Keywords

We have argued in Chap. 2 that major shifts in the drivers of enterprise value creation, risk management and societal expectations have substantially increased the financial materiality of environmental, social, governance and data stewardship (ESG&D) issues. This new materiality is compelling companies to transcend the traditional, segmented logic of shareholder and stakeholder considerations—exemplified by the concepts of shareholder primacy and corporate social responsibility—by integrating them, which is to say by systematically internalizing material ESG&D risks and opportunities into corporate governance, strategy, management and reporting.

Such integration is required to give practical effect to the principles and values of stakeholder capitalism. It is how companies implement and institutionalize their commitment to deliver sustainable enterprise value creation—how they “walk the talk” of stakeholder capitalism.

Business leaders who are pioneering this reset of enterprise value creation within their firms are implementing a wide variety of approaches. They are combining new governance, business and financing models with innovations in the way they invest in new technologies, markets and their people alongside more diverse and integrated approaches to risk management, stakeholder engagement, talent development, incentives and reporting. The specifics vary, based on different industry sectors, ownership and operating models, and on geographic reach, but this change agenda boils down to five key priorities:

  1. 1.

    Align governance, strategy and capital allocation with the key drivers of sustainable enterprise value creation

  2. 2.

    Internalize material ESG&D risks and opportunities into enterprise risk management and innovation

  3. 3.

    Reinforce preparedness and resilience to crises and systemic shocks

  4. 4.

    Recognize that the firm is a stakeholder itself in the vitality and resilience of its operating context and partner with other stakeholders to address relevant systemic challenges therein

  5. 5.

    Integrate financial and material non-financial information in mainstream reporting

Each of these leadership priorities is necessary, but not sufficient on its own. Success will be determined by the dynamic interaction between them and the agility and ability of boards and executive teams in working with key stakeholders to shape not only their own strategy and operating environment, but also the vitality and resilience of the broader system in which they operate and in which they themselves are stakeholders.

This chapter provides a thematic overview of this business leadership agendaFootnote 1—a holistic picture of the priority actions business leaders need to embrace to respond effectively to both the current crisis and the secular forces reshaping our economies, societies, geopolitics and environment in the twenty-first century. Most of these leadership priorities touch on more than one corporate function and team, and hence Chaps. 4, 5, 6 and 7 in Part II present a functional view of this agenda, breaking it down into specific recommended practices, including best-practice illustrations of leading companies, for corporate governance and oversight, strategy and capital allocation, disclosure and accountability, and partnerships with other stakeholders. Specifically, Chap. 4 presents what full integration of ESG&D considerations means for board processes, practices and composition. Chapter 5 does the same for the C-suite and its responsibilities for strategy, resource allocation and other relevant executive practices. Chapter 6 provides a practical agenda to adapt corporate reporting to stakeholder capitalism: how firms should work with their accountants and auditors to strengthen accountability to investors and other stakeholders through construction of a disclosure “stack” having an integrated annual report as its foundation. And Chap. 7 interprets what heightened ESG&D materiality means for the role of companies as stakeholders themselves within a broader system—as actors with a material interest in and the ability to positively influence in concert with others the basic health of the social and economic ecosystems in which they operate.

1 Align Governance, Strategy and Capital Allocation with the Key Drivers of Sustainable Enterprise Value Creation

The ultimate purpose of a business is the creation of sustainable enterprise value for its shareholders and other stakeholders. This is the fundamental axiom of stakeholder capitalism, as expressed in the principles issued by the World Economic Forum (WEF) and Business Roundtable as well as various corporate governance statutes around the world. The first step in aligning a business with these principles is to rigorously test its business model, strategy and resource allocation priorities against them.

“Sustainable” takes on new meaning in a decade characterized by a deadly pandemic that has disrupted business continuity for millions of companies, dangerous climate change that poses existential risks to many businesses, so-called de-globalization that is challenging current business models and supply chains, and the technological disruption of the Fourth Industrial Revolution which is creating new risks and opportunities for every industry sector. In the midst of such change, boards and executive teams are re-examining old assumptions and taking the time to consult with key internal and external stakeholders to sharpen their shared understanding of the larger and longer-term social purpose their business model serves and how it benefits people, especially those producing and consuming its goods and services and their communities. Such an exercise in defining corporate purpose can be unifying and inspiring for the board, management, employees, suppliers and communities. It can also help to place consideration of the firm’s governance, strategy and resource allocation priorities into wider and longer-term context, leading to more coherent decision-making on priorities for near-term performance and operational excellence.

Corporate strategy and capital allocation should also be tested against the firm’s conception of its ultimate purpose and its commitment to sustainable enterprise value creation. The aim should be to ensure that they properly balance near-term returns and distributions to shareholders with investments in long-term competitiveness and growth opportunities, including increasingly important intangible drivers of value. These include research and innovation, employee well-being and empowerment, talent development, brand loyalty, corporate culture, and stakeholder relationships and public trust.

What is long-termism? An April 2020 report, Tone at the Top: The Board’s Impact on Long-Term Value by Russell Reynolds Associates and Focusing Capital on the Long Term (FCLTGlobal) provides a useful summary:

It is how boards and executives think and act in regard to the practice of applying a long-term approach to business and investment decision-making, including focusing on key elements of performance such as competitive advantage, long-term objectives and a strategic plan matched with clear capital allocation priorities. It stands in contrast to short-termism, or a continued focus on quarterly or other near-term performance issues and is increasingly in demand from stakeholders who want a fundamental rethink around how companies operate and create value.Footnote 2

Consensus among leading investors and companies on the need for a greater board focus on long-termism has been gathering momentum for several decades, especially since the global financial crisis. Collective initiatives such as Focusing Capital on the Long Term, the Embankment Project for Inclusive Capitalism and the Aspen Institute’s Business and Society programme on Long-Term Capital, among others, are developing important insights, tools and metrics to support boards and executive teams in driving long-term investment.

In 2017, the International Business Council of the World Economic Forum created The Compact for Responsive and Responsible Leadership: A Roadmap for Sustainable Long-Term Growth and Opportunity.Footnote 3 Signed by 145 major companies from 35 countries, the Compact commits firms to:

  • Ensure the board oversees the definition and implementation of corporate strategies that pursue sustainable long-term value creation

  • Encourage the periodic review of corporate governance, long-term objectives and strategies at the board level as well as clear communication between corporations, investors and other stakeholders about the outcomes

  • Promote meaningful engagement between the board, investors and other stakeholders that builds mutual trust and effective stewardship and promotes the highest possible standards of corporate conduct

  • Publicly support the adoption of the compact and implement policies and practices within the organization that drive transformation towards adherence to long-term strategies and sustainable growth for the benefit of all stakeholders

The overall aim of the Compact is to provide guidance for governance and investor relations practices to balance short- and long-term business practices. It has led to a body of work and related community on Active Investor Stewardship, with the goal of building a set of tools for stronger and more long-term focused investor-corporate relationships.Footnote 4

Work by these and other initiatives continues to focus on two important enablers of long-termism. First is a growing body of empirical research and evidence to support the business case for boards to engage proactively with management on maintaining a long-term commitment to capital allocation while executing on shorter-term imperatives. Second are collective efforts that combine survey work, legal analysis and accounting methodologies to develop common metrics and reporting practices for long-term-oriented boards and investors.

