How to Build Sustainable Capitalism

Originally published on www.Inc.com on September 14, 2020.

Some 50 years after Milton Friedman declared that "the social responsibility of business is to increase its profits," his doctrine of shareholder primacy is having its day of reckoning. Many entrepreneurs have been skeptical for some time of a system that incentivizes squeezing profits out of the business and handing them off to shareholders not involved in operations. Indeed, companies like Airbnb and Patagonia have stated they want to create value for all stakeholders, not just shareholders, and there's a strong argument that the stakeholder approach is better for the bottom line over the long term.

Friedman's narrative, published in September 1970, set the stage for decades of corporate behavior prioritizing the interests of shareholders above all else. But half a century later, market forces have exacerbated inequality, while deregulation has let companies off the hook for things like air and water pollution and climate change. 

Opposition to the Friedman doctrine has been building for some time (last year, the Business Roundtable announced that the purpose of a corporation is to create value for all stakeholders, not just shareholders), and is accelerating with the pandemic. With inequality and natural disasters in the spotlight, leaders in business and finance are rallying for a new narrative. 

Enter Imperative 21, a network of business associations created in the early weeks of Covid-19 and representing more than 70,000 businesses, with the ambitious goal of ushering in a more inclusive, stakeholder-focused economic system. The founders include the leaders of B-Lab, an organization that runs a rigorous certification process for companies interested in identifying as having a societal mission. Investors are also represented in Imperative 21 through the Global Impact Investing Network (GIIN), and large corporate CEOs through Chief Executives for Corporate Purpose (CECP), an association originally founded by Paul Newman.

Starting in April, the leaders of these and other organizations partnered with the Ford and Skoll Foundations and began a broad conversation over Zoom with whomever was interested. The conversation led to a couple of drafts of "Imperatives for Economic System Change," and the creation of international coalitions to work on cultural change and shifting the financial system towards better management of systemic risks like inequality and climate change.

The allies chose the 50^th anniversary of Milton Friedman's doctrine to announce themselves to the world, launching a campaign they call "Reset." The campaign opens with a display on the Nasdaq Tower in New York's Times Square and on a building in São Paulo, Brazil, along with a full-page, paid announcement in the New York Times. The Nasdaq will also begin projecting key indicators of economic success on its tower, including biodiversity, living wages, anti-racism, and shared prosperity. 

Imperative 21 is campaigning for an economic reset based on three pillars: 

• design for interdependence,
• invest for justice, and
• account for stakeholders.

The group says it wants an economic system that:

• "recognizes the interdependence of healthy people, planet, and economies; reimagines the relationships between the private sector, government, and civil society; and ensures that everyone has access to free and fair markets;
• "removes structural inequality; ensures leadership and ownership are more representative and investment more accessible; uses technology to advance democratic ideals and human rights; and promotes greater voice, power, and opportunity for those currently marginalized; and
• "measures success based on credible common metrics of value creation for all stakeholders; creates incentives that reward business and investments creating social and environmental value; and enhances standards of fiduciary duty."

While entrepreneurs have long favored such changes, the effort behind Imperative 21 offers a framework for envisioning a different system. The group plans to find ways to highlight actions that help bring about change, and catalyze growing enthusiasm about conscientious business activity. They are designing their strategy around three audiences: the general public, business leaders, and policymakers.

Still, the leaders acknowledge that proper delivery of their message will take a decade or so. Despite such widespread desire for change, the shareholder system ushered in by Friedman is strongly entrenched and tough to deviate from. Just this summer, the Department of Labor issued a proposed rule that would limit the use of investments that consider environmental, social, and corporate governance factors in 401(k) plans. Regulation of the financial sector is designed around shareholder primacy, and shareholders are in a powerful position to continue propagating the notion that greed is good, or perhaps inevitable. 

This is why the Imperative 21 allies are focusing on getting the word out: They understand that policies governing the financial system won't change until public opinion builds enough momentum to change them. So as important as it is to advance concrete proposals for a new system, perhaps even more important, according to the network, is sparking conversations. A reset can only begin with awareness.

To Protect Its Supply, Kind Speaks for the Bees

Originally published on www.Inc.com on August 25, 2020.

