WBCSD’s CEO Peter Bakker on why the rules of the game must change. And why they will.

The world faces three pressing global challenges: the climate emergency, nature loss and mounting inequality. With Vision 2050: Time to Transform, the World Business Council for Sustainable Development (WBCSD) has created a framework to help the global business community make the transformations needed to address them. It believes business can turn this vision into reality; but with the window of opportunity rapidly closing, WBCSD President and CEO Peter Bakker explains why it will require a fundamental reinvention of capitalism itself.

Tipping point What makes Peter believe the glass is half-full is that he senses the tipping point for changing capitalism has finally arrived. “My prediction is that within three years, the fiduciary duties of boards will have shifted so they’re not only responsible for financial performance, but also environmental and social impacts. The cost of capital will depend not just on a company’s financial exposure, but also on its sustainability performance, for the simple reason that a company that can manage its environmental and social impacts has a lower risk profile and should therefore attract a lower cost of capital. If we can make that thinking mainstream in the next 3-5 years, we’ll see a decoupling of sustainability from whether or not a CEO happens to ‘get’ why it matters, because the rules will have changed. And that’s what this is all about: changing the rules of the game.”

“Unless we fundamentally change the way we value things, we’re never going to get to a sustainable world.”

From incentives to integration

While Peter applauds pioneering steps to include environmental and social benefits in the cost of capital, such as FMO’s own incentives (e.g. 25 basis points on a loan of 400 basis points interest rate), ultimately, he believes a more systemic change is needed. “I’m also very happy to see this widespread push for standardisation in Environmental, social, and governance (ESG) criteria from the International Financial Reporting Standards Foundation (IRFS), the Financial Stability Board created the Task Force on Climate-related Financial Disclosures (TCFD) and others. But we need to address the real question of how we integrate non-cash elements (i.e. environmental and social benefits) into valuation or capital allocation models. Companies or projects should not get discounts in the hope or expectation of a correlation. I want us to be able to measure that correlation and pay rates accordingly. This clearly requires some serious systems changes.”

Not unrelated to this topic, WBCSD is currently busy building a CFO network, as they believe CFOs will increasingly need to lead on sustainability within companies as ESG standardisation, TCFD governance, integrated reporting, etc all become mandatory in the coming years. This creates challenges. For example, while most CFOs can already measure greenhouse gas emissions, they will also need to develop similar methods to measure inequality.

“What the valuation model of the future should be and how we price capital is for me the big issue for the next couple of years.”

Mindset shifts

When Peter joined WBCSD, it had just released its original Vision 2050 report, calling for a world in which more than 9 billion people can live well, within planetary boundaries, by mid-century. That’s now been updated with Vision 2050: Time to Transform, a highly pragmatic framework developed by some 40 business leaders to guide their peers. “We’ve created 9 pathways to transformation, covering every product and service businesses provide. But this transformation isn’t primarily an ‘engineering’ problem. It requires new ways of thinking, and we’ve identified three mindset shifts that we need to instill.” First, says Peter, we need to reinvent capitalism. “This isn’t an ideological point. It’s about redefining value so we set longer-term horizons than quarterly ones, internalise the externalities, and ensure boards and CEOs are accountable for the environmental and social performance of their business.” The second shift, highlighted by COVID-19, is thinking much deeper about resilience. “The pandemic has shown just how interconnected the world is: the speed at which the disease spread, how it disrupted supply chains, and how quickly we managed to respond in developing vaccines. But the shocks we’ve seen from COVID-19 are nothing compared to the ones we’ll face from nature loss, climate change or mounting inequality. So the question is how we prepare our systems to better adapt to those shocks, because we won’t be able to avoid all of them.” The third shift is about becoming regenerative. “Currently, we extract resources from the planet and then throw them away. What must we do to become circular? How can we create regenerative agricultural systems and ensure we have a healthy planet?”

Beyond dilemmas

Isn’t this a problem for Development Finance Institutions (DFIs) like FMO, who want to support these objectives but operate in developing countries that desperately need economic growth and have less means to make this mindset change? “I think you need to avoid seeing this as a dilemma. If these countries don’t address sustainability as they develop their economies, they’re going to be hit hardest. Their infrastructures tend to be anything but resilient, so climate emergency or weather events will severely disrupt their economies. And where those economies are dependent on activities that exacerbate the global challenges of nature loss, inequality or climate emergency, we must find ways to help people transition to the new economy, for example through education and on-the-ground support.” For Peter, the real challenge for DFIs revolves round the pricing of capital. “We’re moving towards a standardisation of ESG that will apply in all countries. The question is, how can FMO use that framework to differentiate the pricing of loans or investments in respect of sustainability in developing countries? I think you also need to be really tough about the progress you expect investments to make, and in addressing barriers to progress. So while, for example, funding pesticides can obviously help yield, it also damages soil quality. How can we ensure investments actually support regenerative models? With its expertise and reach, FMO can play a really important role here.”

“If developing countries don’t address sustainability, they’re going to be hit hardest.”

