Why sustainability is good business

Luke Fletcher (LF): B Lab, the non-profit organisation that runs the B Corp certification, seeks to use business as a force for good. It was started by three US entrepreneurs, who were disillusioned when they came to sell their own company, and were obliged to sell to the highest bidder rather than the one that shared their values. The certification rewards firms with high standards of social and environmental performance, transparency, and balancing profit with purpose. 

It starts with a free, confidential questionnaire, with sections assessing governance, workers, community, environment and customers. A company can then apply for certification if it scores over 80 out of 200, and a B Corp representative will rigorously investigate their answers. Interestingly for me, in addition to the questionnaire, companies must also meet a legal requirement to integrate stakeholder consideration into their governance structure: so the company must be run not just for the benefit of shareholders but also for the benefit of wider society. This constitutional change is a simple, yet profoundly deep one for any company. For me it means that B Corp companies join a community of like-minded firms that share similar values.

James Fairweather (JF): A quarter of the points we scored at Lombard Odier in our B Corp assessment were for our sustainable investment offering. We are currently embedding sustainability into all our investment processes, across the group. People talk a lot about demand for sustainable solutions coming from the younger generation. I think this is true, but by no means exclusively; this mentality is becoming more mainstream across the client base we serve from London. Anecdotally I would say interest has picked up materially even in the last six months. Of course, a sustainable approach has to deliver value for our clients, and we have to counter the myths that it affects returns. It is our strong conviction at Lombard Odier that sustainability will drive higher investment returns mid-term – something which has been borne out by the recent performance of our sustainable mandates¹.

BG: There are certainly signs that the sustainability movement is gaining momentum. In the days that followed the news of our own certification, B-Lab Switzerland received almost 300 enquiries from firms in Switzerland seeking information about it. There are now around 2800 B Corps globally in more than 50 countries, including companies from many different sectors. This figure includes some publicly traded firms, and at least one big multinational listed firm, Danone, is now applying. This will be an interesting test of whether the system can be applied to firms where challenging shareholder primacy could prove more problematic.

B Corp have an interesting way of nudging companies towards doing the right thing. The system rewards positive movements; it does not punish companies’ actions. And B Corp re-certify companies every three years, so there is an incentive to continue improving.

LF: Yes, there is potential reputational risk if a firm is not re-certified. That can be a powerful incentive. I think the scoring system is also interesting, and plays into senior managers’ behaviour – the incentive to compare one’s score against competitors, and to better one’s previous score, is high. I think that certification also raises some interesting questions with senior management that might never have occurred to them otherwise. For instance, looking at employee pay across the firm. I think it also changes management’s mind on the way a company creates value. That’s an important aspect for me – can we change the way companies think, from a narrow focus on quarterly performance to a broader, longer term view on their impact? Ideally, we would put the concept of impact into regulation, to ensure that all companies think about profit as just one element of their purpose.

BG: I agree, and I think regulators have a big role to play in pricing a company’s positive and negative externalities. At the moment, there is an artificial decorrelation between a company’s performance and its environmental and social impact. I think that will change as consumers become more demanding, regulators become more stringent and companies realise they risk losing their social licence to operate. B Corp certification is just one way of demonstrating that at Lombard Odier, we are taking these issues seriously.

[1] USD balanced sustainable mandate has delivered three-year annualized performance of 12%, versus 11.8% for a standard balanced benchmark; EUR balanced mandate has delivered 5.8%, versus 4.9%. Performances are gross of fees and comprise the back-test of a theoretical allocation, combined with the performance of a real portfolio since 31.12.16.