Kind today announced the company will commit to source by 2025 its almonds exclusively from bee-friendly farms that set aside land for wildflowers and do away with two bee-killing pesticides. The snack company will also fund a program at the University of California, Davis to monitor progress.

By encouraging growth of healthy bee habitats, Kind hopes to combat a decline in the pollinator population. Since Kind uses one to two percent of the world's almonds, the project will have significant impact and, according to an Environmental Defense Fund spokesman, can bring "long-term environmental benefits for soil health, water retention and regional biodiversity." Founder Daniel Lubetzky says his company is placing a real emphasis on environmental sustainability: "It's the logical next step." 

It is hard to underestimate the importance of bees. One study published last month noted that: "Most of the world's crops depend on pollinators, so declines in both managed and wild bees raise concerns about food security." The study looked into seven crops in 131 locations across the US, estimating "the nationwide annual production value of wild pollinators to the seven crops we studied at over $1.5 billion." The study said a decline in pollinators "could translate directly into decreased yields or production for most of the crops studied."

Last year Kind competitor Clif Bar attracted media attention by publishing an ad in the New York Times where it challenged Kind to source organic ingredients. Lubetzky says he respects Clif's societal commitments and that the competitor is doing good things, but he continues to counter that Clif's use of sugar as a leading ingredient is a dissonance for a nutrition bar brand. 

Today's announcement is the result of more than two years of stakeholder engagement with scientists and Kind's own supply chain to refine an environmental sustainability plan where the company can have real impact. "If bees end up collapsing we have a very very serious problem," says Lubetzky. "The hope is that three to five years from now these steps become standard practice."

After growing his snack company from the ground up, Lubetzky last year stepped down as CEO to become Executive Chairman. He gives his team the credit for developing the new sustainability plan, which also includes aspiring to reach 100% recyclability, compostability, or reusability across all its plastic packaging by 2025, and an investment in renewable energy.

During a Zoom interview Lubetzky continuously makes reference to his four children (who want his attention during our call), saying it's his responsibility to leave them a better world. That means a world with biodiversity, pollinators, good water management, and a steady food supply. Promoting a healthy ecosystem for almonds also means ensuring that Kind will be able to continue sourcing its key ingredient well into the future. "This is about enlightened self-interest," says Lubetzky.

He notes that in today's world the private sector "permeates our lives more than government... and with that power comes responsibility." While not every problem can be solved through market solutions, "when you're able to come up with business models to tackle challenges that exist, they can scale faster - I don't have to go around with a hat asking people for donations. So market forces are really powerful and you want to try to deploy them and channel those strengths to try to do the maximum that you can do in society," he adds. 

Above all though, his advice to other business leaders is to be authentic. "I think that in the future it will become more of an expectation that corporate actors behave responsibly and holistically in a more long-term oriented way," he says. "But I'd rather a company that is transparent and authentic and just says 'I'm providing good jobs, I'm providing this type of products,' than a company that tries to jump on the bandwagon and is not authentic. If it's not authentic, if it's not real, it's not going to help."

5 Ways for Your Company to be More Sustainable

Originally published on www.Inc.com on April 22, 2020.

The 50th anniversary of Earth Day comes at a strange time: when all the world is on hold, frozen in place by a pandemic. With human economic activity nearly at a standstill, for a brief moment the air and water are cleaner and animals have come out to play on deserted beaches and streets. It's worth asking if we can take this opportunity, this pause, to build something greener. Could a system based on more caring communities emerge? Can human activity be more in balance with the natural world? Do we really need everything we were used to before?

On a practical level, here are some design tips for entrepreneurs thinking about the building blocks to a better future.

1. Design with children in mind.

This means avoiding anything toxic. Bill McDonough, one of the great figures in sustainable design thinking, said in a recent presentation that toxins are not "bad" things, but rather elements in the wrong place or the wrong quantity.

For example, he says, if someone is drowning, the water all around her is toxic. Think of putting things in their right place, he says. A hammer belongs in a construction site, but not in a child's playpen. Carbon belongs in soil, but not in excess emissions released into the atmosphere.

As an entrepreneur, you might want to apply your creativity to clean tech solutions. An example that McDonough uses is thinking of plastic bottles as a form of carbon, which can be designed to be biodegradable and to return to the soil.

