Key actions to accelerate mainstreaming Sustainable Capitalism

In February 2012, we published a white paper, Sustainable Capitalism [pdf], which recommended five key actions for immediate adoption to accelerate mainstreaming Sustainable Capitalism; a framework that seeks to maximize long-term economic value creation by reforming markets to address real needs while considering all costs and stakeholders. Below is a list of the five key actions outlined in our white paper, which along with a broader set of ideas, collectively serve to guide the Foundation’s focus. This list is dynamic and we welcome an open dialogue on other potential opportunities to advance Sustainable Capitalism.

Identify and incorporate risks from stranded assets

A stranded asset is one which loses significant economic value well ahead of its anticipated useful life as a result of changes in legislation, regulation, market forces, disruptive innovation, societal norms, or environmental shocks. Stranded assets have the potential to result in significant reductions in the long-term value of entire sectors ranging from oil and gas to pharmaceuticals, and not just the value of particular companies. Until there are policies that establish a fair price for widely understood externalities, academics and financial professionals should strive to quantify the impact of stranded assets and analyze the subsequent implications for assessing investment opportunities.

Mandate integrated reporting

Despite an increase in the volume of information made available by companies and the frequency with which it is produced, access to more data from public equity investors has not necessarily translated into more comprehensive insight into companies. Integrated reporting addresses this trend by encouraging companies to integrate both their financial and ESG (environmental, social, and governance) performance into one report that includes only the most salient or material metrics. This enables both companies and investors to make better resource allocation decisions about how ESG performance can contribute to sustainable, long-term value creation. While voluntary integrated reporting is gaining momentum, it must be mandated in order to ensure swift and broad adoption. Additionally, we support the development of new standards that identify material sustainability performance metrics as part of the integrated reporting process.

End the default practice of issuing quarterly earnings guidance

Quarterly earnings guidance can create incentives for executives to manage for the short-term and encourage some investors to overemphasize the significance of these measures at the expense of the longer-term, more meaning measure of sustainable value creation. Ending this default practice in favor of only issuing guidance as deemed appropriate by the company (if at all) would encourage a long-term view of the business rather than the current focus on quarterly results. More thoughtful issuance of earnings guidance is compatible with enhanced standards of disclosure.

Align compensation structures with long-term sustainable performance

Presently, most compensation schemes emphasize short-term actions disproportionately and fail to hold asset managers and corporate executives accountable for the ramifications of the decisions over the long term. Instead, financial rewards should be paid out over the period during which these results are realized and compensation should be linked to fundamental drivers of long-term value, employing rolling multiyear milestones for performance evaluation.

Encourage long-term investing

The dominance of short-termism in the market, often facilitated and exacerbated by algorithmic trading, fosters general market instability as opposed to useful liquidity and undermines the efforts of executives seeking long-term value creation. Companies can take a proactive stance against this growing trend of short-termism by attracting long-term investors with patient capital through the issuance of loyalty-driven securities. Loyalty-driven securities offer investors financial rewards for holding a company’s shares for a certain number of years. This practice encourages long-term investment horizons among investors and facilitates stability in financial markets, therefore playing an important role in mainstreaming Sustainable Capitalism.