For example, in 2017, research by the McKinsey Global Institute in cooperation with FCLTGlobal found compelling evidence that companies deliver superior results when executives manage for long-term value creation and resist pressures to focus excessively on meeting quarterly earnings expectations.Footnote 5 Using a dataset of 615 large- and mid-cap US publicly listed companies from 2001 to 2015, they created a five-factor Corporate Horizon Index (CHI ) based on investment, earnings quality, margin growth, quarterly management and earnings-per-share growth. After controlling for industry characteristics and company size, their findings showed that companies classified as “long term” outperformed their shorter-term peers on a range of key economic and financial metrics. Specifically, they concluded that over the 14-year period, long-term firms:

  • Exhibited stronger fundamentals and delivered superior financial performance

  • Continued to invest in sources of growth, for example, R&D, even in difficult times

  • Added more to economic output and growth, including job creation

Their findings for the period studied included evidence that

companies that operate with a true long-term mindset have consistently outperformed their industry peers since 2001 across almost every financial measure that matters. The differences were dramatic. Among the firms we identified as focused on the long term, average revenue and earnings growth were 47% and 36% higher, respectively, by 2014, and market capitalization grew faster as well. The returns to society and the overall economy were equally impressive. By our measures, companies that were managed for the long term added nearly 12,000 more jobs on average than their peers from 2001 to 2015. We calculate that U.S. GDP over the past decade might well have grown by an additional $1 trillion if the whole economy had performed at the level our long-term stalwarts delivered—and generated more than five million additional jobs over this period.Footnote 6

Despite this evidence, pressure on CEOs, CFOs and their teams to make decisions and take actions that bolster short-term, quarterly earnings continue to be high. Their research also found “that 61% of executives and directors say that they would cut discretionary spending to avoid risking an earnings miss, and a further 47% would delay starting a new project in such a situation, even if doing so led to a potential sacrifice in value. We also know that most executives feel the balance between short-term accountability and long-term success has fallen out of whack; 65% say the short-term pressure they face has increased in the past five years.”Footnote 7

Despite the progress made by leading companies over the past five years to integrate long-term goals into their strategy, capital allocation frameworks and incentives, investor pressure on companies to meet quarterly earnings targets and other short-term performance goals continues to be high. Boards and executive teams must continue to deliver short-term performance while demonstrating a compelling strategy for creating long-term value; however, more research is needed on the business benefits of long-termism and integration of ESG&D risks and opportunities into core business goals and performance metrics.

For example, current accounting and reporting practices have not fully addressed the challenge of measuring and reporting the value of intangible assets.Footnote 8 As a result, there is still a significant discrepancy between market capitalization and reported assets, on the order of two-to-one. This means that around 50% of market capitalization is effectively unaccounted for, creating a skewed view of an organization’s ability to create long-term value. A central aspect of a firm’s intangible capital is its human capital, the talent and engagement of its people, and this has long been an area of underinvestment by companies as well as governments. As outlined further in this book, other types of capital such as natural capital and social capital and other aspects of ESG&D performance are also key components of a firm’s non-financial and intangible capital. As such, they need to be more rigorously understood, measured and accounted for, with board oversight.

In their 2019 report, Predicting Long-Term Success for Corporations and Investors Worldwide, FCLTGlobal reviewed long-term performance in terms of Return on Invested Capital (ROIC), focusing on the large publicly traded companies in the MSCI All Country World Index (AWCI ), which represents 85% of the global investable opportunity set.Footnote 9 They concluded that using Total Shareholder Return (TSR) rather than ROIC would have produced similar, if slightly weaker, results. Their analysis identified the following range of factors associated with the long-term health of companies:

  • Factors associated with higher long-term value creation: Greater fixed investment; higher research quotient (RQ); greater board gender diversity; higher sales growth; and greater long-term investor presence.

  • Factors associated with lower long-term value creation: Overdistribution of capital; ESG controversies; providing short-term guidance; and leverage ratio.Footnote 10

There is obviously no simple ‘one-size-fits-all’ approach, and appropriate capital allocation will vary depending on factors such as industry, strategy, risk tolerance and growth profile. However, all companies should be engaged in ongoing, rigorous dialogue and analysis on how best to achieve long-term value creation while delivering short-term performance. Leading firms, for example, are reviewing performance targets and capital allocation plans through both a long- and a short-term lens as well as aligning director and executive compensation more closely to long-term success and investing more time in reviewing corporate culture and talent development beyond the executive team. They are allocating more dedicated time to strategy discussions and retreats to work through corporate purpose, its long-term value drivers and how these translate into immediate strategic and resource allocation priorities. And, as part of this process they are engaging with and learning from external perspectives to better understand long-term risks, disrupters and opportunities, speaking not only with key institutional investors but also with other stakeholders.

2 Internalize Material ESG&D Risks and Opportunities in Enterprise Risk Management and Innovation

The financial costs and loss of stakeholder trust stemming from failure to identify and address material ESG&D risks can reverse years of advances in market value and, in some cases, threaten a firm’s very existence, especially if accompanied by high litigation and remediation costs and/or fines and increased regulatory oversight. These include risks relating to climate change; corruption and financial crime; human rights and labour practices; and one of the most important drivers of innovation today, the collection, application and stewardship of data. Equally, failure to identify and invest in ESG&D-related business opportunities can undermine current and future innovation, productivity, revenue growth and competitiveness.

In this book, we have added “D,” data stewardship, to the commonly used acronym, “ESG,” environmental, social and governance issues, as we argue that it needs to be given a higher profile in the context of disruptive and widespread digitalization and the Fourth Industrial Revolution. In essentially every industry, the value-added application of data generated in the production and consumption of goods and services represents one of the most dynamic areas of new value creation today. And yet the way a company collects, applies and stores such data can have profound social externalities—that is, broader human impacts—either positive or negative. For example, lapses in the security of personal and other sensitive data or poor judgement in the deployment of algorithms in the workplace or the design of products and services sold to customers can backfire severely on firms, destroying trust, customer and employee loyalty and brand value. These stewardship considerations are similar in nature and potential material impact to the traditional areas of non-financial corporate performance and risk which have been characterized since at least 2004 as “ESG” factors.Footnote 11 In short, given the increasingly digital nature of economic activity and business value creation in the mid-twenty-first century, which has accelerated and scaled even further during the COVID-19 pandemic, it is time to update this construct by appending to it a “D” for data stewardship: ESG&D.

Material ESG&D risks and opportunities need to be integrated directly into core business strategy, goal setting and operations as well as internalized into broader enterprise risk management frameworks. In its 2018 report, Enterprise Risk Management, the World Business Council for Sustainable Development cooperated with the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to release guidance for applying enterprise risk management approaches to ESG-related risks.Footnote 12 In addition to broad frameworks, there is a growing need for more topic-specific and technically rigorous guidance for companies desiring to strengthen their focus on specific ESG&D issues that represent the most material risks and opportunities to their business.

Following are examples of some of the most authoritative governance frameworks and tools that have been created for use by companies on the key ESG&D topics, which are relevant to most businesses regardless of industry sector, jurisdiction or ownership model. In addition, most strategic consulting and advisory firms, as well as a plethora of niche ESG&D consulting firms and non-profit organizations have or are developing guidance on corporate governance and management frameworks across a wide range of ESG&D risks and opportunities. Boards and executive teams wishing to internalize ESG&D factors into their firm’s efforts to create and preserve value through diligent risk management and responsible innovation should ensure that their firms apply these frameworks and management systems or their equivalent.