2. Simplify.  

A system that is unnecessarily complex can be reduced to what is essential. As an example, CEO of Social Impact Capital Sarah Cone doesn't think today's food supply chain makes any sense. Agricultural products make their way across oceans to be put in warehouses and sold through multiple intermediaries before getting to a family's refrigerator. That is a lot of margin reduction.

Cone says her company invests in the essentials of human need, noting that they "look at deals in food, water, affordable housing, education, energy, and particularly drugs. And having these things at lower cost, and better-performing via technology, becomes more important." There's plenty of opportunity in simplifying your systems from a sustainbility standpoint

3. Think locally and build resilience.

Michael Shuman, a proponent of local community building, suggests designing businesses for resilient, interconnected local communities. Does your business respond to a local need? Will it help the community thrive? Does it measure performance through tools like the B-Corp assessment (a certification program for societal benefit)? 

We can't all predict a pandemic the way Bill Gates did, but entrepreneurs can understand risk and weave environmental and social risk management into the way they do business.

So ask yourself, how could climate risk affect your business? Shuman says that those who are best able to withstand future crises--be they pandemics, climate disruptions, or financial meltdowns--will be the ones who thrive economically.

4. Be part of the clean tech climate challenge.

We've become used to hearing about climate change as a problem too big to solve, a conundrum for policy-makers and not entrepreneurs. But the climate challenge presents immense opportunities for innovation. We should treat this as an engineering challenge, according to Solomon Goldstein-Rose, author of The 100% Solution: A Plan for Solving Climate Change. "We can do that through moonshot-style innovation projects," he wrote in a recent article. The goal is to outcompete fossil fuel infrastructure and technology, building new systems that are affordable enough to spread rapidly.

5.  Design for seven generations into the future.

This was a concept coined by Native Americans that first appeared in the Great Law of Peace of the Iroquois Confederacy, an oral framework thought to have influenced the U.S. Constitution. Designing products and business models that stand the test of time, a long time, can help entrepreneurs make a positive impact on the environment and society as a whole.

As we meditate how to rebuild after Covid-19, let's celebrate Earth Day by recommitting to the earth with these tips.

Why Seventh Generation Chose the State of the Union to Discuss the State of the Planet

 Originally published on www.inc.com on February 5, 2020

With climate anxiety on the rise, particularly among younger generations, it shouldn't be surprising that one brand picked President Trump's State of the Union address to deliver its message on the issue. Seventh Generation's 60-second SOTU ad featured a clip from Franklin Delano Roosevelt's State of the Union address of January 7, 1943 with current footage of children marching for the climate. "The people have now gathered their strength," FDR proclaims, as images of young people displaying bold messages like "There is no planet B" flash across the screen. "They are moving forward in their might and power," the voice continues, and then "They see before them the hope of the world." 

Unlike its past commercials, which have featured its household cleaning and paper products, in the "Believe in a Seventh Generation" ad the company is using its advertising budget strictly to call for action against global warming. 

Why right after the State of the Union?

"We feel there cannot be a strong State of the Union without a discussion of the State of the Planet as well," says Hanneke Willenborg, Chief Marketing Officer at Seventh Generation. "It's the most important issue of our time."

Seventh Generation, a Unilever brand, wants to get the word out about its name: a reference to an Iroquois principle that decisions should be made taking into account sustaining people's livelihoods all the way to seven generations in the future. 

Willenborg says by taking a stand on climate the company hopes to raise awareness and change consumer behavior, which dovetails nicely with the brand's ability to sell more of its biodegradable and recycled products. The company's target audience is millennials with small children, and 40% of its sales already come from this demographic. That group, which in Seventh Generation speak is known as "mindful progressives," is expected to become more and more passionate about sustainable consumer choices with the wellbeing of future generations in mind.

Indeed, many brands are noticing that sustainability is key to conquering the hearts and minds of younger consumer groups and millennial employees. The trend is accelerating and companies want to get on board. 

Is taking a stand on the environment political? Willenborg says no. "It's not a partisan issue," she says. "When the Titanic is going down, it doesn't matter if you're wearing a blue shirt, or a red shirt." Or any shirt at all. 

A Poem

The Future of Business

I see shiny buildings

they are interacting with the sun

water circulates within their walls,

purifying and being purified as it circulates.

