We don't need more disclosure. We need better companies.

Jean Rogers
LTSE Advisor, Founder of the Sustainability Accounting Standards Board (SASB)
Feb 17 2020

Last year, concentrations of carbon dioxide in the atmosphere topped the record level of 407.8 parts per million set in 2018. At the same time, investment funds with a focus on sustainability pulled in $20.6 billion in total new assets, about four times as much as the previous record a year earlier.

The planet is getting warmer. And a growing number of investors care about socially responsible investing. Yet with all that capital rushing to do good, society is still struggling to produce positive change. Income and wealth inequality in the U.S. have increased over the last several decades; globally, roughly one percent of the population holds nearly 45% of the world’s wealth.

The disconnect between capital and change underscores the limitations of our reliance on disclosure; the idea that if companies report a range of information about their impact on the environment and society, investors can consider those factors in their decision-making. Thanks to decades of investors pushing companies to produce information about environmental, social and governance (ESG) risks, roughly 86% of companies in the S&P 500 Index report on sustainability and corporate responsibility.

As founder of the Sustainability Accounting Standards Board, I respect the hard work of developing disclosure standards. I also support integration of ESG into portfolio management, including efforts to standardize disclosure of ESG risks and to improve the quality of information provided.

But there is a world of difference between a company’s reporting its greenhouse gas emissions and innovating to remove carbon from the atmosphere. If we hope to harness the potential of business to address environmental and social issues, we don’t need more disclosure. We need better companies.

By better, I mean companies governed for the long term. Long term-focused governance has contributed to outperformance because it breeds resilience. Resilience is not captured by ESG data that comes across your Bloomberg terminal. Instead, we find it in such markers as:

  • Whether a company allocates capital in support of a long-term strategy; whether it spends more on research than, for example, on buybacks or marketing; and whether it treats long-term investors as trusted partners;

  • Whether a company’s culture — as demonstrated by diversity, equity and inclusion — creates a capacity to address and solve problems;

  • Whether a company treats employees, customers, suppliers, and communities as first-class members of its decision-making process.

Resilience is the capacity to adapt. It enables companies to avoid things that can derail (or destroy) them. (Think Boeing. Or Purdue Pharma. Or Valeant.) Resilient companies focus on innovating continuously and engaging with stakeholders to pursue shared priorities, learn from problems, and capitalize on opportunities. Resilient companies don’t wait to report problems that have become material; they avoid them altogether.

Conviction from investors

Achieving impact also requires conviction on the part of investors. For large institutional investors, that means not just reporting on the so-called green parts of your portfolio, but also reporting on the “brown” parts and the rate at which you are moving from brown to green. It means not hugging a passive index and proclaiming to be environmentally focused , unless it’s an index comprised of companies that derive at least 40% of their revenue from solutions to climate change.

It also requires actively investing in companies that are taking action. I commend Microsoft and Starbucks for committing to be carbon negative, but between them they have already spewed tons of carbon dioxide into the atmosphere throughout their combined 95 years in business.

Contrast that with the dozens of young companies such as Allbirds and Peak Design that are making climate neutral the minimum standard for business. Stripe is going further: operating carbon neutral and investing at least $1 million a year on sequestering carbon.

Here, again, is that disconnect. Because Stripe is a business-to-business payments company, not an energy firm, it is not deemed to face material risks from climate change under guidelines used by investment giants like BlackRock and State Street Global Advisors. But Stripe’s commitment could not be more material to all of us who inhabit this planet.

And innovation in the capital markets

Resilience demands sustained innovation and focus. In short, the opposite of public capital markets, where short-term thinking is an epidemic problem. Most public companies live quarter to quarter, struggle to make the right investments, and cannot focus long term.

One study finds that when companies go public, innovation falls by the wayside, as companies reposition their investments toward projects that have a shorter-term payoff. Another survey revealed that 80% of chief financial officers of public companies acknowledge they would forego initiatives such as research and development to avoid missing quarterly targets.

Investors measure alpha, not adaptive capacity. But as Eric Ries, the founder and CEO of LTSE has noted, “We treat the facts of our capital markets and the structure of our financial reality as facts of nature when they are in fact human creations and are changeable.”

We need public capital markets that support the building of sustainable businesses. LTSE aims to address that problem with an ecosystem of support for long term-oriented companies and like-minded investors. It includes the only U.S. national securities exchange created specifically to provide a public market option for companies and investors who measure success over years and decades, not financial quarters.

To list their shares on the Long-Term Stock Exchange, companies would adopt and publish a series of policies that operationalize business through a long-term lens. They include policies that explain how the company prioritizes long-term strategic decision-making, how it considers all stakeholders critical to its long-term success, and how it engages with long-term investors.

The policy will differ for every company, but every company has to do something real, and the Long-Term Stock Exchange will use its listing standards as a means to make such policies real. Inherent in LTSE’s vision is the reality that until we support companies built for the long term, companies will struggle to tackle the big existential challenges, and even to do business responsibly.

Modern companies have a very different value system than what’s come before. For such companies, business is about values, not just value. The next generation of business leaders care a lot about sustainability, diversity, and equality. Consider some examples:

  • Rothy’s is making shoes from 100% recycled plastic bottles.

  • Molekule produces air purifiers that use patented technology to eliminate bacteria, viruses and allergens from indoor air.

  • Asana, the business software maker, is building a sustainable culture. The company invests in employee health and well-being, including yoga, mindfulness training, and unlimited vacation

  • Airbnb has put forth a road map and principles for serving all of its stakeholders, together with plans to establish a stakeholder committee of its board.

  • Shine Medical is using uranium from decommissioned nuclear submarines to develop medical isotopes for the detection and treatment of cancer, as well as producing reusable isotopes without the need for a nuclear reactor.

These companies and leaders like them would be the first to agree that they will not achieve such bold aspirations without long term-focused governance in place to support it; that is, without resilience. Companies can use their ingenuity to address the biggest challenges. They may not succeed, but investors and markets can support those that try.

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