Last week Davos 2020 celebrated its 50th birthday. The world’s top Chief Executives and decision makers were flown in on their private jets to discuss the devastating effects of climate change and social inequality, whilst washing an appropriately sized steak (they were limited to 140g this year) down with local wine (champagne was discouraged this year)…

The irony isn’t lost on most of us, so it’s unsurprising to hear that the event is not without its critics. Critics who suggest there is a lot of talk and not enough action. A sentiment repeated several times by Swedish activist, Greta Thunberg, in one of the opening panels.

So what real change did we see in this year’s manifesto, if any?

The ‘Davos manifesto’ has been updated to promote a new stakeholder model of capitalism. It argues that the current form of shareholder capitalism is ill-equipped to deal with the environmental and social challenges we now face. The manifesto states that, “companies should pay their fair share of taxes, show zero tolerance for corruption, uphold human rights throughout their global supply chains, and advocate for a competitive level playing field – particularly in the ‘platform economy’.”

Radical? Not really. But how achievable is it?

The manifesto highlights two things to push this forward:

–           The standardisation of ESG metrics.
–           Re-alignment of executive remuneration.

Speaking on a panel at Davos last Tuesday, Brian Moynihan CEO of Bank of America, spoke of a project to work with the ‘big four’ auditing firms along with the International Business Council (IBC) to standardise how, and what, ESG metrics should measure (not the first project of this type launched with much fanfare).

On executive remuneration, the manifesto states that they should; “align with the new measure of long-term shared value creation.” ESG metrics within bonus payments are indeed on the rise; research looking at the STOXX 600 found that from 2015 to 2018, ESG metrics used in LTIP awards increased from 7% to 14%, and STIP from 21% to 35%*.

But on the same panel as Mr Moynihan was the chairman of Siemens, Jim Snabe, who recently inadvertently highlighted the difficulty of a shift in our current form of capitalism. On the face of it, Siemens are well aligned with a stakeholder model and Mr Snabe enthused about the sustainability initiatives and pledges already made by the company. ESG metrics are also included within both the short and long-term incentives, he said.

However, just the other week, Siemens were embroiled in a media storm when it was found that the company were providing the railway signalling system for the controversial Adani Carmichael coal mine in Australia. Since then the CEO has released a statement that reads a little like an apology. Here are two lines that I found particularly interesting:

“There is practically no legally and economically responsible way to unwind the contract without neglecting fiduciary duties.”

And

“Had it been my own company, I may have acted differently.”

For now, despite the platitudes, it still looks like fiduciary duty to shareholders holds the trump card and we suspect that shareholder primacy, remains at the front of most CEOs’ minds.

*“GS Sustain: Euro STOXX 600 Management Incentives Guide”.

About the author

Euan Ker is a Sustainable Investment Analyst. He is responsible for analysing and monitoring environmental, social and governance factors within the Global Sustainable Equity Strategy. Euan joined us in 2014 as an investment implementation analyst with responsibility for implementing macro investment decisions across a number of fund-of-fund mandates, totaling some £13 billion under management. Prior to moving to the ESG Research team in 2018 his responsibilities also included asset class, regional and currency hedging overlays through derivatives. Euan has a 1st Class Honours degree in Management with Economics from Robert Gordon University. He has the IMC professional qualification and has 6 years’ industry experience.*  *As at 30 November 2019.

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