I am in those shiny buildings

and I look back at my history.

Business was once powerful;

it wrote the rules

it competed and grew fat

it depleted our resources;

it conquered, and brought inequality.

It served itself.

But now, we have learned to really live, together.

Business is at our service

to build the technology we need.

We have a new model.

We are, each of us, both consumer and producer.

We create and we share our gifts and our products.

When we are finished using a product, the waste becomes a resource

for something new.

How did we get here?

Business had to become sustainable.

Company by company, it adapted its financial reporting to sustainability reporting.

Consumers became loyal only to brands that continued raising the bar on transparency, human rights, and better environmental practices.

Technological innovation brought us the ways to fulfill all our basic needs

and disrupted all the top-down models we were used to.

The internet of information brought us the internet of things.

It was exciting to come forward with one's own invention and to share a new product

that others would want to use.

We had an explosion of entrepreneurship.

With so many entrepreneurs, our largest businesses had to become not only leaders in sustainability,

but great places to work

for creative, entrepreneurial individuals.

So in the end we let go of our old addiction to squeezing quarterly profits

out of our people and our resources.

The businesses that held on to that old model

simply lost their best employees, their consumers, and, inevitably, their investors too.

And here we are, in our shiny, self-sustaining buildings

in sustainable cities,

feeling creative.

And we still have nature.

She has not been destroyed.

She is, in fact, happy.

June, 2015

Casino Capitalism and the Way Forward

Denmark has decided to freeze its economy for a few months, with the government subsidizing employer costs like salaries so people won’t be laid off during this crisis. And providing for the unemployed. When you have a welfare state in place, and when economics is about income and costs, keeping cash flow flowing, it seems plausible that decisive action like this could work.

But the American economic model is casino capitalism. Masters of the Universe buy and sell pieces of our economy every day, putting the financial system, originally supposed to fuel and support entrepreneurship, on a roller coaster ride we all hope will go well. Our retirement system works like this: the Department of Labor has encouraged American workers to hand over a portion of hard earned wages every month to gambling professionals. These professionals are good at their jobs, but it’s a guessing game and a roller coaster ride for everyone.

When companies get very big, and their stock is publicly traded, and their ownership is diluted among many, Short-Term-Shareholder logic takes over. Growth is king. Margins must continue widening. Revenue must increase and costs must be cut. Corporate decision-making is ruled by a nebulous greedy monster that has no face: it’s the crowd. Corporate decision-making becomes irrational, drawn to behaviour that puts profits over everything. Over human life, even. 

Imagine if instead of human shareholders we had robots programmed to seek only profits. At a time like this, companies would be programmed to keep their workers working, and at maximum productivity. If a competitor firm had its employees wiped out by a virus, so much the better. Money money money.

My cousin who is a single mother of two with rent to pay has already lost both her jobs. Do the robots at the top care?

This pandemic puts us at a crossroads. Will we jump into a competitive bloodbath feet first? Will we condemn our citizens to a looting war, to a Lord of the Flies world while the rich retreat to island paradises with heaps of cash? Or can we recognize that we are brothers and sisters, interconnected and in community? 

When Europeans came to the United States, they brought a mentality of conquest and growth, and immediately began expanding their wealth on the back of slave labor. They wiped out the philosophies of the indigenous peoples who had been in America before: philosophies not without violence, but where life is cyclical like the seasons and to be shared in community. 

Short-Term-Shareholder culture will destroy us. We should not keep going down this path. The practical question of how to switch gears so late in the game, and now as our house-of-cards economy is about to crumble, is the hardest to answer. 

But there are models and there are people with answers. The simplest, clearest existing models are in Scandinavia. I started by citing Denmark’s answer to this economic crisis, which can work for Denmark where there is a welfare system in place. 

Here is some of the way forward, in bullet points:

-introduce checks and balances to the shareholder model. The new (already existing) model is stakeholder capitalism. Corporations and societies must create value for all stakeholders: workers, the public good (first and foremost care for the environment and recognition of our proper place within nature), community, consumers, families, and so on. There are ways to do this. Multinational corporations can use the Integrated Reporting model to report on deployment of six capitals: financial capital; manufacturing capital; human capital; social and relationship capital; intellectual capital and, natural capital. And on value creation for all stakeholders.