Although the following sections are framed under the pillars of ESG&D, it is important to note that there are systemic linkages and feedback loops between each of these pillars. Many environmental challenges and negative externalities that are the heart of the “E,” for example, create risks not only for the planet, but also for people and for human rights and livelihoods. Climate change is obviously an existential environmental risk, but also a massive financial and economic risk for business and for economies, and a threat to human rights and to millions of people’s health and safety, livelihoods and living incomes. Corruption offers another cross-cutting example. While it is viewed as a key issue under “G,” it not only creates legal, financial and reputational risk to companies and undermines good governance and economic growth, but also often facilitates environmental degradation and over-exploitation of natural resources, and it tends to increase inequality and undermine efforts to improve access to essential services, especially for the most vulnerable and excluded populations. Similar cross-cutting examples can be found for most other “E,” “S,” “G” and “D” issues. As such, leading companies need to understand each of these individual risks and opportunities in depth, which requires specific technical or professional expertise, as well as the linkages between them and how they either reinforce or undermine each other in the broader value chains and systems in which the company is operating. Understanding systems dynamics and complexity has become a key leadership imperative for responsible business and sustainable enterprise creation.

2.1 Environmental: The “E” in ESG&D

The over-riding environmental risk, and associated financial and resilience risk, facing most companies is the climate crisis. There are also business opportunities for those companies that set ambitious net-zero carbon emissions targets and invest in effective mitigation and adaptation strategies, technologies, processes and business models.

There are a growing number of governance and management frameworks to guide boards and executive teams in addressing climate change. Most notably, the Financial Stability Board’s Industry Task Force on Climate-Related Financial Disclosures (TCFD) established a corporate governance framework in 2015 in respect of climate change that has begun to be adopted by companies and investors around the world.Footnote 13 As outlined in other chapters, the TCFD recommendations call on companies to report on how they are addressing climate change through their governance, strategy, risk management, and metrics and targets. The Climate Disclosure Standards Board (CDSB ) and Sustainability Accounting Standards Board (SASB) have produced a joint TCFD Implementation GuideFootnote 14 and related set of Good PracticesFootnote 15 for the reporting of climate-related performance and risk in mainstream corporate reports in line with the TCFD framework.

In 2019, the World Economic Forum issued a set of climate governance principles for boards of directors. Developed in collaboration with PwC, these are designed to help increase directors’ climate awareness, embed climate issues into board structures and processes and improve navigation of the risks and opportunities that climate change poses to business.Footnote 16 In 2020, the Centre for Climate Engagement at Cambridge University, together with the World Economic Forum, established the Climate Governance Initiative to accelerate and scale the implementation of these principles by boards around the world. By providing a compass to enable more effective climate governance within companies, this framework provides boards with the right tools to make the best possible decisions for the long-term resilience of their organizations.

There is also growing urgency and momentum for companies in all industries, but especially the large carbon emitters, to establish science-based targets and plans to reach net-zero greenhouse gas (GHG) emissions, no later than 2050. Companies are increasingly required by regulators and investors to set and disclose annual progress towards an absolute and/or intensity GHG reduction target. Initiatives such as CDP, GRI and SASB provide frameworks for companies to measure and report on their GHG emissions. This is a step all organizations can take to increase both their internal operating efficiency and the pace at which society is implementing the goals set by the United Nations Paris Agreement.Footnote 17 Yet, while many current corporate commitments are important steps forward, they are not commensurate with the scale and urgency of the climate crisis. Best practice is now defined in terms of science-based targets,Footnote 18 aligning companies’ GHG emission reduction targets with the well-below-2 °C and 1.5 °C emissions scenarios recommended by the scientists of the Intergovernmental Panel on Climate Change (IPCC) and enshrined in the Paris Agreement.

The increasingly urgent need for companies to understand and improve the management and governance of climate-related risks and opportunities has been the key driver in ensuring that environmental issues have become a boardroom topic across industry sectors. It is, however, not the only one. Depending on the industry sector, boards and management teams also need to be asking the same types of questions around their company’s policies, strategies, risk management processes and targets for tackling other material environmental issues, such as water insecurity, nature loss in terms of biodiversity loss and land use trade-offs, and pollution, such as air, water and land pollution.

In all these areas, as with mitigating and adapting to climate change, there is a growing expectation that large companies will move beyond focusing only on improvements in their own operations and supply chains, although these remain crucial, to also addressing the more complex and systemic challenges associated with negative environmental externalities.

In the case of water, for example, companies are being called on not only to be responsible managers of fresh water in their own activities, but also stewards of the watersheds or river basins where they operate, and even advocates for water security, more broadly. As such, in addition to establishing plans and targets to mitigate negative environmental, social and economic impacts of their water usage and discharges and to improve the efficiency and other aspects of operational performance associated with water management in their own operations and supply chains, they are also establishing partnerships to address system-level water challenges.Footnote 19

Over the past decade, there has been a growing focus on the linkages between biodiversity loss, land use systems and the unsustainable business models and policies that currently underpin global and local food systems. As the World Resources Institute and others have stated, “If today’s levels of production efficiency were to remain constant through 2050, then feeding the planet would entail clearing most of the world’s remaining forests, wiping out thousands more species, and releasing enough greenhouse gas emissions to exceed the 1.5 °C and 2 °C warming targets enshrined in the Paris Agreement—even if emissions from all other human activities were entirely eliminated.”Footnote 20

Companies operating at all stages of food and beverage value chains, as well as in the many other industries that rely extensively on the extraction and development of natural resources, from energy and mining to packaging, construction and even consumer electronics, need to focus not only on understanding their full impact on natural capital and establish strategies to minimize nature loss that is directly caused by their own operations but also take more ambitious steps to support regenerative or net positive approaches that contribute to nature and biodiversity recovery. As with other major operational and systemic environmental challenges, while there are costs in failing to act, there are also business opportunities in developing new technologies, products, services and business models to find solutions. The 2020 report, The Future of Nature and Business, provides some of the most rigorous empirical evidence to date on both the costs and opportunities and guidance on the best ways for companies to take action.Footnote 21

There is also an urgent imperative to tackle the substantial growth in waste of non-biodegradable materials and products such as plastics, batteries, electronic devices and computers, glass and metals, which are increasing the need for landfills and creating pollution on land, in fresh water and the ocean. Leading companies are recognizing that they must move beyond traditional reduce, reuse and recycle approaches in their own operations, although these remain important, to develop new technologies and system-level circular economy models within larger systems such as industrial parks, cities, global supply chains and industries more broadly.Footnote 22 The World Economic Forum’s Platform for the Circular Economy, the Ellen MacArthur Foundation and the Global Battery Alliance are three of a growing number of initiatives that provide useful guidance for companies that aim to be leaders in this area.

2.2 Social: The “S” in ESG&D

Effectively addressing the “S” in ESG&D requires a company to respect human rights, including the letter and spirit of labour standards, and to address the most salient risks that its operations and business relationships pose to people and their right to be treated with dignity. Almost all people-focused issues considered to be part of “S,” such as diversity, inclusion and equity, minimum wages, living wages and pay ratios, and health, safety and well-being, are strengthened if a company builds on a strong foundation of the corporate responsibility to respect human rights and people’s dignity.

Respect for labour standards is often a legal obligation. Many of the International Labour Organization’s Conventions and Recommendations have been implemented by countries in national law and regulation.Footnote 23 Moreover, the ILO has identified eight “fundamental” Conventions in its Declaration on Fundamental Principles and Rights at Work (1998) covering: freedom of association and the effective recognition of the right to collective bargaining; the elimination of all forms of forced or compulsory labour; the effective abolition of child labour; and the elimination of discrimination in respect of employment and occupation. The ILO’s 187 member countries have an obligation, by virtue of their membership in the organization, to work towards realizing these fundamental rights even if they have yet to ratify them. As of 2019, there were 1376 national ratifications of these Conventions, representing 92% of the possible number of ratifications.

