Davos notebook: 'Sustainability' has a new and more troubling meaning for the global business elite

US President Donald Trump speaking in Davos, Switzerland. Photo: Fabrice Coffrini / AFP / Getty Images.

DAVOS, Switzerland — US President Donald Trump was the headline act at the World Economic Forum annual meeting in Davos, delivering a speech that was something of a victory lap highlighting the current strengths of the US economy.

Trump had plenty to highlight with his tax package having unleashed billions of dollars in investment promises and one-off payments of thousands of dollars to workers from major American companies.

There were some soothing words for the gathered elites — “America first does not mean America alone” — but its domestic focus was a marked contrast to the theme of global trade in last year’s special address from China’s Xi Jinping.

There faint rumours of a potential walkout during Trump’s speech which never came to anything. Practically the whole town tried to get into the Congress Centre hall hear him speak. I saw a total of four protestors in and around the streets: three on Thursday, and one on Friday.

Trump’s speech came at the end of a week-long gathering of CEOs, investors, policy-makers and political leaders in the Swiss town that serves as both a forum for debate and a high-intensity networking and deal-making environment. “It’s like speed dating,” explained one investor and company director who recently had joined the board of one of the major tech companies. “You don’t sleep.”

In and around the forum, the talking points were:

  • Sustainability (a term that has become much broader, outlined in detail below);
  • AI and automation, and
  • Blockchain and crypto — although this was mainly on the fringes and only a tiny fraction of the official program.

Below is a look at the sustainability question and some observations on crypto. You can find a panel on the challenges of AI here — more to come on that subject.

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In and around the WEF official program, sustainability is a central topic of conversation but term has taken on a new and more challenging meaning for companies; it’s really just a shorthand now for the realisation that there is a bigger structural problem facing big firms everywhere.

In short, it’s that capitalism has a problem.

As Matt Turner writes here, everyone in Davos was talking about “Larry’s letter”, the missive from Larry Fink, the CEO of the world’s largest investment fund BlackRock, which warned companies that they need to “serve a social purpose”.

At the heart of the conversation around sustainability is a recognition that elements of capitalism — including but not limited to the focus on quarterly financial performance which in turn tends to drive equity valuations — don’t sufficiently incentivise things like social inclusion programmes, skills training, community cohesion, and environmental protection.

The higher levels of income and wealth inequality in advanced economies in the years since the GFC are the simplest, most direct indicator of this problem, but it also is reflected in the more intense brands of politics and economic policies that have been emerging in various countries, driven by a sense of disenfranchisement from those people who feel they have been left behind.

Perhaps this focus is connected to how the political volatility is creating new challenges for business. People believe the system has been failing them; the political outcomes that result in turn make for an increasingly complex business operating environment. You see this in the dissolution of consensus on trade and open markets, with Trump withdrawing from the Trans-Pacific Partnership and Europe looking in danger of further fractures after Brexit, especially with what has happened in Catalonia.

So sustainability has moved from a notion that has been previously been, for many firms, a matter of branding (through corporate social responsibility programmes and environmental initiatives) to being about company strategy itself. Companies’ business models can be more easily disrupted in a more fractured world through, for example, sudden regulatory interventions or changes to trade arrangements.

To a large extent this is a reassessment of the importance of company values and then some questions about how conventional financial modelling can evolve to keep up with the new threats there are to companies in the modern environment, chiefly through brand risk.

It’s becoming increasingly clear that not only does the workforce want to be at companies with strong values on social issues, but that the absence of strong values can also be a threat to a company.

Limousines on the Promenade in Davos. Photo: Fabrice Coffrini / AFP / Getty Images.

Take Uber, which has lately been lurching between a series of crises that reflect poorly on the firm’s leadership. There was CEO Travis Kalanick’s embarrassing diatribe against an Uber driver, and then a series of embarrassing leaks against the company from former employees about its corporate conduct, including claims that it engaged in mass espionage and even theft of data from rivals.

The evolving conversation around sustainability would suggest that Uber might need to consider that these two events are not unconnected, and here’s why.

First, the speed of information flow now and the ability of disgruntled employees to inflict damage on their current or former employer is now clear.

And second, company values and missions are increasingly important to the generation of skilled employees that is just starting to assert its authority in advanced economies. Millennials.

In this view of the world, corporate values and strong leadership on expected behavioural norms are not just about discounted yoga memberships, charity activities to lift staff engagement, and saying the right things to attract talent. They are functions of business risk management.

The threat of disruption by neglecting organisational values is, of course, not just internal. A company whose product or business model fails to align with the values of its customers can suddenly find those customers looking elsewhere.