-companies will also need to map their growth against planetary boundaries such as CO2 emissions limits, toxic chemical impacts, and ozone.

-regulate, regulate, regulate. No share buybacks. Heavy taxation on pure financial profits. No offshore wealth hoarding, risky speculation with other people’s money, senators selling out just ahead of the crash they are overseeing, etc.

-build new models for financial stability in retirement that are removed from gambling. This could include providing services to the elderly for free.

-rebalance inequality. The many side effects of inequality (for example, that the increased cost of living means smart people no longer choose to be teachers) need to be addressed, first of all by reducing inequality through tax policy, but in many specific ways as well.

-break up monopolies, oligopolies, and concentrations of power, particularly in tech.

-for the love of God, healthcare for all. 

We have to do all this, AND freeze our economy like Denmark, overnight. There is certainly no time to lose.

March 21, 2020

The View From Davos: The Global Economic System Is Transitioning to Stakeholder Capitalism

Originally published on www.inc.com on January 24, 2020.

First BlackRock, and then Goldman Sachs. Money is stepping in to drive sustainable change in places where regulation is not.

BlackRock CEO Larry Fink's annual letter to corporate CEOs was a call to action on climate change.

And this week, Goldman CEO David Solomon, speaking at the World Economic Forum in Davos, said the bank will no longer take a company public if it doesn't have a diverse board of directors.

As world leaders wrapped up a week of high-level talk at Davos, the theme was clear: Our house is (still) on fire, and we need new, more diverse leadership for a new kind of capitalism -- called stakeholder capitalism -- to fix it.

The mood in Davos: The global economic system is at a major tipping point. This was highlighted by one exchange in particular: Time magazine Person of the Year Greta Thunberg, the teenage climate activist from Sweden, responded to criticism that she should study economics by tweeting, "My gap year ends in August, but it doesn't take a college degree in economics to realise that our remaining 1.5° carbon budget and ongoing fossil fuel subsidies and investments don't add up."

The point about stakeholder capitalism is that if companies continue to put narrow, short-term profitability above all else, rather than seeing their companies as actors in a connected system of stakeholders, community, and planet, they will be responsible for the fallout caused by excess emissions, waste, and income inequality -- and their profits will likely come under threat in the process.

In the BlackRock letter, Larry Fink predicted an accelerated reallocation of capital, coming faster than we see the evidence of climate change itself. And he talked about the responsibility of CEOs in an interconnected world. "We believe that all investors, along with regulators, insurers, and the public, need a clearer picture of how companies are managing sustainability-related questions," wrote Fink in the letter. "This data should extend beyond climate to questions around how each company serves its full set of stakeholders, such as the diversity of its workforce, the sustainability of its supply chain, or how well it protects its customers' data. Each company's prospects for growth are inextricable from its ability to operate sustainably and serve its full set of stakeholders. The importance of serving stakeholders and embracing purpose is becoming increasingly central to the way that companies understand their role in society. As I have written in past letters, a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders."

From Davos, Goldman's Solomon echoed the stakeholder message. "I'm a big believer that unless you take care of your stakeholders more broadly, in the medium and long term you won't deliver outstanding returns," Solomon told CNBC.

He then stressed the need for diversity with a strong statement, which is part of a broad movement for greater gender and racial diversity on boards of publicly traded companies. "I think from a governance perspective, diversity on boards is a very, very important issue, and we've been very, very focused on it," he said in the interview. "I look back at IPOs over the last four years, and the performance of IPOs where there's been a woman on the board in the U.S. is significantly better than the performance of IPOs where there hasn't been a woman on the board. And so starting on July 1st, in the U.S. and Europe, we're not going to take a company public unless there's at least one diverse board candidate, with a focus on women, and we're going to move toward 2021 requesting two." 

Plenty of research shows that companies with diverse boards perform better than those with traditional, non-diverse boards.

California was the first U.S. state to actually mandate that boards of publicly listed companies include women. India, Germany, Australia, Norway, Spain, France, Italy, Denmark, Finland, Iceland, the Netherlands, Belgium, and Israel had already instituted similar rules or guidelines, following heated debates on the merits of this type of affirmative action.

