Alexander Rhodes was appointed by Mishcon de Reya in April 2020 to head Mishcon Purpose, the first purpose-oriented business to be established by a major law firm. Mishcon says this offering reflects its view that sustainability is now a central issue for business and society.
Its launch follows the firm’s decision to write social and environmental objectives into its LLP Deed and adopt a net-zero-carbon commitment.
Both commitments underline the seismic change that has occurred in corporate governance since August 2019, when the Business Roundtable, a lobby group comprising 200 of the biggest US companies, issued a statement on the purpose of corporations in which it stepped away from the guiding principle of ‘shareholder primacy’ and argued that companies should “no longer advance only the interests of shareholders”.
They should also invest in their employees, protect the environment and deal fairly and ethically with their suppliers.
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It was a watershed moment, and now, despite Covid-19, environmental, social, and corporate governance (ESG) factors continue to transform how companies and investors think about risk, corporate governance standards continue to evolve to meet growing demands for greater accountability and transparency, and it is becoming increasingly important for boards to ensure that companies operate under a clearly articulated corporate purpose.
LH: There seems to have been a real shift towards embedding ESG values within corporate governance. In your view, what is driving this shift, and how is it manifesting itself?
AR: At its base is a realisation that we face existential threats to our way of life, such as climate change and growing inequality, which cannot be addressed by governments alone. In terms of leadership, capital allocation, behaviour change and collective international effort, businesses have a really important role to play.
This has been recognised by business leaders, for example the decision by the Business Roundtable to focus on a wider view of the purpose of business. That is not only because, of course, it is good for society and the planet, but because it is also good for business.
That commitment was made by chief executives of some of the biggest companies in the real estate space. Giants including CBRE, Cushman & Wakefield, Turner Construction and property owners such as Target, Walmart, the Carlyle Group and others.
The reason they have done this is because it drives value. Businesses that focus on ESG appear to have fared better than their peers during the pandemic. ESG funds are widely reported to have proved more resilient and better placed to recover than others. This is being mirrored by a growing focus on ESG by investors in the public and private markets. Looking beyond short-term returns to that longer-term value seems to be fundamental.
LH: How are you seeing that change in agenda manifest itself in boardrooms?
AR: This is really bringing a new way of thinking into boardrooms. ESG risks come from within; they are different from the classic risks that boards are good at spotting and dealing with, which are three- to five-year time horizon external risks – the icebergs that the boat might hit. By contrast, ESG risks come out of the way you decide to run your business, which means they need a slightly different approach, looking at a longer time frame.
So, the first challenge for boards is to change the way they start thinking about risk. For example, how do we properly deal with climate change risk? Are we properly footprinting our carbon emissions? Are we setting science-based targets, which will mean that our business is on track for 1.5°C warming of the world’s temperature? Or are we not? And if we are not doing that, then are we contributing towards the problem? These are really pertinent questions that boards are trying to address.
LH: What avenues do you think are available for companies that want to address ESG risk within their business but are not really sure where to start?
AR: There are a number of avenues, but it is really more a question of approach than of avenue. We were talking about boards and it has to start with them. Different parts of a business hold responsibility for different ESG factors. The board is responsible for ensuring they are incorporated and addressed in a holistic way.
Where we are seeing people doing this well is where they are approaching it at a granular level. There is a shift here from a simple values-based approach to an impact-based approach, in which people say: “Here are our values, this is where we’re coming from; and here’s our purpose, where we’re going to and what we’re actually seeking to achieve.”
That means focusing on the real granular developments they want to take. On gender pay, for example, what is your target? How are you doing that? And what steps are you taking within the business to work towards those objectives on recruitment?
LH: How widespread do you think that granular approach is? How many businesses have made that transition to the more granular approach that is required?
AR: It is increasing, and it is increasing in the bigger companies. That is in part because they have the capacity to do it, and they naturally have a longer time horizon and a broader view of value. It is also because that is where the regulations are beginning to bite. However, it is happening across the board.
Another important reason that is driving it is the investment community and access to finance. The people who provide capital – who allocate capital – are now looking at where it gets allocated and making those decisions in accordance with how people’s businesses are being run.
One of the frameworks that is specifically designed for businesses is called a B Corp, which we are a great fan of at Mishcon.
It came to the UK from the US about five years ago, and we have been supporting businesses that want to become B Corps by partnering with B Lab UK, which is the UK charity that supports it. B Corp is a certification of responsible business, but to get that certification there are a couple of things you have to do.
LH: It’s a really challenging certification to acquire, isn’t it?
AR: It is, but the fundamentals of it are very straightforward. The first thing that a business needs to commit to for a B Corp certification is a legal change to the constitution of your company to back up that change in your purpose.
So, you remove shareholder primacy and you say: “We acknowledge the directors need to run the business not only for the benefit of the shareholders but equally for the benefit of society and the environment.”
The second part behind that change is actually how you implement it. The B Corp needs to run an impact assessment, where you go through a painstaking process turning every rock in your business over and you assess yourself. It is an independent framework for responsible business. It also allows you to benchmark yourself against peers.
Interestingly, in reference to your earlier question about how the pandemic has affected this whole agenda, we have had a flood of companies coming to us asking: “Can you help us with the B Corp process?”
LH: What in your view are the three most important ESG issues that the real estate industry should be focusing on right now?
AR: A proper grasp of decarbonisation is absolutely fundamental. The second thing is engaging properly with the process. The Responsibility100 Index ranks the FTSE100 by two measures: assessing each business’s ‘walk’ and ‘talk’ from a responsible business perspective. That underpins the focus on not only making commitments, but actually delivering on them.
Thirdly, this is a team game. It is all about partnerships. What Property Week is driving with the Climate Crisis Challenge absolutely underlines that.