This conversation about values and sustainability won’t be received well in some corners of the business world, including in Australia. And particularly the case for those more sleeves-rolled-up, punctilious elements of the Australian financial sector where a scoffing cynicism is the default response to practically everything (except whatever lines up with their own investments and trade ideas).

But this is a live conversation in the world’s biggest companies and investment management firms. Australians are going to need to be able to participate, even if it is to argue against the whole premise of a broad philosophy that sustainability is important.

With company valuations conventionally based on the hard metrics of cash flows and earnings multiples, it’s easy to see why some will roll their eyes and want to change the record when the sustainability question comes up. How do you even start to measure it?

But it’s happening. UBS and other banks are already building sustainability into their financial modelling, trying to account for brand and social equity when running the ruler over companies.

And as Bob Mortiz, the global chairman of PwC, told me in an interview: “it very much plays into the modelling that the analyst community does”. He went on (my emphasis):

And you wonder whether some of the cashflow models that are out there have really taken into consideration that sustainability of cashflow, and whether the discount is appropriate enough for the volatility and the disruption that comes either because they’re disrupted by competitors, technology, companies or otherwise, or disruptive because the brand is not actually seen as contributing to society and dies a slow death, or maybe in some cases a fast death.

I think that’s the issue of how you think of these evaluations because right now they just assume steady course. There’s not that much discount in terms of that volatility or that risk, that I think is more evident in society today than ever before right now.

Now, it’s not like everyone was walking around agreeing on everything having drunk some magical Alpine sustainability potion. There’s still the “two Davoses”, as it was put by Sharan Burrow, a former ACTU leader and now general secretary of the International Trade Union Confederation in Brussels.

WEF co-chair Sharan Burrow at the Congress centre in Davos. Photo: Paul Colgan

(Burrow was co-chair of this year’s World Economic Forum meeting, along with Christine Lagarde, Ginni Rometty and four other leading women.)

One is the Davos that thinks not much needs to change, and it can be business as usual. On the other hand there’s a group — and Burrow says it is growing — that acknowledges there needs to be some change in how companies operate and maintain their social licence.

Burrow told me (my emphasis):

I do think [there’s] the recognition that we are in fractured world and that that’s not just dangerous to society, to working people as you break down fundamental human and labour rights, or to indigenous people, or to communities, but that it’s also actually dangerous for any economic model. So I think that recognition is growing. I think there is a larger community here this year of business, civil society, union leaders, governments… [that] we do need to create a new sustainability. But I think there’s also an awareness that you can’t just keep talking about that.

Trust the Australian to be the one insisting on pulling the collective finger out.

The sustainability question was so central to everything at Davos this year that a failure to see action from companies and governments on some of the issues would be damaging to the cause. We’ll await decisions and initiatives with interest.

I remain open-minded on the question of sustainability in company valuations, by the way. Spending more on corporate social responsibility programs, and saying nice things about the environment and how we must a better society isn’t going to cut it. (In fact, it would be a good thing if that kind of all-talk approach was called out a bit more for what it is: posturing.)

But convincing investors on the merits of a new approach to sustainability needs detailed justification from boards, executives, and the analyst community. Short-term “programmes” and “sustainability initiatives” aren’t good enough; what the serious, business-minded sustainability advocates at Davos are talking about is baking in corporate resilience and therefore long-term shareholder value (and returns!) by having sustainability built into strategy and behaviour.

“It’s crypto, man; everyone’s f***ing each other”

So said one of the many Russians at a dinner I attended — a remark about how cryptocurrency entrepreneurs are in it for themselves alone and will steamroll everyone to try get ahead, and it was only somewhat in jest.

The attendees were crypto investors and entrepreneurs, and it’s evident there are large amounts of capital available to these crypto hustlers now. And it’s not all new or Russian money. One investor was from an established Swiss industry family, who said she had put 2.5% of her wealth into the sector and wanted to do more. There were Americans, Brits, and Germans, too.

If you went to Davos hoping for the whole event to be about crypto and blockchain, then you could easily have come away believing everyone in Davos was talking about it. There was even a large “Crypto HQ” on the Promenade, but it was a tiny part of the main forum agenda.

In saying that, blockchain applications for business and cryptocurrencies were noticeably prominent topics on the fringes. This is still a nascent space and it will be interesting to see how long the intensity of the talk is sustained, and worth watching the growth of blockchain and cryptos on future agendas.

As part of the work looking at crypto, there was this story about Masha Drokova, a Russian venture capitalist who just took the covers off a $US30 million fund that’s investing in crypto, health technology, self-driving cars, and other startups.

Turns out she used to be a prominent leader of a pro-Putin youth movement in Russia called Nisha — an eyebrow-raising background for a Silicon Valley investor.

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