Alex Edmans, Professor of Finance at London Business School and Mercers’ School Memorial Professor of Business at Gresham College, has made it his life’s work to propagate the wisdom of sustainable business and convince business leaders to mould companies with purpose, not to tick boxes set by rating agencies or investors, but because it makes good business and economic sense.
A former investment banker for Morgan Stanley, Edmans’s career trajectory might seem contradictory. Still, he has the evidence to back up his beliefs that sustainable business choices increase shareholder value.
Edmans, author of Grow the Pie: How Great Companies Deliver Both Purpose and Profit, has been researching sustainable finance for 15 years. The whole idea of Edmans’s ‘pie-growing approach’ is that the choice is not between benefitting shareholders or society. Companies can serve both shareholders and society and “this is why I think my approach to sustainability is one that businesses will voluntarily adopt”. He isn’t in favour of the regulatory approach to sustainability either, but wants business leaders to see that profit often follows purpose.
As part of his research, Edmans set out to gather evidence to prove that socially responsible businesses perform better. The four-year research project was based on employee well-being using qualitative and quantitative data. His findings revealed that the 100 Best Companies to Work For in America delivered stock returns that beat their peers by 2.3-3.8% per year over a 28-year period. “Companies that treat their workers better do better. This fundamentally changes the way that management should be thinking about their workers,” he says.
Short-termism has long been a major issue in balancing business sustainability and shareholder returns. Indeed, some leading global companies have shunned the quarterly reporting cycle to focus on long-term goals. Edmans argues that a focus on the long term is critical to nurturing sustainable businesses.
“Sustainable business is important for two reasons. Firstly, companies have an obligation to wider society, not just to their shareholders, because they have the power to solve the massive problems that the world faces. But secondly, I’m also suggesting that it is in the company’s own interest to do it. Research suggests that in the long term, if a company is creating wider societal value, this will ultimately improve shareholder value,” Edmans says.
In a TEDx talk, ‘The Social Responsibility of Business’, Edmans cites myriad examples of well-known and long-established household brands that chose to embed social and/or environmental policies into their workplace for no other reason than to improve life for their workers and create more efficient processes, and not simply to increase profit.
In his recent book, Edmans points to the example of M-Pesa – a mobile money service created by Vodafone – which accelerated financial inclusion in Kenya and other African countries. Today, Africa leads the world in mobile payments.
He doesn’t subscribe to the belief that sustainability is the preserve of global multinationals because of their extensive resources either. He says that donating to charities, for example, isn’t always an option for smaller companies due to finite resources, but with innovation smaller companies can be more sustainable.
“In terms of large versus small companies, the traditional approach to sustainability was what I call the pie-splitting mentality where you give up part of the pie to others. This might involve donating money to charity, for example. Now if you’re a small company, you can’t always donate money to charity. However, the importance of my pie-growing mentality is that you can serve society by thinking creatively, by innovating.”
Neither does Edmans believe there are ‘good’ industries (healthcare) and ‘bad’ industries (oil and financial services). “I understand that the fossil fuel sector is challenging, but it is making some really great investments in clean energy.”
Edmans was winner of the Driving Change category at the 2021 Finance for Future Awards, backed by ICAEW. The award is dedicated to the memory of Jeffrey Unerman, a prominent academic in sustainability accounting. It recognises the contribution of individuals, organisations or joint entrants in effecting change to integrate sustainability through education, training and academia.
Edmans is passionate about making sustainable finance more mainstream. If there is one thing that he would like this win to achieve is to disseminate this passion for companies that want to create purposeful organisations instead of simply profitable ones.
“What characterises a sustainable business model is that a company is first driven by how much value it can create for society, not directly how much money it can make. Instead, it sees profits as a by-product of creating wider value for society. So, the first goal is to ask: how can we solve the challenges of society, rather than how can we make money.”
Find out more about Alex Edman here.
Finance for the Future excellence
The Finance for the Future awards programme is a partnership between ICAEW, A4S and Deloitte. The awards recognise and showcase high-quality examples of financial leadership. They're also about inspiring others, boosting ambition and building community by sharing knowledge and creating momentum for real change.
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