The United Nations Guiding Principles on Business and Human Rights (UNGPs) have become the authoritative global standard on business and human rights.Footnote 24 They were developed over five years by a team led by Professor John Ruggie, the UN Secretary-General’s Special Representative on Business and Human Rights, through extensive research, pilot projects and about 50 consultations around the world, engaging governments, business, civil society, the legal profession, academics and international organizations. In June 2011, they were unanimously endorsed by the United Nations Human Rights Council. The UNGPs clearly state that “all companies everywhere have a responsibility to respect human rights, which means to avoid having negative impacts on them and to address such impacts where they do occur. This responsibility applies to their own operations and to all their business relationships, including those throughout their value chain.”Footnote 25 Over the past decade, they have been “increasingly incorporated or reflected in law, regulation, judicial and administrative decision-making, public policy, multistakeholder norms, commercial and financial transactions, the practices and policies of leading companies, and the advocacy of civil society.”Footnote 26

Boards and management teams should have oversight on the policies, due diligence processes, stakeholder engagement and remediation mechanisms their company has in place to respect human rights. Importantly, they should understand the human rights risks that are most salient to the people who are affected by the company’s operations and business relationships and not only those that are material to the company, in terms of its own legal, financial, operational and reputational risks. The UK’s Equality and Human Rights Commission has prepared Business and Human Rights: A Five-Step Guide for Company Boards, which provides useful guidance for boards on implementing the UNGPs.Footnote 27

Increasingly there is an expectation that in addition to managing human rights risks within the company’s own operations and value chain relationships, businesses should also understand the risks to people that result from their business models and the systems in which they are operating more broadly and should aim to use their leverage, which “refers to the ability of a business enterprise to effect change in the wrongful practices of another party that is causing or contributing to an adverse human rights impact.”Footnote 28 There is also growing awareness of the links between respecting human rights and addressing environmental challenges, leading to a focus on topics such as climate justice.Footnote 29

In addition to individual company policies and due diligence practices to respect human rights, a variety of industry-sector initiatives have evolved over the past decade that are focused on defining standards that companies operating in that sector should adhere to in respecting human rights. These are particularly prevalent and important in high-risk sectors such as oil, gas and mining, agriculture, apparel and other consumer goods manufacturing, tourism, financial services and information and communications technology. Extensive guidance also exists on specific issues, such as labour practices, employee health and safety, tackling discrimination and harassment and improving inclusion and diversity, community relations, indigenous peoples’ rights, consumer and product safety and living wages. Boards should be aware of the collective initiatives relevant to their company and industry and understand if and how their company is adhering to these industry-wide or issue-specific standards.

Preventing discrimination and harassment based on race, religion, nationality, gender, sexual orientation, disability, age and other personal traits and characteristics is a key component of respecting human rights. There is also a growing imperative for boards and executive teams to be more proactive in addressing ways in which their company’s corporate culture, behaviours, social norms and incentives are either promoting or impeding more diverse, inclusive and equitable working environments, value chains and communities.

Also relevant to the “S” in ESG&D is the importance of training and skills development, especially investments made by companies in the new types of skills and capabilities needed for the future in the Fourth Industrial Revolution. Corporate commitments to create employment opportunities, improve livelihoods and wealth generation and develop products and services that directly address social needs are other areas where businesses can make a vital contribution to improving the quality of people’s lives and their opportunities to build assets and economic security. Finally, there is the role that companies can play to support local communities, build social capital and help to address broader social issues through their corporate social investments and philanthropy, product donations, employee volunteering and policy advocacy activities.

2.3 Governance: The “G” in ESG&D

Key governance issues include the composition and quality of a company’s governing body and its committees, the rigour and transparency of its stakeholder engagement mechanisms, the systems it has in place to ensure strong risk management and oversight, and the company’s policies, standards, audit processes and performance in areas such as ethics compliance and integrity, anti-corruption, anti-competitive behaviour and compliance with myriad laws and regulations in different countries.

An area of growing focus for many global companies is how to ensure a more holistic and systemic approach to tackling corruption that includes but goes beyond compliance to build a corporate culture of ethics and integrity. Useful guidance for boards is provided by the World Economic Forum Partnering Against Corruption Initiative (PACI), launched in 2004 in partnership with Transparency International and the Basel Institute on Governance.Footnote 30 The platform is CEO-led and focuses on public-private cooperation, responsible leadership and identifying and promoting technology advances in tackling corruption, through its Tech for Integrity programme.

In 2020, PACI endorsed an Agenda for Business Integrity. Developed by the Forum’s Global Future Council on Transparency and Anti-Corruption, this framework is aimed at providing guidance to companies on achieving the following four pillars of leadership action in tackling corruption and strengthening integrity and transparency, all of which have implications for board oversight:Footnote 31

  • Commit to ethics and integrity beyond compliance

  • Strengthen corporate culture and incentives to drive continuous learning and improvement

  • Leverage technologies to reduce the scope of corruption

  • Support collective action to increase scale and impacts

Another area of growing focus in the “G” of ESG&D is the increase in requests from investors and other stakeholders for greater transparency and public disclosure on corporate lobbying activities with governments and, where relevant, corporate political contributions to politicians and their parties. Increasingly, this includes requests for information on the company’s financial and in-kind contributions to trade and industry associations, research institutions and non-profit, policy advocacy organizations. In an era of political polarization and growing mistrust among citizens about the relationships between regulators and the companies that they regulate, the board of directors needs to understand and provide oversight on the nature and range of the company’s relationships with politicians, governments and policy advocacy organizations.

2.4 Data Stewardship: The “D” in ESG&D

Over the past several years, it has become increasingly clear across a wide range of industry sectors that company data protection and use are far more than technical or operational matters. They are first order strategic considerations that pose major—potentially existential—risks as well as important opportunities for competitive advantage. Accordingly, directors and management teams need to ensure that they have the skills and processes in place to perform these rapidly evolving dimensions of fiduciary and executive responsibility diligently.

2.4.1 Cybersecurity

In 2017, the World Economic Forum issued a first-of-its-kind resource to support boards of directors and CEOs to take action on cybersecurity and cyber resilience: Advancing Cyber Resilience: Principles and Tools for Boards.Footnote 32 Developed in collaboration with the Boston Consulting Group and Hewlett Packard Enterprise, the report is the product of an extensive process of collaboration and consultation that distilled leading practice into a framework and set of tools that boards can use to smoothly integrate cyber risk and resilience into business strategy so that their companies can innovate and grow securely and sustainably.

The Forum has since released a second resource aimed at corporate leadership teams more broadly, entitled The Cybersecurity Guide for Leaders in Today’s Digital World. Produced by the Forum’s public-private Centre for Cybersecurity,Footnote 33 the guide charts the key tenets of how cyber resilience in the digital age can be formed through effective leadership and design. From the steps necessary to think more like a business leader and develop better standards of cyber hygiene through to the essential elements of crisis management, it offers a practical cybersecurity playbook for business leaders.

2.4.2 Artificial Intelligence (AI) and Machine Learning

As AI increasingly becomes an imperative for business models across industries, corporate leaders and boards will be required to identify the specific benefits this complex technology can bring to their businesses as well as address concerns about the need to design, develop and deploy it responsibly. Striking the right balance will lead to sustainable businesses in the Fourth Industrial Revolution, but failing to design, develop and use AI responsibly can damage brand value, risk customer backlash and lead to litigation and financial costs. Board members of all companies are responsible for stewarding their companies through the current period of unprecedented technological change related to AI, and its attendant societal impacts.

