$8.7tn reasons 'purpose' will drive profit, and why brands that fail to adapt will die: Volvo, The Guardian and former Danone CEO urge marketers to wake up
Volvo is out of petrol and oil engines and about to launch vegan leather; The Guardian is banking on progressive-leaning audiences for ad growth from purpose-led brands and former Danone China and US CEO Lorna Davis predicts 50% of Big Four audit firm revenues will be from Environment and Social Governance (ESG) compliance. Purpose remains polarising - here’s the update for brandland.
What you need to know:
- The world’s largest asset manager, BlackRock, has warned businesses if they do not improve environmental and social governance, it will vote against their boards and investment capital will be more expensive.
- Some 77% of institutional investors say that within a year they will stop investing in companies they do not consider to be sustainable.
- That means environmental auditing will be easily as big as financial auditing, per Lorna Davis, the former CEO and Chair of Danone North America.
- She says both CEOs and marketers need to wake up too – too many are focused on old metrics instead of driving change.
- Davis urges companies to create ‘clean’ divisions or acquire companies to ‘infect’ the broader organisation with purpose and then scale up.
- Volvo has gone the other way: Committed to go all-electric vehicles by 2030 – and to decarbonise its entire supply chain by 2040. Marketing Director Julie Hutchinson says transparency is key.
- Guardian Australia MD Dan Stinton says purpose-driven brands that push ESG credentials in ad campaigns are seeing “much more effective results”.
- Kylie Brosnan, Public Affairs Director at Ipsos, says the opposite is also true – greenwashing will backfire
- The Guardian won’t take ad dollars from those it thinks are attempting to greenwash their business, per Stinton, but will work with those making a genuine effort.
- All say tighter ESG is the shape of things to come.
Companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing scepticism from the markets, and in turn, a higher cost of capital.
This year, the company made carbon reduction mandatory within its procurement processes: If you want to work with Microsoft, you have to be on the same path.
Given the latest commitments coming out of major economies, such as the US and Europe, much of the world appears to be heading in the same direction.
While sceptics may rightfully question whether governments will match rhetoric with action and resources, companies – and crucially financial institutions – are already walking the talk.
That means good environmental, social and corporate governance (ESG) is already table stakes and in the short-to-medium term, companies without sustainability and purpose baked into their business – and fully reported upon and disclosed – will find their opportunities drying up.
They will also soon find it harder to get finance. Larry Fink, CEO of the world’s largest asset management firm, BlackRock ($8.7tn+ under management) last year warned companies that they will find capital increasingly expensive if they do not commit to – and deliver – ESG improvements.
This year, despite the pandemic, Fink wrote that the shift to sustainable investment has not contracted, but accelerated. By some measures, it has almost doubled: “No issue ranks higher than climate change on our clients’ lists of priorities,” states Fink. “They ask us about it nearly every day.”
BlackRock is already holding companies accountable for their decisions. In 2019 it voted against or withheld votes from 4,800 directors at 2,700 companies.
Fink said BlackRock will be ”increasingly disposed” to vote against those firms that “are not producing effective sustainability disclosures or implementing frameworks for managing these issues.”
He added: “Over time, companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing scepticism from the markets, and in turn, a higher cost of capital. Companies and countries that champion transparency and demonstrate their responsiveness to stakeholders, by contrast, will attract investment more effectively, including higher-quality, more patient capital.”
Note Fink said companies and countries will find cost of capital closely tied to environmental sustainability, perhaps a point to ponder.
I think that the idea of having a business that doesn't have a clear sense of purpose will be as ludicrous in two years – or certainly in five years – as smoking is now.
Unthinkable, impossible, inevitable
Lorna Davis, the former CEO and Chair of Danone North America, which globally is adopting B Corp status (see footnote on B Corps), says any leader that doesn’t believe in purpose driven-commerce needs to wake up – or prepare to go extinct.
“Change goes from the unthinkable to the impossible to the inevitable,” says Davis, who is now a B Corp Board member and sits on the board of Seventh Generation Social Mission Board and the Integrity Board of Sir Kensington – both owned by Unilever.
Given the push from both governments and financial institutions, Davis predicts large audit firms like the Big Four will ultimately derive 50% of their revenues from auditing the environmental and social affairs of companies – not just P&Ls and balance sheets – which is precisely the direction BlackRock’s Fink outlined in this year’s letter to CEOs of the world’s largest companies.
“[Today] companies as a matter of course have an audit subcommittee of the board, plus an entire infrastructure to measure the financial metrics, plus external auditors,” says Davis.
“[In future] they will also have a subcommittee of the board for CSR or ESG or whatever you want to call it, with an entire infrastructure to measure the impacts of that company on the planet and the people on the planet. And there will be external auditors – and I think people are seeing that future come toward them,” she says.
I have enormous compassion for CEOs of big businesses who are trying to juggle so many stakeholder interests. I think it's wise for them to get small pods in their companies that can experiment and create new ways of thinking.
