The World Wants Four Things

The World Wants Four Things

Just four things.

That’s all the world wants.

The September 2015 UN Sustainable Development Summit in New York was a big deal. The outcome — 17 Sustainable Development Goals (SDGs) and 169 targets — is more than a road map to the year 2030. It’s the most democratic expression of a global vision in modern history. Any corporation not fully aligned with this vision is risking its reputation, its competitive position, and maybe its survival.

The Paris Agreement on Climate Change that followed in December 2015 was important, but combating climate change is a plot point in a bigger story — the continued advancement of a civilization threatened by limits. Welfare inequality is reaching a breaking point, testing even the patience of citizens living in the world’s most advanced economies. Confidence that government and industry work for the benefit of society has eroded. And the natural boundaries of a planet being asked to support another billion people each decade are becoming more clear. The SDGs address these critical issues.

Socially responsible investors play a critical role in promulgating the SDGs. Regulatory capture often diminishes the ability of government to advance a popular vision. Success is more likely to come with coordinated pressure from shareholders, customers, and employees of businesses with global scale and reach.

I find it difficult to apply the list of 17 SDGs when evaluating most individual companies. Their specificity often gives the impression that most of the goals ‘do not apply’. An investor may falsely believe the subject company is at worst a neutral player and minimal engagement on the SDGs or other ESG issues is merited.

At their core, the SDGs are about four things — reducing inequality, sustaining economic growth while achieving sustainable use of resources, ensuring healthy lives, and ensuring effective government.

These four goals apply to all companies and make potential action items more likely to surface.

Reduce inequality

Incorporates parts of:

  • Goal 1 (end poverty)
  • Goal 2 (end hunger)
  • Goal 4 (inclusive and equitable quality education with lifelong learning opportunities for all)
  • Goal 5 (gender equality)
  • Goal 6 (availability of water and sanitation for all)
  • Goal 7 (access to affordable and reliable energy for all)
  • Goal 8 (inclusive economic growth, full and productive employment)
  • Goal 9 (inclusive industrialization)
  • Goal 10 (reduce inequality within and among countries)
  • Goal 11 (make cities and human settlements inclusive)
  • Goal 16 (promote inclusive societies, provide access to justice for all, build inclusive institutions at all levels)

The duty of addressing inequality rests primarily with government. But inclusion is a key responsibility of corporations. Anti-discrimination laws are difficult to enforce. The U.S. Equal Employment Opportunity Commission (EEOC) typically recovers less than $10,000 per victim of employment-related discrimination. The soft power of activist shareholders is likely to be more effective.

Business has the responsibility to ensure a diverse workforce across dimensions — gender, ethnicity, age, religion, and ability. The larger the business, the greater the responsibility and the less burdensome it is to meet. And there is a growing body of evidence that diversity helps corporate performance.

Corporations can also address inequality through better executive compensation policies. How much top executives take home isn’t the real problem, even if the money earned by some CEOs is beyond “stupid”. A bigger concern is the over reliance on short-term incentives.

When executives receive most of their pay based on sales or profit targets for a single year, they have less concern for the long run health of the business. This can encourage behavior such as over hiring a sales staff to juice revenue, or reducing headcount below a sustainable level to meet profit targets. The consequence is employment variability that is likely to impact dozens, hundreds, or even thousands of workers down the corporate ladder. Executive compensation policies with a longer-term incentive focus and claw back provisions should promote greater employment stability.

Socially responsible investors should reward businesses that invest in employee education and skill building. It reduces the burden on individuals and government, and better aligns education with the skills businesses want. Many large businesses already provide employee education benefits.

Corporate philanthropy and community service can be helpful in reducing inequality as well. Even if a business is global in scope, its buildings, employees and transportation infrastructure live in and rely upon local communities. But investors should evaluate corporate philanthropy with a critical eye to ensure the business is not giving with one hand and unfairly taking with another.

Sustain economic growth while achieving sustainable use of resources

Incorporates parts of:

  • Goal 2 (sustainable agriculture)
  • Goal 6 (sustainable management of water and sanitation)
  • Goal 7 (sustainable and modern energy)
  • Goal 8 (sustainable economic growth)
  • Goal 9 (build resilient infrastructure, promote sustainable industrialization and foster innovation)
  • Goal 11 (make cities and human settlements sustainable)
  • Goal 12 (ensure sustainable consumption and production patterns)
  • Goal 13 (take urgent action to combat climate change and its impacts)
  • Goal 14 (conserve and sustainably use the oceans, seas and marine resources)
  • Goal 15 (protect, restore and promote sustainable use of terrestrial ecosystems)

The responsibility for sustaining economic growth within natural boundaries rests heavily with business. Governments can set broad parameters like carbon taxes or quotas and restrict land and water use, but democratic government in particular is too slow to respond to the growing consequences of climate change. The largest cumulative emitter of green house gasses (GHGs) since the industrial revolution —the United States — still has no national carbon tax or quota. This is in no small part due to the political influence of the nation’s fossil fuel industries.

Improved corporate disclosure of carbon emissions allows investors to better monitor and engage on progress toward sustainability. However, my recent review of the largest U.S. companies shows there is still a lot that business doesn’t know about its own carbon footprint.

Ensure healthy lives

Incorporates parts of:

  • Goal 2 (achieve food security and improved nutrition)
  • Goal 3 (ensure healthy lives and promote well-being for all at all ages)
  • Goal 6 (availability of water and sanitation for all)
  • Goal 8 (decent work for all)
  • Goal 11 (make cities and human settlements safe and resilient)
  • Goal 16 (promote peaceful societies).

Decent work for all is the chief job of businesses in ensuring individual health. That means physically and emotionally safe and healthy workspaces where the employer/employee power disparity is not abused.

Measuring success can be difficult, especially in post-industrial economies dominated by service industries. Indecent work in many instances is more likely to involve emotional or mental distress rather than physical injury. Socially responsible investors should press large businesses for mental health statistics of their employee population. Ideally, corporations should establish policies that monitor and seek to measurably improve the well-being of their workforce (e.g., exercise incentives, smoking cessation programs, internal community building efforts).

Product safety is already a key focus of many businesses. But investors should evaluate the responsiveness of corporations when concerns about a product arise — some management teams are more proactive than others, and the difference can sometimes be measured in lives. Businesses should also be evaluated on the fairness of their marketing practices. The negative externalities of marketing that preys upon vulnerable or uninformed populations should be incorporated into an investor’s valuation.

Ensure effective government

Incorporates parts of Goal 16 (build effective and accountable institutions at all levels).

The role of business here is simple — don’t subvert democratic governments and institutions. There are many things that can only be accomplished through an effective government with the power to tax, spend, and regulate.

Lobbying efforts that are anti-competitive, anti-labor, anti-environment, anti-diversity or merely anti-regulatory carry a social cost. Estimates of corporate influence dollars spent and the foregone benefits of policies that would otherwise have been enacted provides a good starting point for assessing these costs.

Share the pie, grow the pie forever, live long and healthy, and govern fairly — that’s the essence of the global vision behind the SDGs. It’s up to socially responsible investors to help business do its part in carrying it out.

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