The announcement by Solomon places the emphasis on value creation from diversity. When more women and minorities sit on boards, companies are more likely to evaluate stakeholder viewpoints and integrate a more purposeful approach into corporate strategy.

The message from Davos is clear: Listen to your stakeholders, and act with environmental and social purpose.

Airbnb's New Approach: Turning Stakeholder Value Into Shareholder Value​

Originally published on www.inc.com on January 21, 2020.

As Airbnb prepares for an IPO this year, instead of doubling down on messaging about maximizing shareholder returns, the company took a hint from the Business Roundtable and announced a new approach focused on value creation for all its stakeholders. Last August, the Business Roundtable updated its statement on the purpose of corporations, saying that rather than focusing exclusively on profits for shareholders, businesses should create value for all stakeholders, including employees, customers, suppliers, and local communities. BlackRock CEO Larry Fink echoed the sentiment in his recent CEO letter, calling for businesses to do their part on environmental and social sustainability issues such as climate change.

Airbnb spelled out in an announcement on its website the five stakeholders it considers important, the priorities and principles it will focus on for each, and the metrics it will use to measure success and value creation. "Serving all stakeholders is the best way to build a highly valuable business," the statement said, "and it's the right thing to do for society."

The company listed its main stakeholders as guests, hosts, communities, shareholders, and employees. As an example, for communities Airbnb said it wanted to focus on sustainability around travel. "We are measuring the carbon footprint of both Airbnb's corporate operations and the carbon footprint of travel facilitated by the Airbnb platform," the statement said. "Measuring our impact informs our efforts to reduce our carbon footprint and set a new standard for sustainable travel."

The company said it would put two of its key executives in charge of the project, and acknowledged that its new strategy is about "problems and opportunities that will take multiple teams working over multiple years to solve." The statement said it expected the strategy would invite criticism.

The implication, especially with the announcement coming in the run-up to an IPO, is that Airbnb bets creating value for all stakeholders will actually translate into creating more value for shareholders than if the strategy were to focus narrowly on shareholders alone.

Those familiar with risk management would likely make the same bet: A stakeholder approach attempts to address major risks that can upend a business and detract from its bottom line. Getting ahead of those risks means being serious about engaging with stakeholder expectations.

Airbnb's main operational risk is the safety of guests, and the company put that front and center in its stakeholder strategy. Its metrics for the "guest" stakeholder category are: number of personal safety incidents, percentage of stays where both hosts and guests have a verified identity, and percentage of listings that are verified (the goal is 100 percent by December 15, 2020).

Transparency in disclosure, particularly in reporting risks, progress, and failures, is essential to shareholder value. This is why in today's complex world, greater focus on each stakeholder and each area of risk and opportunity, and the kind of transparency that builds trust, are parts of the shareholder equation.

Airbnb is certainly exposed to reputational risk. As it disrupts traditional travel and tourism markets, it has been criticized for driving housing costs up, upending the hotel business, and putting unprotected travelers (and hosts) at risk. Local and national governments have stepped in and in many cases regulated or outlawed Airbnb-type rentals. And landlords often ban Airbnb sublets. A clear focus on stakeholders is also a step in the direction of managing reputational risks more proactively.

Airbnb notes that its announcement is only a step. "We are early in our work. And we are far from being a perfect company, which is why we want to share what we're doing," the statement said. Outlining its stakeholder map and issues, setting goals, and admitting there will be bumps in the road is realistic and also strategic. Airbnb is taking a step toward illustrating what the Business Roundtable is now defining as the purpose of a corporation. It is starting to clarify what that means, and setting out to prove that the stakeholder/shareholder conversation isn't "either/or" but "yes, and."

How to Respond to Larry Fink's Call to Action

Originally published on www.inc.com on January 15, 2020.

The sense of urgency is rising like a hot thermometer.

In BlackRock Chairman and CEO Larry Fink's latest annual letter to CEOs, he sounds the climate change alarm in a way that should make everyone in business and finance sit up and pay attention.

And for the first time ever, the World Economic Forum's annual Global Risks Report shows all five of the most likely global risks according to survey respondents to be climate-related.

Larry Fink publishes a letter every year addressed to the CEOs of the companies BlackRock invests in. For several years he has used the letter to step up a call for companies to create value for all stakeholders, to embed a greater sense of purpose within their companies, and to focus more on environmental, social and governance risk.

