Beyond bluewashing: How investor activism can bring companies in line with the Global Goals

Andie Davis
Apr 19, 2019 · 4 min read

Investor monitoring of companies’ ESG performance can be a stick to the Global Compact’s carrot.

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Source: aicd.companydirectors.com.au

The United Nations Global Compact, the world’s largest corporate sustainability initiative, is anchored in respect for human rights, fair labor practices, environmental sustainability, and anti-corruption. Couched in language at once valiant and vague (Principle 7 of 10 reads: “Businesses should support a precautionary approach to environmental challenges”), it is engineered for maximum accessibility, an open call for businesses to aspire to the highest norms of corporate citizenship.

It’s a call many are heeding. For nearly 10,000 companies around the world, from global behemoths to local small and medium enterprises, blue has become the new black.

Critics of the Global Compact point to two weaknesses: its voluntary, non-binding nature, and the fact that companies can assess their own compliance without independent verification. Unless these loopholes are sealed, they contend, the initiative risks devolving into an exercise in ‘bluewashing’ — that is, gaining the reputational advantages that come with association with the UN, without sufficiently upgrading business practices.

Cheers to the UN for not allowing the perfect — say, an ironclad, legally binding multilateral agreement to adhere to a clearly articulated set of rules, the likes of which the international body is ill-equipped to enact or enforce — to become the enemy of the good. Despite being, by its own admission, ‘more guide dog than watch dog’, the Global Compact has managed to get over 3,500 participating companies to submit compliance reports that have been independently verified.

This voluntary disclosure reflects growing public demand for greater ethics, accountability and sustainability in business. Thanks to evolving public priorities and expectations, concepts such as corporate social responsibility have begun to sprout teeth all their own, a trend that seems set to continue.

Nevertheless, relying on companies to ‘do the right thing’ or risk reputational damage is a tenuous strategy.

Studies of shaming as a deterrent for bad corporate behavior suggest that it works best on companies that interact directly with consumers. But with many of the world’s largest corporations engaged to a significant degree with institutions (governments or other businesses) rather than people, opportunities for consumer-driven change are limited.

Even companies with the best intentions can face practical dilemmas, such as how to balance long-term commitments to environmental sustainability against the short-term obligation to produce profits. Many CEOs feel caught between shareholder demand for quick yields and public pressure to remain sound corporate stewards over time.

What, then, does this mean for the Global Compact? Is the world’s largest corporate sustainability initiative at the mercy of cynical bluewashers and reputational risk managers? Is it only as strong as a company’s weakest earnings streak?

The answer, thankfully, is no.

The same shifting social mores that have bolstered the activist consumer have also given rise to the activist investor. Far from focusing narrowly on the bottom line, this cohort is increasingly attuned to the environmental, social and governance (ESG) factors that can affect a company’s well-being in the long run.

And they are in it for the long run: according to one estimate, 75 percent of the US market is held by long-term investors who tend to buy and hold, thus maintaining an interest in a company’s long-term health.

As to the pressure some executives say they feel to focus on the short term, in a 2014 FCLT survey of 600 executives and directors, nearly two-thirds acknowledged that such pressure was coming not from investors, but from their own board and executive team. The time may be ripe for boards and C-suites to re-examine old assumptions about what investors want.

ESG analysis inherently takes a long view. It looks past mere regulatory compliance to examine how a company’s approach to environmental protection, worker safety and well-being, community engagement and corporate citizenship, and anti-corruption are likely to affect its financial condition and operating performance over time.

Such factors track the principles laid out in the Global Compact. This means that, with the systems in place, investor monitoring of participating companies’ ESG performance can be the stick to the Global Compact’s carrot.

In February, the Sustainability Accounting Standards Board released its latest Engagement Guide for Asset Owners and Asset Managers. It offers a detailed series of questions to assist investor due diligence on ESG factors in 77 industrial sectors, from metals and mining to consumer finance to biofuels and IT services.

The Engagement Guide serves a dual purpose: by helping investors to ask the right questions to ground investment decisions in both long-term viability and their own value systems, it also signals to companies the ESG factors for which satisfactory answers will be needed to earn and keep investor confidence.

Proponents of the Engagement Guide include such titans as institutional investor BlackRock, with USD 6 trillion in assets under management. In his 2019 letter to CEOs BlackRock CEO Larry Fink served as bellwether.

“Society is increasingly looking to companies, both public and private, to address pressing social and economic issues,” he wrote. “As wealth shifts and investing preferences change, environmental, social, and governance issues will be increasingly material to corporate valuations.”

Activism among civic-minded investors, equipped with both the information and capital to influence corporate agendas for the greater good, augurs well for the Global Compact to succeed beyond bluewashing.

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