The Great Shift: More than a Trend? Why Stakeholder Capitalism May Have Staying Power

COMPANIES ONCE JUDGED MAINLY ON PROFITS are increasingly being challenged to show that their operations can help elevate society in addition to share price. It’s an economic shift towards “stakeholder capitalism,” encouraging companies to consider how they can potentially benefit all of their stakeholders—employees, customers and the communities they serve—in addition to their shareholders.

 “Capitalism and free markets have brought significant economic benefits to the world, but often with unequal consequences,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “Stakeholder capitalism addresses that imbalance,” adds Hyzy, co-author of a new report from the Chief Investment Office (CIO), “The Great Shift: Shareholder to Stakeholder Capitalism.”

This shift can go hand in hand with the rising popularity of sustainable and impact investing—seeking benefits for society in addition to financial returns—and the development of more consistent ways to measure companies’ environmental, social and governance (ESG) performance. On September 22, 2020, the World Economic Forum’s International Business Council, chaired by Bank of America Chairman and CEO Brian Moynihan, released standardized “Stakeholder Capitalism Metrics” (SCM). Developed in partnership with the Big Four accounting firms—Deloitte, PricewaterhouseCoopers (PwC), Ernst & Young (EY) and Klynveld Peat Marwick Goerdeler (KPMG)—the SCMs look beyond traditional financial results at how companies treat their workers, affect the environment and impact the communities where they operate. With this consistent, comparable and measurable information, capital can then be directed towards companies whose goal it is to effectively deliver across stakeholders.

Can sustainable companies also be stronger companies?

“Qualities previously seen as ‘nonfinancial’ are increasingly recognized as critically important to financial areas such as revenue growth, operating margins and cost of capital,” says Jackie VanderBrug, Head of Sustainable & Impact Investment Strategy for the CIO. VanderBrug co-authored “The Great Shift” with Hyzy and Jonathan Kozy, Senior Macro Strategy Analyst for the CIO.

 “Companies that embrace more climate-friendly business models and operations have the potential to position themselves for sustained growth over the long term,” Kozy says. “We believe the shift to stakeholder capitalism has staying power.” As such, investors who recognize this great shift may stand to benefit as well. “Portfolios in the coming years could allocate more capital to assets backed or underpinned by high sustainability, in our view,” Kozy says.

Investment strategies to consider

While companies in any industry can take steps to become more sustainable, specific industries may offer special opportunities, VanderBrug notes. “We see potential opportunities in renewable energies, electrical vehicles, next-generation batteries, clean technology, energy-efficient electronics and building systems, and clean water and sanitation.” Another promising area is infrastructure, especially technology infrastructure.

As important as ESG considerations may be, Hyzy stresses the importance of making investment decisions within the context of your overall financial goals and broad market trends. “We currently prefer stocks over bonds and large, U.S.-based companies,” he says. “Speak with your advisor about how sustainable investing could help to better position your portfolio for long-term success.”

For a closer look at how ESG concerns are altering the landscape for businesses and investors, read “The Great Shift: Shareholder to Stakeholder Capitalism.”