders, engagement with policymakers, and close partnerships with local organizations. Therefore in 2016, BSR, in collaboration with Win-Win Strategies, launched Business Action for Women, a global platform to drive collective action on women’s empowerment. Gender-based violence is one of our focus areas, and we invite you to join as we take this global challenge on. 

Blog | Wednesday March 15, 2017

A New Tool to Help Companies Close the Gender Gap

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At the current rate of change, it will take more than 100 years to achieve full gender equality. The UN’s High Level Panel on Women’s Economic Empowerment, which includes leaders from business, the UN, government, and women’s organizations, reported last autumn that progress has been “far too slow.” And a recent McKinsey study highlights the fact that while many companies are making top-level commitments to women’s empowerment and gender equality, few companies have matched commitments with concrete plans integrated throughout the business. As a result, companies are missing out on tremendous potential gains across their business—from improved performance and retention of employees, to innovation, to expansion to new markets.

With so much clear evidence of the social, moral, and business case for promoting gender equality, what is needed to accelerate the pace of change and for companies to take intentional, ambitious action? One challenge we’ve heard from companies is identifying the right entry point for their company—essentially: “Where do I start?”

A new tool released today is intended to begin answering that question. The WEPs Gender Gap Analysis Tool helps the global business community identify gaps in its performance on gender equality and enables companies to make informed decisions on setting goals and strategies. Inspired by the Women’s Empowerment Principles (WEPs) initiative, the tool is a joint project of the UN Global Compact, UN Women, the Multilateral Investment Fund of the IDB, and the Inter-American Investment Corporation, and is supported by the Governments of Japan and Germany, The Coca-Cola Company, BSR, Itaipu, and KPMG.

The tool is grounded in the WEPs global framework, which helps companies empower women in the workplace, marketplace, and community. BSR signed the WEPs in 2015 to uphold best practices in our own organization, as well as to work with our member companies to promote, share, and scale best practices on women’s empowerment. Since we signed the WEPs, we joined its Leadership Group to contribute to the promotion and uptake of the WEPs by our network of member companies. We’re pleased to be among 38 of our BSR members in joining the WEPs initiative—and more than 1,400 companies globally.

As many of our members know, women’s empowerment is a central focus for BSR, and through our women’s empowerment practice, we work with companies to catalyze effective and ambitious action. Our women’s empowerment practice draws on more than 10 years of experience working on global women’s issues. Developing practical strategies, tools, and solutions with companies is one prong of our strategy.

Through our work on the WEPs tool, we are adding another resource to assist companies to take action on women’s empowerment. BSR and our partners designed the tool to translate the WEPs from principles into action through two key features.

First, the tool provides a broad overview of areas in which companies affect women. The tool asks a number of questions, including around companies’ leadership commitment and workplace policies and programs to support women, as well as a companies’ approach to supply chain, product development, CSR, and more. Companies and gender equality experts identified these areas during 12 global consultations with more than 170 companies.

Second, the tool helps companies understand how far they’ve gone in each area. Have companies made a formal commitment in a particular area, such as business relationships with women-owned businesses? Are they implementing practices to improve their performance? Are they measuring impact and ultimately sharing results with their board or external stakeholders? The tool provides a checklist for companies to see what action looks like across commitment, implementation, measurement, and transparency.

Initial feedback on the tool has been positive. Through the consultation phase, as well as a pilot with an additional 20 companies, we’ve worked to make the tool reflect real-world business practices. During the pilot phase, companies liked that the tool covers broad points of analysis of how a company takes action on gender equality. The tool also inspired internal conversations across the business about “what good looks like.”

By applying the tool, companies will not only have a better understanding of their own status, they will also be equipped to take the next step. BSR now offers additional services to help companies understand the tool’s results, identify priority investments, design and implement a women’s empowerment strategy, and measure impact.

Although much work remains to achieve gender equality, the launch of the new WEPs tool is one resource to make progress. We look forward to supporting companies to take stock of their current performance, and we hope that, in a few years, the tool will evolve to reflect emerging, leading examples of corporate practice. 

Blog | Tuesday March 14, 2017

Sustainability: A Brand’s Secret Weapon

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Business leaders possess a singularly powerful tool to build the world we all want to live in: their corporate brands. We witnessed this recently through a handful of remarkable Super Bowl 50 commercials. Brands such as Airbnb, Budweiser, and Coca-Cola aired politically charged commercials celebrating multiculturalism.

