How much good, or bad, a firm does should be monetised, says Harvard professor
George Serafeim wants to put a monetary value on companies’ impact on people and the planet, then add or subtract it from their bottom lines
New York — George Serafeim wants to revolutionise the way businesses calculate their success.
Profit and loss aren’t enough, says the Harvard Business School professor. Serafeim aims to do what no-one has done before: put a dollar value on the impact of products and operations on people and the planet, then add or subtract it from companies’ bottom lines.
Intel provides an example of both. Serafeim and his five-person team credited $6.9bn to the chipmaker in 2018 for paying its employees well and for boosting local economies where it has offices. But they deducted $3.1bn for what they said was a shortage of female employees, the difficulty of career advancement, and not enough attention paid to workers’ health.
“Without monetising impacts, we’re left with the illusion that businesses have no impact,” Serafeim said. Companies that show big profits can have enormous negative effects on society, he said. “They’re just cheating because they’re operating in a context that doesn’t price all those impacts.”
Serafeim’s research throws out the playbook of measuring business performance primarily by shareholder value, which was popularised last century by Nobel prize-winning economist Milton Friedman. Besides providing an antidote to “good washing” — corporate happy talk without follow-up — his work comes as companies increasingly search for ways to help boost a society that, despite its wealth, suffers from woes that include racism, a widening chasm between rich and poor, and deepening damage to nature. The coronavirus pandemic has made that quest more urgent.
Serafeim plans for his work to culminate in a set of impact-weighted financial accounts. The metrics can aid in investment decision-making, help design tax incentives, be a factor in credit ratings or even assist companies in raising money.
“Not all profits are created equal,” Peter Harrison, CEO of London-based asset manager Schroders told the Bloomberg Sustainable Business Summit on Monday.
Serafeim is well-known in the world of environmental, social and corporate governance (ESG) investing — in his words, he was “doing ESG before it was cool”. Growing up in Greece and observing problems in its government sparked his fascination with measuring performance.
His analysis goes beyond the established work on measuring greenhouse gases or using carbon pricing. Keeping in line with the adage, “what gets measured, gets managed”, Serafeim’s goal is to value intangible, non-financial factors. By tapping machine-learning technology, Serafeim and his team evaluate products and services on factors that include how accessible and affordable they are, their health and safety, and the ability to recycle them.
This means charging credit card companies for the medical costs of depression connected to indebtedness, debiting airlines for the human toll of flight cancellations and making food producers accountable for health issues related to obesity. Their calculations also credit carmakers for the safety of their vehicles and companies that hire in areas of high joblessness.
On employment, the team assesses issues such as the quality of wages paid, the number of black women in high-salary positions and the impacts of sexual harassment.
“The challenge is in making sure the data reported is an accurate representation, otherwise this just becomes a race to the bottom with respect to manipulative marketing of corporate policy,” said Dean Karlan, an economics and finance professor at Northwestern University in Evanston, Illinois.
“It will help managers make stronger business cases,” said Susanne Stormer, chief sustainability adviser at Danish pharmaceutical company Novo Nordisk. “Instead of saying, ‘This is the right thing to do or we need to avoid that,’ they’ll have more robust data, better information, which is lacking right now.”
Already, about 60 companies globally, including Dutch bank ABN Amro, Kenyan telecommunications firm Safaricom and Sweden’s Volvo Group, have quantified some of their impacts, Serafeim said. French food producer Danone has introduced a metric called “carbon-adjusted earnings per share”, and private equity firm TPG has worked on estimating the financial value of the social and environmental good from investments.
Impact investing, so recently viewed as fringe, had grown to $715bn in assets at the end of 2019 from $8bn in 2012, according to the Global Impact Investing Network. Many big companies are adopting its principles.
BlackRock, the largest asset manager in the world, said that this year it would make sustainability a top investment rationale. Microsoft plans to invest $1bn to support work on carbon-reduction technologies and Citigroup vowed to spend the same amount on efforts to help close the racial wealth gap.
Keeping shareholders happy has long been the primary goal and focus of decision-making for companies, and it remains to be seen whether Serafeim’s work can be a part of altering that.
Friedman, the Nobel prize-winning economist, declared that a corporation choosing social responsibility over maximising profits was practising socialism — a “fundamentally subversive doctrine”, he called it in 1970. In a free society, Friedman said, “there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud”.
Cracks in adherence to that philosophy are showing. Last year, the Business Roundtable, a group of the largest US corporations, surprised many business leaders when members committed to broadening the beneficiaries of their firms’ work from simply shareholders to customers, employees, suppliers and communities.
Serafeim’s work at Harvard could ease those changes by putting number values on them. “What we’re doing is empowering capitalism to really have free and fair markets,” he said. “Otherwise, it’s kind of a crony version of it.”
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