Blue chip permafrost
Davis says some boards are fearful of what the future represents. Others are actively resistant to change. While she describes those leaders as “permafrost”, Davis accepts it is “really difficult” to pivot while trying to maintain profitability and deliver immediate returns for shareholders that hold “old style values”.
However, she urges big companies to consider taking a Trojan Horse approach, and to try and conquer from within.
“Some of the big companies are buying small B Corps or they're turning divisions within their organisation into a B Corp so that these can ‘infect’ the organisation, if you like, from the inside – and so they can learn,” says Davis.
“I have enormous compassion for CEOs of big businesses who are trying to juggle so many stakeholder interests. I think it's wise for them to get small pods in their companies that can experiment and create new ways of thinking. That way they can do a little test-bed and then scale up when they're ready,” she suggests.
“People running big companies are trying to keep the financial system of the old metrics moving while embedding some of these innovations. So I think it's a smart idea for big companies to start small - or to buy small - to embed that stuff in their company in an unusual way.”
To [decarbonise] we have to work really closely with our suppliers. There are emissions as result of the production of batteries. So we are looking at that, and how we source things like cobalt – working with suppliers, using blockchain technology [for traceability] but also on the ground conducting audits to ensure that we’re sourcing responsibly.”
Volvo: Reading the road
Rather than start small, or drag their heels, some companies decide to go all in – and Volvo is a prime example. Within nine years, the Swedish carmaker will ditch combustion engines, which it has been making since 1927, and pivot to all-electric models.
By 2030, it’s likely most other carmakers will be racing to get to the same point as countries, particularly those in Europe, bring forward bans on the sale of new petrol and diesel vehicles.
While marketing director Julie Hutchinson says the brand has always had sustainability and safety as core values, Volvo’s leadership formalised the brand’s purpose three years ago as “the freedom to move in a safe, sustainable and personal way.”
According to Hutchinson, that mission statement "is now embedded throughout the entire organisation”. But like Microsoft, Volvo must look beyond its own business and across its supply chain to reach its commitment of becoming carbon neutral by 2040.
“To do that we have to work really closely with our suppliers – and there are challenges we face in going all electric,” says Hutchinson. “There are emissions as result of the production of batteries. So we are looking at that, and how we source things like cobalt – working with suppliers, using blockchain technology [for traceability] but also on the ground conducting audits to ensure that we’re sourcing that cobalt responsibly.”
Likewise, the brand will phase out leather. Volvo’s new C40, launching next year, will be both its first electric-only vehicle, and the first without a leather trim option. Buyers, however, can opt for vegan ‘leather’ or wool.
“We’re starting to make that move towards really walking the talk,” says Hutchinson.
“It’s not lip service, it needs to be embedded within the organisation – and we have to demonstrate to customers that we’re being transparent about how we behave as a sustainable organisation.”
The results that we're seeing suggest that these [purpose-driven] campaigns can be really, really effective – much more effective than campaigns that don't necessarily draw on these values.
Guardian Australia: Beware greenwashing
While vegan leather might push those who fear politicians are coming for their utes permanently over the edge, Guardian Australia MD, Dan Stinton, thinks brands walking the talk, and shouting about it, is the shape of things to come.
Australian companies are increasingly putting their purpose and ESG credentials central to marketing campaigns, he says. “The results that we're seeing suggest that these campaigns can also be really, really effective – much more effective than campaigns that don't necessarily draw on these values.”
Stinton says The Guardian, itself a B Corp, won’t take ad dollars from those it thinks are attempting to greenwash their business. But the publisher recognises that there are ways to work with brands that are taking “meaningful steps”, provided they can “tell a story which is more authentic and genuine”.
He cites Dairy Australia as an example.
“They are doing a lot of work to mitigate the impact of methane emissions, as well as replacing plastic packaging with plant-based packaging. That’s a really important story that I don’t think many consumers would be aware of, so I think it’s important to get that message out.”
Yet livestock, particularly cattle, are major emitters of methane, a far more potent greenhouse gas than CO2. In total, they contribute 14.5% of global GHG emissions – largely from beef and dairy.
“Obviously this is an area where you have to be pretty alert to the possibility of greenwashing. We had a session that included our editorial team and we investigated the claims that were being made. We made sure they were genuine, made sure they were substantial and after we found out that they were, we were happy to promote them,” says Stinton.
“But it’s worth noting that the reason campaigns like this perform so well on The Guardian is because we tend to attract people that have a fairly progressive world view. These kind of values tend to be ones that are shared with our audience.”
Kylie Brosnan, Public Affairs Director at Ipsos, points out that the opposite is also true – greenwashing will backfire. Ipsos’ surveys, she says, show that if brands overstate their credentials, it will inevitably end in tears.
“If the brand is not authentic and if the brand does not really deliver on what they promise to do, then consumers are pretty savvy and they're pretty cynical – they'll get hurt and they'll back off.”
Often I'm staggered to find that marketing people are not in touch with this journey. They [marketers] are still operating in their own little world, and I think the more connected they get to a very diverse range of stakeholders, the more likely they are to succeed.