It’s well researched that brands capture consumers’ hearts and minds in an incredibly powerful way. Brands can inspire people to be more tolerant of other cultures, empower women, or conserve resources. Not only can brands make a positive difference, but when they seriously engage with issues like inclusion and diversity, greenhouse gas emissions, raw materials and product design, or labor issues, they can build winning brand strategies.

One of the most talked-about demonstrations of this in practice is Unilever’s “sustainable living” brands, which are growing 30 percent faster than the rest of the business. These brands—including Ben & Jerry’s, Dove, and Knorr—have put societal and environmental responsibility at the very core of their brand strategies, shaping not only brand communications but also community engagement, product innovation, and the supply chain.

In short, the discipline of sustainability can be the brand manager’s best friend. An understanding of social, environmental, and economic impacts can precisely identify the big issues that a brand can credibly address and that are relevant to the organization's strategy, purpose, and material issues. This understanding can also drive insights and creative thinking. Brand managers and sustainability professionals can work together to define meaningful metrics, such as demonstrating success in brand affinity or societal impact.

Yet many businesses are missing these huge opportunities. Sometimes, the brands in their portfolio haven’t fully embraced the corporate-level sustainability strategy, or brand owners haven’t thought through how improved sustainability practices can drive brand desirability, business growth, and innovation.

Integrating sustainability into brand strategy requires a different approach for brand and sustainability teams that may not have worked closely together before. After all, how many brand specialists will be familiar with materiality assessments or, conversely, sustainability experts with the intricacies of brand keys?

Yet, this collaboration can transform the positioning of sustainability within an organization and deliver a purpose-led brand that is differentiated in the market and drives growth. In short, it's a win-win.

To integrate sustainability into the brand strategy requires a two-step process. Brand owners and their creative agencies should start by gathering and refining consumer and cultural insights related to the organization’s sustainability commitments. They then use these insights to create a toolkit whose aim is to help brand managers make the leap from abstract sustainability strategy to consumer-led brand strategies. For example, a brand in a declining fragrance market might find ways to engage women who are concerned about allergens and perfumes when pregnant. A laundry brand, aware of increasingly frequent water crises, could formulate a low-rinse formulation, which creates a consumer benefit, increases brand love, protects its market, and helps alleviate a serious and deepening environmental problem.

In developing the toolkit, it is critical to get inspiration from other brands—both in and out of category—that have embedded sustainability commitments into their core brand strategy or as long-running campaigns. And “steal with pride”—use existing internal brand key or innovation models to help translate the organization’s sustainability commitments to the brand level.

The next step is to work with each brand to figure out how it delivers on the company’s sustainability commitments and, more importantly, how it can leverage sustainability to build brand equity. By examining the toolkit, the specific brand key, consumer insights, and the product innovation pipeline, the brand can identify positioning territories, product innovation ideas, and campaign-able areas to drive brand growth. The process considers the brand’s existing or potential purpose (its role in the world) and its products (encapsulating social and environmental impacts). This process allows brands to build a marketing roadmap to implement in house or alongside their marketing agencies.

But the process can be challenging, and so, we want to share five lessons we’ve learned from working with multi-brand clients in the luxury, beauty and personal care, food, and retail sectors.

1. The process is part art and part science. It combines rigorous process, technical knowledge, consumer insight, and creative thinking. The answers won’t be immediately obvious.
2. Take a robust approach to filtering corporate commitments, and only focus only on those that are relevant and authentic to the brand and its consumers.
3. Involve brands at the earliest opportunity. A purely top-down approach takes too long, and marketers move very quickly once brand-building value is understood.
4. Involve R&D early in the process, as the team’s input, especially on sustainable product innovation, will be invaluable.
5. Ask yourself whether the revised brand positioning passes the sniff test—does it feel authentic? If not, don’t press on.

As business leaders try to make sense of the rapidly changing world around them, one of the most powerful things they might do this quarter to boost the top line and fulfill their duties as corporate citizens, is to invite their brand and sustainability teams to collaborate more meaningfully on the products and marketing campaigns they will bring to life. Now is the time to move to this still largely unexploited phase of sustainability and reap the rewards.

Blog | Monday March 13, 2017

Preventing Violent Extremism: An Interview with Amy Cunningham, GCERF

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Amy Cunningham is a senior advisor at the Global Community Engagement and Resilience Fund (GCERF), a Geneva-based public-private partnership and global fund working to support grassroots initiatives to prevent and counter violent extremism. A foreign policy professional who previously spent five years at a U.S. think tank working on issues related to human rights, security, and religious tolerance, Cunningham leads the fund’s private-sector engagement and supports its external relations and outreach.