From willing to able

Peter is positive about initiatives by corporations like Unilever’s setting aside $1billion to ‘fight climate change, and protect and regenerate nature’, but with a caveat. “It’s good when companies show leadership in this way, but it won’t be sufficient without the system catching up and making it systemic, ensuring that all businesses follow this route.” It’s an area where Peter predicts real acceleration. “For example, Unilever has also been the first to commit to paying a 100% living income throughout their supply chain, and a big discussion area at the first-ever United Nations Food Systems Summit taking place in September 2021 will be for business to make that same commitment to pay a 100% living income throughout all food supply chains by 2030.”

But commitment and good intentions are one thing, delivering is another. Peter says he hasn’t met a single CEO who wouldn’t want a living wage for everybody. But while they can promise it for their own employees and maybe their tier 1 suppliers’ workers, as they move down the supply chain to tiers 2, 3, 6 or 8 visibility shrinks or disappears. So with CEOs saying they can make the promise but don’t yet know how to deliver on it, Peter again sees a role for DFIs, with their on-the-ground knowledge in countries where many global supply chains begin, to help multinationals get greater insight or incentivise the right behaviour on the ground.

“I think technology will be the main accelerator, along with the business models that emerge in its wake.”

Bean counting

That’s the positive side of the story. “In contrast to all the companies trying to do their bit, there are many who aren’t. Like the cocoa traders who recently responded to farmers’ efforts in the Ivory Coast to secure a living wage for their product by threatening to source their cocoa from other countries. These practices need to be stopped or exposed, and this is where regulation and reputational pressure come in.” Here, Peter also believes in the power of giving businesses simple, practical examples of how they can make progress. “Take the $5 we pay for our designer street coffee. About 3 cents goes to the farmer who grew it and $3.25 (65%!) to the owner of the real estate where you bought it. But if the farmer was paid 6 cents, whether the extra 3 cents is added to my bill or absorbed elsewhere in the chain makes no difference to me. But it’ll transform the farmer’s life by giving him a living wage.”

Transparency through tech

One of Vision 2050’s four key enablers for system transformation is Technology and Innovation. “I think technology will be the transformation’s main accelerator, along with the new business models that emerge in its wake, though we’ll have to ensure technological innovations support and accelerate sustainability within businesses.” He cites the example of transparency in supply chains. “Technology can help trace where and under what conditions products are produced, and provide end-to-end visibility. But the importance of the design of products and services is often underestimated: it’s one thing to mine sustainably, but if you’re mining a material inappropriate for a given product, you may use sustainable raw materials but still create an unsustainable end-product. So it’s not just about transparent tracing from beginning to end, but also sustainable designing from end to beginning.”

Peter also sees enormous potential in how technological developments can affect consumer behaviour (another of Vision 2050’s four key enablers). “A small example: in Japan, if you scan a bar code on the wrapper of a certain chocolate brand, you not only see which farmer grew the cocoa, you also get asked if you want to tip him. If you decide to tip him 5 cents, ping! that money goes directly to that farmer.” It’s just one more example of how, in Peter’s view, transparency is where the big shift is going to happen.

Reinventing capitalism isn’t an ideological point. It’s about redefining value so environmental and social impacts, and not just financial performance, are part of valuation.”

Too small to succeed

Nevertheless, Peter would be the first to say the private sector can’t solve these problems alone. Which is why Policy and Regulation is another of Vision 2050’s four key enablers. Particularly, in many of the countries where FMO operates, systemic problems exist that the market can’t address. The example was given of research by Wageningen University that found that many farms are too small with yields too low to ever generate a living wage, regardless of any well-intentioned commitments to a living income by companies like Unilever. “If the percentage of such farmers in a country is, say, 3% then let’s first focus on getting the economic incentives right for the 97%. But if it’s 25% then we have a fundamental flaw in the design and need a big idea to address it. And this is precisely the sort of issue it’s important forums like the upcoming UN Food Systems Summit [for which Peter is part of the Advisory Committee] hear about.”

What we value

The last of Vision 2050’s four key enablers is the financial markets and incentives they provide, and during the discussion Peter revealed that, in collaboration with PRI (Principles for Responsible Investment), WBCSD will be running a series of round tables for CFOs and CIOs on the IFRS’ impending new accounting rules for non-financials. “We’ll be asking the CIOs which rules will be decision-useful for investors, what information they need; and asking the CFOs of corporates what they plan to do with that information to ensure we understand the impacts on capital allocation or valuation models. I suspect this will lead to a discussion around what the valuation model of the future should be and how we price capital to reflect that. And for me, this is the big issue for the next couple of years. Because whatever progress we make with companies and consumers, unless we fundamentally change the way we value things (i.e. change our capital allocation and risk evaluation models), the transformation isn’t going to scale-up fast enough, and we’re never going to get to a sustainable world.”

In 2012, Peter Bakker made the switch from the corporate world, where he was CFO then CEO at couriers TNT, to his current role at WBCSD. Ten years on, he sees a mixed picture. “I think you can see sustainability as a glass half-full or half-empty. On the one hand, there’s been huge progress in how the world thinks about sustainability. When I joined WBCSD, our drive for integrated reporting received massive pushback from most businesses. Yet today, these same companies don’t find it strange when I say we need to reinvent capitalism, and the issue is discussed daily in publications like the Financial Times. On the other hand, there’s not enough progress yet in terms of actually implementing changes on the ground.”

How can businesses lead the transformation the world needs? Read more about Time to Transform