Subject: Corporate & M&A
Autor: Guy Deillon
Paper: NZZ
Reading time: 4 Min

How woke do companies need to be?

In Switzerland, too, corporate bodies are increasingly being pressurised to position themselves - and this is often criticised

The hashtag used by thousands of spiteful bloggers to criticise managers who place more emphasis on so-called environmental, social and governance (ESG for short) aspects in their companies is: "gowokegobroke". According to critics, this commitment is primarily due to the zeitgeist and comes at the expense of profitability.

However, the debate about the concept of wokeness is not only taking place on social networks, but also in the business world itself. The term polarises here too. Some companies are endeavouring to prioritise ESG. Others, however, question how far these endeavours should go. After all, the company's core objectives should not be compromised. And then there are those – such as Blackrock CEO Larry Fink – who have turned from Saul to Paul and back again, as the debate about wokeness and ESG has slipped away from them.

One thing is certain: business wokeness and its antagonist, ESG scepticism, require more attention when it comes to the management of a company. After all, the question of whether management should focus entirely on the short-term profit of its shareholders or take the interests of other stakeholders into account is one that requires more attention. The question of whether management should focus entirely on the short-term profit of its shareholders or take into account the interests of other stakeholders has preoccupied society since Black Friday in 1929.

Today, numerous studies prove the higher profitability of diversity-sensitive companies. However, critics like to argue that more profitable companies can simply afford better to look after the soft factors. The most common criticisms levelled at the consideration of ESG factors are as follows: The imposition of moral obligations, the misappropriation of capital from companies and – as a result – the reduction of returns from investment funds, particularly pension funds.

Customers set the direction

What is the factual situation? The Swiss Code of Obligations summarises the duties of the Board of Directors and the Executive Board. Board members must perform their duties with due care and safeguard the interests of the company in good faith. Today, some companies have added a clause to their articles of association stating that they strive to create long-term, sustainable value. The need for such a specification is not dictated by shareholders - apart from marketing aspects - but by business partners, customers and also by the challenge of finding young, qualified and motivated employees. And not least by the keen observers in the activist scene.

In practice, every member of the board of directors or management must understand the relevance of ESG factors in order to create long-term sustainable value. This also involves concrete opportunities, risks and a robust balancing of interests. Even before the three letters ESG appeared, successful entrepreneurs were already incorporating these factors into their decision-making.

Management courses at all leading universities have been integrating the observation of environmental and social trends into their strategy models for some time now. This is because a company operates in a socio-economic environment and cannot operate in complete isolation. It is important to consider the risk-return ratio.

In terms of the environment, a resource-conscious company that is less dependent on fossil fuels will be better able to withstand the volatility of energy prices. Long-term investors have understood this. More and more investors and lenders are basing their decisions on this: Profit is not the primary driver for a company, but the consequence of good business behaviour.

Many factors difficult to measure

Nevertheless, companies are not obliged to actively shape the values and culture of their stakeholders with their activities. It is the other way round: companies hear from their stakeholders how they should change. The importance of ESG factors is not only evident in the business world, but also in everyday life. Today, parents are increasingly being asked by their children to act more sustainably and inclusively, and this trend is reflected in the expectations placed on companies. The young generation standing up for their values at the family dinner table are the future employees, customers and investors.

Are the ESG criteria perfect? Of course not. While CO2 emissions, for example, can be objectified, there are many difficult-to-measure factors that need to be taken into account for the environment. In addition, governance and social factors are very subjective. It is difficult to maintain an overview.

So who has the greatest influence on improving the ESG balance sheet? The one who invests his money in a green fund, first buys Patagonia shares and then sells them on? Or the one who invested in the fund of a shareholder activist like Jeff Ubben? Ubben succeeded in toppling the board of directors of the oil company Exxon and putting the ESG strategy on the company's agenda. Conversely, every investment in ESG role models means that ostracised companies receive fewer resources to improve.

One can criticise the way in which ESG factors are analysed. After all, just talking about ESG is no guarantee of a better world. But good corporate management today involves using resources sparingly, treating the weakest fairly and listening to stakeholders. Even if you are vilified as a woke for doing so.