She sat down with us to discuss how all stakeholders, particularly the private sector, can engage to provide positive alternatives that prevent vulnerable men, women, and youth from joining terrorist groups.  

Susan Winterberg: Why should business leaders focus on the issue of violent extremism?

Amy Cunningham: Violent extremism threatens not only the safety of citizens, but also economic development and investment. According to the 2016 Global Terrorism Index, the global economic impact of terrorism reached US$89.6 billion in 2015. Violent extremism affects business operations, disrupts markets and supply chains, depletes talent pools, inhibits investment, limits expansion, and curtails innovation. Additionally, it is important that the private sector take this issue seriously because, at times, their actions have inadvertently stoked community tensions or contributed to the ability of groups to perpetuate a violent narrative.

There is a misconception that violent extremism threatens only those companies with assets on the ground. In fact, violent extremism (including the presence of or threat from terrorist groups) prevents access to markets and hinders growth in all sectors. Certain industries have obvious interests in preventing violent extremism, such as extractives and agriculture, which are threatened by violence that erupts in the areas where they maintain personnel and property. For the tourism industry, revenues are twice as large (in terms of contributions to GDP) in countries where there have been no terrorist attacks. There are, however, many other industries that can play an important role in preventing violent extremism and that are also directly affected (food and beverage retailers, garment industry, construction, and technology, to name a few).

Winterberg: How is GCERF working with communities to promote inclusion as a means of preventing violent extremism?

Cunningham: From our work in Bangladesh, Kenya, Kosovo, Mali, and Nigeria, we know that political, social, economic, and other forms of marginalization can play a huge role in motivating a person toward adopting violent extremist narratives. For this reason, GCERF works diligently to promote inclusion and social harmony from the grassroots level upward.

Community cohesion is essential to strengthening resilience against violent extremism ("resilience" being the ability of community members to adapt and recover from violent extremist threats and attacks). For this reason, in each community we fund activities in, we prioritize raising awareness of the threat of violent extremism. To raise awareness, we support community dialogue programs that are inclusive of members of society who might otherwise not have the opportunity to engage with their peers and neighbors. For example, we fund network events for women and girls who might traditionally be excluded, interfaith dialogues to encourage peacebuilding, and gatherings to provide safe avenues for engagement and sharing of frustrations among civilians, law enforcement, and officials. An inclusive society, one where trust, transparency, and human dignity are prioritized, will prove more resilient—and, ideally, resistant—to the violent narratives and ideologies professed by terrorist groups.  

Winterberg: What opportunities are there for companies to become engaged in work on preventing violent extremism?

Cunningham: There is no shortage of opportunities for companies, large and small, to engage in preventing violent extremism. On the whole, the private sector is regarded as faster, more flexible, and more focused than the public sector and, therefore, has the potential to help stabilize at-risk communities, while simultaneously securing its own business operations. When encouraged and supported, enterprise can also take more risks, such as piloting ideas or innovating programs that might fail but still provide valuable lessons for all stakeholders.

We recognize that business can offer more than just financial resources. For example, companies have marketing and branding acumen that can help position and promote prevention of violent extremism objectives. Also, by virtue of working on the ground directly with—and within—local communities, they have intimate understanding of local contexts, cultures, and networks that governments and aid agencies may not. In our experience, some of the best private-sector engagement on this issue comes from communications, technology, and social media companies, which readily harness their internal expertise to produce or amplify content online that counters violent extremist narratives. Similarly, it is no secret that one way to curb the appeal of violent extremist groups is to provide positive, alternative opportunities to vulnerable individuals, such as job training and job creation—two things that the private sector has excelled in.

At GCERF, we frequently meet with dedicated and ethical business leaders who are genuinely committed to making a difference in the communities where they operate, but too often, their CSR objectives are nearsighted or lack a prevention of violent extremism “lens,” which is to say that they fail to appropriately consider fragile cultural contexts and the level of resilience within the community in advance of beginning programming. We are huge advocates for CSR, but we also think prevention of violent extremism should be considered when crafting core business strategies. After all, you can have security without development, but development without security won’t stand a chance.

To learn more about GCERF, visit the organization’s website, or download its annual report.