A practical set of tools can empower board members in asking the right questions, understanding the key trade-offs and meeting the needs of diverse stakeholders, as well as considering and optimizing approaches such as appointing a Chief Values Officer, Chief AI Officer or AI Ethics Advisory Board. The Forum has produced a board toolkit, Empowering AI Leadership.Footnote 34 Developed by its Centre for the Fourth Industrial Revolution, this framework was established in consultation with over 100 stakeholders. It is designed to help boards be responsible stewards of their companies’ deployment of AI by more deeply understanding this transformational technology, asking the right questions, balancing trade-offs, meeting the needs of diverse stakeholders and formulating innovative governance approaches.

2.4.3 Data Collection, Management and Use

Business models in virtually every industry are becoming more data intensive. Companies are routinely accumulating and applying a large amount of personal and commercially sensitive data via their interaction with customers, suppliers, employees and others. Optimizing the collection, management and use of such data is an increasingly important value creation driver; however, it also poses new material risks that boards cannot assume will be mitigated solely through compliance with regulatory requirements. A leading example of a company effort to formalize a stronger degree of data stewardship to maintain the trust of stakeholders and mitigate risk above and beyond regulatory compliance is Mastercard’s framework of six principles for responsible data management. Its survey research suggests that an organization committing to these principles would help drive trust with upwards of 90% of individuals.Footnote 35

3 Reinforce Preparedness and Resilience to Crises and Systemic Shocks

Company directors and executives need to understand and provide oversight on enterprise-level or specific operational, financial, reputational and regulatory ESG&D risks that their company or a particular business unit, project or product needs to address and mitigate. They also have an increasingly crucial role in ensuring their company’s ability to respond to and be resilient in recovering from short-term or prolonged external crises and systemic shocks.

The reach and impact of these systemic risks and shocks range from global crises such as the COVID-19 pandemic and the 2008–2009 financial crisis to regional or location-specific currency crises, conflict and extreme weather events or other natural disasters, a growing number of which are exacerbated by a changing climate. Despite obvious differences between the types of crises and between locations and industry sectors, they share the common characteristic of being systemic in terms of their impact and beyond the control of any individual company to prevent.

The key question for any company is how well is it prepared to respond to such crises and how resilient is it in terms of its ability to survive the immediate aftermath and to recover, either by rebounding or by fundamentally changing and adapting, over the medium and longer term? Three key areas of focus that all boards and executive teams should consider are improving preparedness, responding to and managing the immediate crisis and strengthening recovery and future resilience.

3.1 Improving Preparedness

The ability of a company to respond to and recover from an acute or systemic crisis is obviously determined by a variety of external factors beyond the company’s control. At the same time, the effectiveness of any response and recovery process also depends on the rigour and scope of the company’s risk management systems and its crisis preparedness processes, combined with an adaptive and engaged corporate culture and the quality of leadership at both the executive and operational levels of the company. Boards should provide oversight and support to management in the following areas.

3.1.1 Undertake Scenarios, Stimulations and Stress-Testing

As an ongoing process, boards and management teams need to undertake more regular and sophisticated scenario analysis, horizon-scanning activities and crisis management simulations and planning to better understand the likelihood and potential impact of systemic risks resulting from technological, environmental, geopolitical and socio-economic changes. Linked to this, they need a better understanding of the potential systemic risks to their company resulting from stress on key systems such as financial services, trade and supply chains and energy and health systems. Such understanding is needed at both global and enterprise level as well as operationally, especially in high-risk locations.

The practice of regulatory-led “stress-testing” has become common in the financial sector following the global financial crisis and more recently is being explored as an approach to assess business resilience in the face of climate-related risks.Footnote 36 This approach could be applied more widely as an internal corporate governance and management tool to help boards and management assess their company’s preparedness and resilience for different types of crisis and system-level shocks. Key pillars of the organization’s preparedness that should be assessed include governance and leadership structures and key components of operational, financial, technological and cultural resilience.

3.1.2 Developing Crisis Succession Plans for Key Executives and Mission Critical Operators

Rigorous succession planning remains crucial at any time but deserves targeted board attention as part of crisis management and contingency planning. Chair and CEO succession plans are obviously essential, but boards also need to ensure there are succession plans in place and optionality for other members of the executive team and for “mission critical” roles and functions at the operating levels of the company. These are the leaders who will be essential in responding to and recovering from a crisis, especially in situations where peoples’ safety and well-being are at stake or where business continuity is being challenged, either immediately or over a prolonged period. Alongside other executives, the human resource function has a critical place at the table on crisis preparedness and planning, and relevant Board Committees should review mission critical roles as well as executive succession plans on an ongoing basis.

3.1.3 Reviewing Deployment Options for Emergency Response Assets and Relationships

In addition to crisis leadership planning, companies should have plans in place at both corporate and operating levels for essential assets that may need to be rapidly deployed and key stakeholder relationships that may need to be mobilized in the event of a crisis. Needs obviously vary based on the industry and location, but in all cases there is usually a need to consider internal asset deployment and stakeholder communications as well as external efforts. From an internal perspective, the company needs to understand how essential physical and financial assets can either be moved or be adapted to respond to a crisis as well as exploring alternative or back-up supply and distribution networks.

Companies that have products, services, digital platforms or physical logistics networks that are particularly important at times of a natural or man-made humanitarian disaster have an additional responsibility to understand and plan how these can best be deployed in a crisis. Leaders in the pharmaceutical, consumer goods, transport and logistics and information technology industries have long-standing experience in the latter, usually with board oversight. All companies, however, should review their assets and stakeholder relationships with a view to internal and external crisis response.

3.2 Responding to and Managing the Immediate Crisis

No matter how well prepared a company is, crises will happen—both acute, short-term crises affecting a particular location, business unit or key leader and more prolonged, systemic crises affecting the entire company. Boards need to be equipped to immediately respond to these. Sometimes the board or a senior non-executive director will be required to step directly into an executive role, but more often such crises require the board to support its senior management team.

The need to distinguish clearly between the roles of management and the board is probably greatest at the time of crisis management. Management teams will be working under intense pressure and time constraints, putting crisis response teams in place, implementing and often adapting existing crisis management plans, engaging with key stakeholders from employees, customers, suppliers and shareholders to communities and governments, depending on the crisis, and making a multitude of decisions, some of them mission critical. The board should be available to offer support, especially in the case of mission critical decisions, but not overload management with constant demands for information or meetings. Having said that, the following areas are important for boards to consider in most crisis situations, especially more systemic shocks.

3.2.1 Put People First

This is crucial in a natural disaster or humanitarian crisis, but also relevant in a sustained economic or financial crisis. A key question is how is the company ensuring the immediate safety and well-being of people in its operations and value chain? Depending on the type of crisis, what are the health, safety, financial and job implications for employees, customers, suppliers (especially small businesses) and people in the company’s local communities? After addressing immediate health and safety considerations, how are the livelihoods and incomes of the company’s stakeholders being affected—both by the crisis itself and by the decisions the company is having to make in terms of business continuity and financial liquidity? What can the company do on its own to support its employees and other stakeholders who are adversely affected, and what type of government support and social welfare or safety nets can the company access or advocate for on behalf of these people? Linked to the above, how effectively are the CEO and management communicating with key stakeholders?