This year the letter reads as if he had seen a ghost.

"Every government, company, and shareholder must confront climate change," he writes.

Fink points to the kinds of disruptive questions climate change is raising, and the growing chorus of investors around the world asking them. "Will cities, for example, be able to afford their infrastructure needs as climate risk reshapes the market for municipal bonds?" he writes. "What will happen to the 30-year mortgage - a key building block of finance - if lenders can't estimate the impact of climate risk over such a long timeline, and if there is no viable market for flood or fire insurance in impacted areas? What happens to inflation, and in turn interest rates, if the cost of food climbs from drought and flooding? How can we model economic growth if emerging markets see their productivity decline due to extreme heat and other climate impacts?"

Because of these questions, Fink predicts an accelerated reallocation of capital, coming faster than we see the evidence of climate change itself.

One day after Larry Fink's letter was circulated, the World Economic Forum presented its annual Global Risks Report ahead of its 2020 Davos summit, and climate risks took center stage.

In a ranking of the most impactful and the most likely risks over the next ten years, the top risks listed by likelihood are: extreme weather, climate action failure, natural disasters, biodiversity loss, and human-made environmental disasters. Listed by impact, the top five are: climate action failure, weapons of mass destruction (remember that?), biodiversity loss (this means food shortages), extreme weather, and water crises.

WEF notes that these risks are interconnected, and that the urgency is rising. In his preface to the 2020 report, WEF President Borge Brende writes: "On the environment, we note with grave concern the consequences of continued environmental degradation, including the record pace of species decline. Respondents to our Global Risks Perception Survey are also sounding the alarm, ranking climate change and related environmental issues as the top five risks in terms of likelihood - the first time in the survey's history that one category has occupied all five of the top spots."

The report points to turbulence as the "new normal" and raises concerns that multilateral institutions may not be equipped to address the geopolitical, environmental, economic and social risks on the horizon. Social upheaval and "fraying fundamentals" are seen as grave global problems. And the report emphasizes economic costs of climate change. It quantifies the economic stress and damage from natural disasters in hundreds of billions of dollars every year, and emphasizes that humanity has little more than a decade to reverse global warming trends, as indicated by scientists. Dystopic scenarios around cyber security are also identified in the report.

For business leaders, the Larry Fink letter and the WEF report are strong reminders of the importance of strategic and structured risk management. Companies need to have governance and corporate culture in place able to identify and prevent risk. They need to increasingly layer risks related to environmental, ethical and human aspects onto the usual financial and operational risk mitigation processes. These new ESG (environmental, social and governance) risks need to be assessed and prioritized, and appropriate responses needed to be readied and implemented. And these new risks and responses need to be communicated and reported on to stakeholders, including shareholders. 

COSO, a committee set up by five major accounting and auditing associations to provide guidance on enterprise risk management (ERM), teamed up with the World Business Council for Sustainable Development and produced a framework for using an ERM approach to manage ESG risks. The framework helps businesses understand how to create a risk-sensitive culture, strategize and prioritize around risk, and take action to bolster resilience.

Some of the actions COSO advises are mapping the company's mandatory or voluntary ESG requirements, embedding ESG-related skills in hiring practices, conducting an ESG SOT analysis, understanding metrics for expressing risk, identifying external changes that may affect business objectives, and reporting relevant risk information internally for decision-making.

At a time of increasing intensity, complexity and pace of work, getting a handle on the vast panorama of interconnected risks that looms for an organization, and making plans around how to position the company to weather them, is more important than ever.

All this may sound complicated. In his letter, Larry Fink directs CEOs to two frameworks for reporting: SASB and TCFD. SASB is the Sustainability Accounting Standards Board, which has created guidance for reporting on material ESG risk by sector. TCFD is the Task Force of Climate-related Financial Disclosures. These offer guidance on reporting for large, listed companies. But smaller companies should be aware of these tools and the direction they are taking financial reporting, and as a consequence, the entire financial system.

Be aware, be agile, and use available tools to navigate the new world this new decade brings. As Larry Fink writes, "we are on the edge of a fundamental reshaping of finance....In the near future - and sooner than most anticipate - there will be a significant reallocation of capital." Be ready.