What would Ben & Jerry do?
Shared values with customers are critical to avoiding missteps when transitioning brands and corporations, says Lorna Davis. Which is where marketers can come unstuck.
“We need to experiment and we need to be tolerant … but companies have a much better chance the more diverse a group of stakeholders that they include in their thinking,” she says.
“A lot of the mistakes we make is when we operate in an echo chamber and we are just talking to ourselves.”
Davis cites Ben & Jerry’s, a B Corp-certified brand, as a template to follow: “Their motto is ‘the closest relationship you can have is one over shared values’. And it’s true. Marketers struggle a lot with this because they’ve lost the connection with their consumers.”
She thinks marketers that are able to visualise the bigger picture are usually those that grasp the scale of challenge – and opportunity – ahead.
“Often I'm staggered to find that marketing people are not in touch with this journey,” says Davis, who spent almost two decades as a marketer with the likes of Unilever, P&G and Smiths Snackfoods before running companies like them.
“They [marketers] are still operating in their own little world, and I think the more connected they get to a very diverse range of stakeholders, the more likely they are to succeed – but I also think we need to give them a break as they experiment.”
Brands that do not quickly embrace strong purpose and ESG principles may go extinct, says Davis, because nobody will want their products.
“Take toothpaste. The whole tooth care business has been disrupted like crazy by small start-ups who don’t have any toothpaste tubes and who are speaking right to the heart of consumers concerns in a way that is relevant to them today.
“So why are the big guys not doing that? Presumably because they are still asleep and trying to sell the stuff they were trying to sell yesterday – trying to put lipstick on a pic, effectively,” she suggests.
Lauding Volvo and The Guardian as “magnificent examples of having really tight brand positioning,” Davis says it is “the ones who are out of touch” that will continue to struggle.
“They are trying to sell stuff that they all know nobody wants anymore. But they have factories to maintain and they've got shareholders demanding a quick hit.”
For marketers, she says “the more honestly and openly they are having that conversation [about embracing change], the better”.
If the brand is not authentic and if the brand does not really deliver on what they promise to do, then consumers are pretty savvy and they're pretty cynical – they'll get hurt and they'll back off.
Where to start…(the young and restless)
Davis urges businesses to start with the youngest cohort within their businesses and work upwards: “Get the youngest, most passionate person in your company and get her to lead it. Young people are more awake and more alert. They don’t want the future for their children that they are looking down at today. And it’s a great way to encourage the younger people in the organisation to take charge.”
But for marketers, she says the key is to face your fears – and not outsource responsibility.
“The smartest place for a marketing person to start right now is to think about the three people that they would be terrified to hear from. First, up, let’s have a conversation with Greenpeace, or whomever it is that you are really scared of.
“And then have a really meaty set of conversations with the people who you're really trying to talk to – not through third parties, but really connect with people like we used to in the old days. You know, those times when you actually spoke to people – because you’ll never have a better opportunity.”
…And where we’ll end up (the smoking gun)
Asked where they believe ‘brand purpose’ will be in two years time, Davis, Hutchinson and Stinton were unequivocal.
“I think that the idea of having a business that doesn't have a clear sense of purpose will be as ludicrous in two years – or certainly in five years – as smoking is now,” says Davis.
Guardian Australia’s Dan Stinton agrees.
“In two years’ time, do we think people will care less or care more about things like climate change, or women’s rights, or black lives matter? My pretty safe bet is that they will care more. So I think companies that don’t lean into this will ultimately be left behind. I think every company is going to embrace this because the general public is going to expect them to.”
Julie Hutchinson predicts Volvo will not be alone in backing purpose and as key brand differentiator.
“I’m predicting companies will be more specific on who they’re after [as customers]. From our point of view, we have one per cent market share [in Australia]. We don’t want ninety nine per cent. We want to go after a very defined group of people who share the values we have,” says Hutchinson.
“And the numbers don’t lie… in a couple of years time we will be able to see those companies who have followed through on brand purpose and what that has delivered.”
But don’t take their word for it. As BlackRock CEO Larry Fink states:
“The more your company can show its purpose in delivering value to its customers, its employees, and its communities, the better able you will be to compete and deliver long-term, durable profits for shareholders.”
That’s $8.7 trillion worth of advice.
Footnote: What's a B Corp?
To achieve B Corp certification, companies must meet minimum standards of social and environmental performance. They are assessed every three years and pay a fee for the certification based on their sales. The scheme is run by US-based non-profit B Lab and to date, there are some 3,900 certified B Corps across 70 countries.
Lorna Davis is a B Corp board member. To meet the minimum standard “you have to score more than 80 points out of 200,” she says.
“You also have to change your legal framework so that you make a legal and public commitment to have a wider range of stakeholders than your financial ones. So you have to actually declare your environmental and social commitments for your company.”
B Corps include Athleta, Patagonia, The Body Shop and Ben & Jerry’s. See a list of Australia’s B Corps here.
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