In response to the COVID-19 pandemic, for example, leading World Economic Forum representatives and members, including Klaus Schwab, Founder and Executive Chairman, Bank of America CEO Brian Moynihan, Siemens and Maersk Chairman Jim Snabe and Royal DSM Chairman Feike Sijbesma, called on their peers to support a set of “Stakeholder Principles” to manage the economic impacts from the public health emergency and work towards economic recovery. These outline a set of principles and commitments that business leaders and boards should make to their employees, ecosystem of suppliers and customers, end consumers, governments and society, and shareholders in helping them to respond to the crisis and build future resilience.Footnote 37

The Forum has also produced additional guidance on Workforce Principles for the COVID-19 Pandemic.Footnote 38 Business Fights Poverty and the Corporate Responsibility Initiative at Harvard Kennedy School have developed a set of toolkits and hosted webinars on how companies can support the most vulnerable people among their employees, workers, customers, small business partners and communities in response to this global humanitarian and economic crisis.Footnote 39 Many national business associations and other corporate responsibility leadership groups have also activated their members to support people adversely affected by the pandemic.

3.2.2 Support Critical Functions and Operations for Business Continuity

In some crises, business continuity will be impossible or seriously constrained, even if the company is not facing a liquidity crisis. In others, the focus will be on maintaining as much functional and operational capacity as possible to ensure that safe and if possible productive and profitable operations can continue. Questions that need to be addressed include: the effectiveness of plans to ensure that mission critical leadership and operational roles are sustained and given the support they need; understanding the extent of disruption in the company’s key supply chains and its own ability to supply customers and what flexibility and optionality is available to address these; how effectively is the company engaging and where possible partnering with key suppliers and customers to resolve bottlenecks and shortfalls; and what, if any, are the trade restrictions and implications the company must address?

3.2.3 Provide Oversight of Financial Risks and Resilience

Closely intertwined with business continuity is the obvious risk of financial liquidity and other financial challenges. At times of crisis, the board and management team need to review their current capital allocation strategies and priorities, as well as their engagement with key investors and regulators. For example, should they be stopping share buyback programmes, reviewing dividends and/or postponing capital projects? Are there opportunities to increase or at least maintain cost discipline? How proactively are the CEO and CFO engaging with investors? What actions should be taken to revise business plans and change operating and financial forecasts and guidance to the market? How can this be presented in a way that addresses the immediate crisis while also outlining longer-term resilience and recovery potential if possible? Are there crisis-related risks from activist shareholders or potential hostile takeover bids? From a compliance perspective, what, if any, are different financial reporting and disclosure requirements to be met in the immediate aftermath of a crisis and how is the company working with its auditors and legal advisers on addressing these? Are there tax implications and/or government support funds and incentives that can be accessed to help address immediate financial losses and manage ongoing risks?

3.3 Strengthening Recovery and Future Resilience

The length of time, intensity and global scope of a crisis management situation will obviously vary depending on the nature of the crisis and how systemic it is. As soon as possible, however, the board and management team should be reviewing medium and longer-term recovery plans and discussing lessons learned to strengthen the company’s resilience for the future.

3.3.1 Start Reviewing Recovery Options and Strategy as Early as Possible

Boards should stay focused on the company’s strategy and be ready to support management as they implement ramp-up options if business activities have been slowed or shut down due to a crisis. More importantly, following a crisis there may need to be changes or even a transformation in the company’s policies and operating procedures, risk management systems, capital allocation priorities and even its core business strategy. Specific markets or industries may have changed fundamentally, and there may be new risks and opportunities emerging for the company as a result. After transitioning out of a crisis management phase there is a unique opportunity for the board and management team to review and where needed to either refresh or transform each of the above areas.

3.3.2 Build Future Operational, Cultural, Financial and Technological Resilience

Linked to the above, crises nearly always provide useful lessons for improving risk management and stakeholder engagement. More broadly, they often point to the need and opportunity to strengthen a company’s resilience, its ability to respond to and recover from future crises. Even in the absence of a crisis, the nature of the technological, environmental, geopolitical and social shifts underway is placing a greater premium on the concept and practice of resilience as a crucial and more strategic element of effective risk management. Research by a variety of practitioners and academics points to the need for boards and management to review resilience through the combined lenses of operational, cultural, financial and technological capabilities and abilities to withstand systemic risks and shocks.

Building long-term and trusted relationships with external stakeholders is another important element in building resilience. At times of crisis, these relationships can be key to the company and its employees, customers, business partners and communities being able to respond and recover. And they usually need to be built over time. As previously outlined, applying the concept of “stress-testing” to these different aspects of resilience offers potential. Likewise with boards and management jointly undertaking scenario analysis and crisis simulation exercises. In the same way that boards are taking a more proactive role in engaging in strategy and long-term value creation discussions with management, there is a need for more systematic board-level discussions around strengthening business resilience.

4 Recognize the Firm Is a Stakeholder Itself in the Vitality and Resilience of Its Operating Context

Recent events, from the COVID-19 pandemic to trade policy shocks to social protests over inequality and discrimination to changes in energy and financial regulation related to climate change, illustrate that companies have a very material stake in the basic health of their operating context—in the essential functioning of the societies and economies in which they operate. Major disruptions therein can have a serious, even existential, impact on businesses. Even though principal responsibility for these matters often resides in public institutions and authorities, company practices and operations can have an important influence, either positive or negative.

Four critical dimensions of the way in which firms guided by the principles of stakeholder capitalism need to think seriously about their shared stewardship of the social and economic context in which they operate are as follows: the capacity of people in the firm’s communities to absorb and manage economic change; the payment of taxes and capacity of public institutions to provide public goods on which all societal actors, including companies, depend; the extent of structural inequality and injustice and adequacy of existing public and private responses to address these; and the relevance of the firm’s core competencies and resources to support national governments in implementing their priority commitments to the Sustainable Development Goal (SDG) and Paris Climate Agreement.

4.1 Collective Investment in Human Capital and a Just Transition

One of the principal weaknesses, even failings, of corporate and public governance during the past generation has been an underappreciation of and underinvestment in the human costs of rapid economic change. A new dimension of corporate governance and leadership requiring attention from boards and executive teams is the need to identify salient just-transition risks related to automation, restructuring, climate change abatement or other plans to move to a low carbon economy. This challenge is likely to intensify in the Fourth Industrial Revolution as automation spreads, global markets become more digitally interconnected and actions to decarbonize economic activity intensify. Companies will be the primary vehicles of these economic changes, which means they will face important decisions with regard to the timeline and nature of the corresponding restructuring and redeployment of their workforces and making human capital investments in the communities or regions where they operate.

In the absence of an understanding of what constitutes a just transition for people and a strategy to make such a transition as humane and economically orderly as possible in cooperation with workers, governments and other stakeholders, companies may inflict severe yet avoidable damage on the social fabric of the communities and countries in which they operate. This could ultimately affect the political stability and economic viability of that context, limiting the company’s own prospects for value creation and growth. Accordingly, a new dimension of business leadership requiring attention from boards and management teams is the need to identify salient just-transition risks related to automation, restructuring, climate change or other plans and to ensure that the company has adequate policies and practices for mitigating them.

In 2015, governments and worker and employer organizations developed a set of consensus guidelines for steps that can be taken by each to manage change and its impact on the world of work, which is to say, on people.Footnote 40 These ILO guidelines were written with environmental change and the transition to more sustainable economies specifically in mind; however, many of the suggestions are relevant for managing major transitions and their impact on workers and their communities related to other causes. The trade union movement has taken an active role in advancing the just-transition concept and supporting social dialogue—tripartite government-worker-employer discussion and consensus building—on specific transition risks, opportunities and solutions in this regard.Footnote 41 Governments, too, are increasingly active on this topic. For example, the European Union has created a Just Transition Mechanism to provide concrete support to the transition to a climate-neutral economy. It provides “targeted support to help mobilise at least €65–75 billion over the period 2021–2027 in the most affected regions, to alleviate the socio-economic impact of the transition.”Footnote 42

4.2 Fair Payment of Taxes to Support Public Goods and Services

Government tax bases have come under pressure, as digitization, deregulation, trade liberalization and global value chains have increased the economies of scale and geographical fragmentation of production as well as the capital share of national income in many countries. This situation has been further exacerbated by the COVID-19 pandemic and the heavy and urgent demands it has placed on public finances. Long-term economic value creation requires functioning public institutions in a wide variety of domains, and these depend on adequate public finances.

