**5. Frameworks for value-creation**

#### **5.1 ESG principles**

As discussed above with respect to Tesla, the events of 2020 increased investors' focus on ESG – or environmental, social and governance – factors that drive corporate value. The term ESG has been part of the business vernacular for nearly two decades; it was introduced in 2004, in a report titled "Who Cares Wins" by the United Nations' Global Compact and the International Finance Corporation as an investment strategy for asset managers [23]. Since then, it has evolved from being a filter for investors to being a focal point for corporate strategy, as corporate leaders have worked to integrate the tenets of ESG into their long-term visions. But what does this really mean? And how have ESG principles been put into practice?

The "Who Cares Wins" report stated that its purpose was to "better integrate environmental, social and governance issues" into both investment and corporate strategies. However, this integration has never happened. Investors, managers and leaders see the terms environmental, social, governance as independent ideals. They focus on one at a time. Managers do regularly account for E, S and G issues in their investment decisions, but full integration of the relationships and synergies between the ideals has never happened [24]. Many of us have been expecting a paradigm shift in how leaders think about and invest in ESG, but there is still a long way to go before businesses fully scale and integrate the interconnected elements of ESG to create economic value [25].

The 2000s were the decade of the G in ESG. Following the corporate governance scandals of Enron, Parmalat, WorldCom and others, corporations focused on increasing the transparency and independence of their governance structures. In the U.S., two major pieces of regulatory reform – Sarbanes-Oxley in 2002 and Dodd-Frank in 2010 – provided guidance on improving the G in ESG. And markets responded. The number of independent directors on boards increased considerably (from just over 50% in 2000 to nearly 80% by 2020) and shareholders felt they had greater ability to monitor and influence corporate decisions (such as through "Say on Pay" votes, encouraged by Dodd-Frank).

The 2010s were arguably the decade of the E in ESG. Following the Global Financial Crisis, many governments realized that they needed to envision new drivers of innovation and growth. In the U.S., the American Recovery and Reinvestment Act of 2009 provided substantial subsidies for businesses to invest in renewable energy programs and infrastructure. For this first time since the U.S. government began subsidizing energy in the early 1900s, renewable energy investments were incentivized more than fossil fuel investments. And the markets responded. Walmart became one of the world's largest buyers of photovoltaic systems. Tesla and its mission "to accelerate the world's transition to sustainable energy" grew out of this legislation. And companies around the world – including Unilever, Nike, ING, Nestle, Danone and others – became missionaries for connecting customers' environmental values to corporate profits.

While it is still early in the decade, the multiple challenges of 2020 and 2021 suggest that the 2020s may be the decade of the S in ESG. The Covid-19 outbreak and the many, divergent attitudes that arose regarding how best to address the pandemic, the continued impact of Black Lives Matter, the resurgence of MeToo, the mental health, data privacy, and relationship issues of a locked-down society and many other potential social issues suggest that we will continue to face new and more complex challenges than we have ever seen before. Companies need to find ways understand how social factors drive value-creation.

The challenge is that this idea can quickly become abstract when trying to quantify social value. Estimating the return on investment on the installation of solar panels or understanding how investors value transparency can be measurable aspects of ESG; understanding how respect, empowerment, equity and inclusion create value is far more complicated. But we know that investing in empowerment, equity and inclusion can lead to greater representation, stronger commitment and higher productivity, all examples of positive externalities that lead to improved cash flows and profits.

But that complexity does not mean that corporate leaders should ignore it. Nothing a business does is intangible; everything has economic impact. As we see the social dimension become more prominent in business strategy, we may begin to see the three ESG factors become integrated. Covid-19 has had disproportionate impacts on certain populations – elderly, immuno-compromised, front-line workers – as a result of the G and the S interacting. The climate crisis around the world has exposed inequities, vulnerabilities and environmental racism that has existed for centuries, as a result of the E and S interacting. These dynamics are not going to moderate until we integrate the E, S and G into corporate strategies that extend beyond the current opportunity. People, the S, will always be the source of revenue for every business and will always be the source of executing any corporate strategy. One key to integrating these seemingly disparate dynamics may be to effectively create novel partnerships between stakeholders rather than traditional business transactions [25, 26]. Shortterm partnerships can become long-term relationships if the businesses are able to authentically integrate stakeholders' values into the strategic plans [27]. So far, the 2020s have made it clear that integrating the broader social dynamics with corporate strategy for their unique stakeholders is more essential now than ever.

#### **5.2 Social responsibility and stakeholder welfare**

In theory, economic value-creation and financial profits come from the same place, making it unnecessary to settle any debates about the accuracy of Milton Friedman's arguments. But where do profits come from? Simply, profits are the result

### *From Corporate Social Opportunity to Corporate Social Responsibility DOI: http://dx.doi.org/10.5772/intechopen.105445*

of revenue increasing or relative costs decreasing. Revenues come from customers; costs are paid to employees, suppliers, governments, partners and investors. Let us assume that all of these people are rational and they only engage with a business because such engagement makes their life better, however they choose to define 'better'. Revenues only increase when the company provides products and services that customers choose to buy; costs only decrease because the employees, suppliers, investors or others choose to charge the company less, presumably because the company is making their life better in some way independent of the cash compensation that shows up on the income statement.


We know the answers to all of these questions: they might. Questions such as these fit within the realm of stakeholder theory (or even social identity theory). Stakeholder theory never attempts to identify which stakeholders are most important; it merely suggests that all stakeholders are important and it's up to managers to determine which stakeholders create the most value for each firm [28]. Shareholders are certainly important stakeholders; they provide financial capital so the firm can invest in people, projects and growth. If the return on their investment is less than what they require, they will take their money elsewhere; if the return on their investment is greater than what they require, they will invest more. Shareholder capital is a critical resource that can be used to increase profits, which will only happen if the company is improving stakeholder welfare.

Hart and Zingales [20] argue that corporations can scale social investments in ways that individual investors cannot and corporations can be more effective at pursuing pro-social objectives than government entities, in part because corporations are more immediately affected by individuals' preferences. Where corporate managers may be expert in designing marketing strategy or financial policy, many issues of ethics or social policy are a matter of individual shareholder well-being and not managerial expertise. Zingales and Hart [20] do not address stakeholders other than shareholders, but it's easy to extend their argument to all other stakeholders. Do managers, directors and owners incorporate the welfare of all stakeholders when setting corporate policy? Of course, they do this all the time. For example, any marketing professional will tell you that their job is to "create customer value." Could any company maximize shareholder welfare without creating customer value? In the same sense, no company can maximize profits without also optimizing its relationships with people and the planet; all of these dimensions are interconnected and interdependent.
