A sustainable business in America is turning upside down

In 2019, environmental, social and governance (ESG) principles gained strong support in business. Key members of the prestigious US Business Roundtable, a group of more than 200 CEOs from leading US companies, publicly departed from their previous focus on shareholder value and argued that companies should instead pursue environmental and broader goals alongside profitability.

As a result, many companies saw the fight against climate change as a moral obligation. Meanwhile, the ESG issue is facing growing headwinds in the US, and the CEOs of the US Business Roundtable have reversed their previous position. Why? The answer to this question has lessons for Switzerland, as opinions in the United States often anticipate developments in other countries.

Morals and facts

It is important to understand that the 2019 ESG commitment of major US business leaders is not due to a failure of the shareholder value approach. The limitations of the Milton-Friedman theory, which states that corporations’ social responsibility lies in maximizing their profits, have long been known.

Conversely, US CEOs embraced ESG because they believed that the dysfunction of US democracy was preventing policymakers from effectively addressing climate change. Because of the political deadlock in the United States, these CEOs are forced to step up and take the initiative, perhaps with the intention of adding a moral tone to their exit and thereby legitimizing themselves.

As a result, however, it turns out that a large portion of the American population is skeptical or strongly opposed to corporations that take a moral stand on social issues. The public sometimes questions the sincerity of the CEO’s commitment to non-financial goals – and its legitimacy: while it is accepted that Patagonia, a privately held American company, an outdoor clothing manufacturer, uses corporate resources for the benefit of all, the same approach applies to a multinational company with many shareholders and a large workforce. “Corporate Vocism” is carried out by a CEO. In the face of these interventions, this could explain why US business leaders quickly retreated from their original ESG positions.

Lessons for Switzerland

The weak legitimacy of organizations that take a moral stance on climate change undermines the impact of their efforts to address the problem. A moral perspective sounds in favor of those negatively affected by fossil fuel supply and is unlikely to gain their consent.

Also, when one looks at climate change from a moral standpoint, the debate shifts from objective facts to the subjective landscape of individual values ​​and opinions, which vary greatly from person to person. Characterizing climate change as a moral challenge inadvertently lends credibility to climate change skeptics and deniers.

There are very good, non-moral reasons for companies to address climate change – because it creates risks and opportunities across the entire economic spectrum. But rather than viewing climate change as a moral issue, companies need to take a fact-based approach.

Fortunately, Switzerland has a solid community of high-quality researchers who are not driven by political goals and are at the forefront of both establishing the facts about the economic consequences of climate change and evaluating solutions. It is not for nothing that Swiss financial scientists are recognized worldwide in the field of sustainable finance. His research shed light on key areas such as the strengths and weaknesses of sustainability metrics and the impact of forced CO.₂Emissions reporting, the shift from brown assets in regulated sectors to shadow banks and less regulated countries, and the use of artificial intelligence in climate risk assessment.

Swiss decision-makers would therefore do well to use this wealth of knowledge to develop well-founded, data-driven strategies to tackle climate change. At first glance, this approach to moral reasoning may seem uninteresting—perhaps banal. But we must remember that a relaxed approach to complex challenges has been Switzerland’s proven recipe for success for decades.

Francois DeGeorge He is the Managing Director of the Swiss Financial Institute (SFI) and Professor of Finance at the Università della Svizzera italiana (USI).