Thus, companies have not only a legal obligation to pay taxes, but also a broader fiduciary responsibility stemming from their sustainable enterprise value creation mandate to ensure that they pay their fair share, which may not always be the same amount as that resulting from aggressive, multi-jurisdictional corporate tax planning. Directors and executives have a responsibility to ensure that their firms are acting not only legally but also in keeping with the trust that society has placed in them to contribute fairly and responsibly to the long-term viability of the economy in which they operate.

The OECD’s Inclusive Framework on Base Erosion and Profit Shifting brings together over 115 countries and jurisdictions to collaborate on the implementation of the OECD/G20 Base Erosion and Profit Shifting (BEPS ) Package. BEPS refers to corporate tax-planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low- or no-tax locations where there is little or no economic activity. Although some of the schemes used are illegal, most are not. The BEPS Package provides 15 actions that equip governments with the domestic and international instruments needed to ensure that profits are taxed where the economic activities generating the profits are performed and where value is created. These tools also give businesses greater certainty by reducing disputes over the application of international tax rules and standardizing compliance requirements. This initiative took a major step forward in 2021 when the G7 and G20 endorsed the approach outlined the “Statement on a Two-Pillar Solution to Address the Challenges Arising from the Digitalisation of the Economy” which the OECD released in July of that year.Footnote 43 As of mid-August 2021, 133 jurisdictions had signed the Statement; however, support for it is not yet unanimous.

In 2020, the Global Reporting Initiative issued a new global standard for public reporting on tax payments by corporations. The standard contains three management approach disclosures and one topic-specific disclosure on country-by-country reporting. The combination of management approach disclosures and country-by-country reporting gives insight into an organization’s tax practices in different jurisdictions. Boards should have oversight of these practices, including transparency and reporting. In addition, the World Economic Forum’s International Business Council as part of its Measuring Stakeholder Capitalism project has recommended that firms disclose the total global tax borne by the company, including corporate income taxes, property taxes, non-creditable VAT and other sales taxes, employer-paid payroll taxes and other taxes that constitute costs to the company, by category of taxes. It further recommends as a best practice a breakdown of total tax paid and, if reported, additional tax remitted, by country for significant locations.

4.3 Tackling Structural Inequality and Injustice

In many countries, deep-seated inequality and injustice persist, even after changes in regulation, government policies, business practices and social norms. Although capitalism, globalization and market-based economic growth have helped lift several billion people out of extreme poverty over the past few decades, in too many cases inequality has increased in terms of asset accumulation and wealth creation, access to jobs and essential services, such as education, health and housing, and access to criminal and social justice and political voice. The COVID-19 crisis has highlighted and exacerbated many of these existing structural inequalities and hundreds of millions of people risk falling back into poverty due to the pandemic’s devastating impact on their health and food security, their livelihoods, jobs and income and their education and learning. Governments must take the lead in addressing these issues. At the same time, there is a growing expectation among employees, consumers, activists, the public and even investors and governments themselves that businesses, especially large companies, should play a more proactive role in tackling inequality and injustice.

There is the growing expectation that companies should be responsible and held accountable for: the impact of their own operations and business relationships when it comes to respecting human rights, workers’ rights and civil rights; promoting diversity, equity and inclusion in their own workplaces and global value chains; as outlined in previous pages, paying their fair share of taxes; and making investments in skills development and a just workforce transition for relevant employees and communities where they operate.

At the same time, pressure is growing for companies to pay adequate entry-level wages to become advocates for higher minimum wage legislation in many countries and to commit to paying a living wage for their immediate employees and workers along their global supply chains if this is higher than the legally mandated minimum wage in the locations where the company operates. The Global Living Wage Coalition has drawn on the ideas found in over 60 living wage descriptions and definitions to define a living wage as “[t]he remuneration received for a standard workweek by a worker in a particular place sufficient to afford a decent standard of living for the worker and her or his family. Elements of a decent standard of living include food, water, housing, education, health care, transportation, clothing, and other essential needs including provision for unexpected events.”Footnote 44

Millions of workers around the world earn less than a minimum wage, let alone a living wage, and in many cases, it is women and racial or ethnic minorities who are the most vulnerable to the combination of low wages and insecure jobs. Take the US, for example, where efforts to raise the federal minimum wage from US $7.25 to $15 per hour failed in 2021. It is estimated that “[a]bout 39 million people earned less than $15 in 2019. That is a substantial decline from more than 61 million in 2014, and it fell further—to around 30 million—after the covid-19 crisis as the closures of countless low-wage employers erased millions of jobs. Black and Hispanic women are more than twice as likely as White men to fall into this low-wage category, and their share of the low-wage workforce has increased even as the U.S. economy enjoyed its longest expansion in history.”Footnote 45 Tackling this systemic issue, and focusing on the most vulnerable workers, will be a key driver in achieving more inclusive growth.

Improving access to paid sick leave, health insurance and other benefits for low-income, low-skilled and/or temporary, contractual and gig economy workers are other systemic challenges that underpin inequality and must be addressed to achieve more inclusive business models and economies.

Beyond their own business operations, there are growing demands for business leaders to step up, both individually and collectively, to help address systemic and structural obstacles to overcoming inequality and injustice. For example, a vanguard of companies is establishing and creating coalitions to advocate for higher minimum wages and to make commitments to implementing living wages in their own operations and supply chains. One example is Business for Inclusive Growth, which was launched by the French G7 Presidency in August 2019. It is a global CEO-led coalition working in partnership with the OECD to coordinate with governments in tackling inequalities of income and opportunity. Collective business efforts are also needed to support specific government or community-based programmes focused on improving access to education, healthcare, housing and economic opportunities. In addition, companies can become more engaged in advocacy for public policy reforms and institutional changes such as implementing better social safety nets, access to universal health, direct cash transfer mechanisms and criminal justice reform.

There are of course limits to what companies can influence on deep-seated social challenges. But there are also limits to how much a company can remain insulated from such problems. If severe and long-standing enough, and the firm has a track record of being passive and insensitive to them, they can evolve into threats to its brand and even business continuity in the event of social upheaval. Companies need to have a serious internal discussion about their role as stakeholders in the basic health of their operating context and their agency to affect it positively. This should take place not only at the corporate level, but it should also be encouraged in areas in which the firm has significant operations.

4.4 Advancing Implementation of the Sustainable Development Goals and Paris Climate Agreement

In September 2015, 193 UN member states signed up to support the 2030 Agenda and its 17 Sustainable Development Goals (SDGs). They were followed in December 2015 by 196 countries committing to support the Paris Climate Agreement, and its core goal to limit global warming to well below 2, preferably to 1.5 °C, compared to pre-industrial levels. Most governments are now translating these commitments into national plans and policy priorities, described as National SDG Plans or Voluntary National Reviews in the case of the SDGs and Nationally Determined Contributions (NDCs) in the case of the Paris Agreement. In both cases, the private sector has a place at the table and a major responsibility and opportunity to work with other companies, civil society organizations, the UN system and national, state and local governments to help achieve these ambitious and urgent goals.

The corporate responsibility to be part of the systems-level changes that are required is clear. There can be little doubt about the urgency and scale of the climate crisis and the inadequate progress that has been made on achieving the SDGs, further challenged by the devastating effects that the COVID-19 pandemic has had on the lives, livelihoods and learning of millions of people. The business risks and costs of inaction are increasingly well understood. They are operational and physical, they are financial, they are reputational, they are transitional in terms of companies having to adapt to changing policies and regulations, disruptive technologies and new markets, and in some cases, they are existential to corporate survival. Furthermore, they are rising for almost all companies that fail to act.

The corporate opportunity to be part of the solution to tackling the climate crisis and achieving the SDGs is also high, especially for companies that can operate at scale, work with industry peers and competitors on system-level solutions and engage with governments on driving policy reforms and market incentives. Setting goals for cutting carbon emissions and achieving net zero by 2050 can spur companies and entire industries to greater resource efficiencies, lower emissions energy sources, innovative products, services and technologies, new markets and greater resilience and ability to prepare for or recover from shocks and crises. Likewise, the SDGs represent an enormous growth opportunity for businesses, including through strengthening their operating context. The Business and Sustainable Development Commission, for example, has concluded that achieving the SDGs has the potential to generate up to $12 trillion of opportunities in 60 different market segments within four economic systems: food and agriculture, cities, energy and materials, and health and well-being.Footnote 46

Accordingly, companies focused on sustainable enterprise value creation should make commitments to support the Paris Climate Agreement and the SDGs that are relevant to their firm’s core competencies and markets and integrate these into their company strategy and operations. This includes appointing senior executives and identifying board and executive champions to prioritize and drive execution as well as working with peer companies, financial institutions, governments and other stakeholders to drive the enabling environment improvements and investments that can affect the necessary transformation of economic systems. As outlined in more detail in Chap. 7, there are a growing number of multi-stakeholder coalitions that are being established to achieve the system-level changes that are needed. In line with the theme of its 50th Annual Meeting in 2020, Stakeholders for a Cohesive and Sustainable World, the World Economic Forum and its International Business Council prepared a report that presented over 150 concrete examples of such multi-stakeholder and corporate “lighthouse” projects.Footnote 47

5 Integrate Financial and Material Non-financial Information in Mainstream Reporting

Integrated reporting follows naturally from the integrated thinking that the simultaneous pursuit of long-term shareholder, other stakeholder and societal value—that is, sustainable enterprise value—requires. In practical terms, this means integrating material ESG&D considerations into the company’s core communications with its investors and in particular its annual report, including as appropriate in the statement of accounts and management discussion and analysis and proxy statements. In some cases, companies are aligning their annual financial reports and annual sustainability reports to providing investors and other stakeholders with clear and consistent performance metrics and analysis of risks and future goals. However, best practice and to a growing extent regulatory requirement is to combine and connect these elements in an integrated report which serves as the firm’s mainstream communication with its providers of capital and securities regulators. A further best practice is to have the ESG&D elements in the report independently assured by an external third party along the same lines that financial accounts are externally audited.

The integrated reporting of ESG&D risk, strategy and performance in mainstream corporate communications with investors and regulators remains at a formative stage, but it is evolving rapidly. A number of collaborative efforts over the past 20 years among non-governmental organizations, accountants, industrial firms and investors have laid the foundation for this approach. They include:

  • The International Integrated Reporting Council has developed a principles-based framework to help companies think about their reporting strategy in an integrated fashion and develop their own approach spanning various reporting formats, mainstream and otherwise.

  • The Global Reporting Initiative issued the first global standards for sustainability reporting, which are designed to be used by any organization that wants to report on its impacts and how it contributes towards sustainable development. They encourage and enable credible non-financial reporting by companies and also provide sector-specific guidance.

  • The Sustainability Accounting Standards Board has created a set of key performance indicators that serve as a standard for particularly quantitative reporting of material aspects of a company’s environmental and social sustainability. It provides materiality maps for companies in 77 different industry sectors.

  • The Climate Disclosure Standards Board has issued a framework to guide the reporting of material natural capital-related aspects of corporate performance, strategy and risk—both qualitative and quantitative material information—in mainstream reports.

  • CDP is the foremost global platform for the disclosure of climate and other environmental data by companies, investors and other stakeholders and, as such, serves as a de facto standard.

  • In an effort to accelerate progress towards a more harmonized and globally comparable system for disclosure of material ESG&D information, the WEF’s International Business Council of approximately 120 large multinational firms has developed a two-tier core-and-expanded set of ESG&D metrics and reporting requirements in collaboration with the four largest accounting firms, drawing wherever possible from existing standards such as those referenced above.

  • The Human Rights Reporting and Assurance Frameworks Initiative (RAFI) and the UN Guiding Principles Reporting Framework provide guidance for companies to report on salient human rights issues.

  • The Corporate Reporting Dialogue has been facilitating a dialogue among sustainability and financial standard setters to advance progress towards a system that better captures and integrates financial and non-financial performance and strategy.

  • The Impact Management Project (IMP) is a forum for organizations to build consensus on how to measure, compare and report impacts on environmental and social issues. It convenes a Practitioner Community of over 2000 organizations to debate and find consensus (norms) on impact management techniques and it facilitates a collaboration of organizations that are coordinating efforts to provide complete standards for impact measurement, management and reporting.

Notwithstanding the considerable progress achieved by the voluntary initiatives described above, the absence of a generally accepted international framework for the reporting of material aspects of ESG and other relevant considerations for long-term value creation contrasts with the well-established standards that exist for reporting and verifying financial performance. The existence of multiple ESG measurement and reporting frameworks and lack of consistency and comparability of metrics hinder the ability of companies to credibly demonstrate the progress they are making on sustainability, including their contribution to the SDGs.

As outlined in greater detail in Chap. 6, there are two things business can do to accelerate the adaptation of corporate reporting to stakeholder capitalism. First, individual firms should implement their own integrated reporting in the form of a combined, best-practice application of existing standards in their annual report. This will ensure that their reporting is fit for the purpose of sustainable value creation in today’s new business context and can be benchmarked against comparable information from other firms for use in decision-making in both their boardroom and financial markets. There is no need to wait for further action by regulators; better returns and more satisfied investors and other stakeholders await those companies that act to integrate and improve their disclosure now. Second, business leaders, including colleagues from the investor and accounting communities, should work to accelerate the birth of an international standard or system of standards for non-financial information reporting, similar to how the private sector played a critical leadership role in the early stages of financial reporting standard setting. The International Organization of Securities Commissioners (IOSCO) and International Financial Reporting Standards (IFRS) Foundation have announced plans to create such a global standard. They will need strong engagement from the private sector in order to succeed.

This chapter has provided a thematic overview of the key priorities business leaders should embrace and guidance tools they can access to embed sustainable enterprise value creation more deeply within their firm and to help translate the principles of stakeholder capitalism into more rigorous and widespread practice. But while these principles may be universally applicable, their practice is context specific. There is no single ideal approach to addressing these issues and applying good practice because ESG&D issues vary in relevance and emphasis across industrial sectors and societies. The practical implementation of stakeholder capitalism is fundamentally about institutionalizing integrated thinking and decision-making in board governance, corporate strategy and resource allocation, reporting and partnerships with other stakeholders in ways that enable the full integration of ESG&D considerations. Chapters 4, 5, 6 and 7 provide more specific, functional guidance in each of these respects, with concrete illustrations of good practice drawn from leading companies.