Peter Bakker, President and CEO, World Business Council for Sustainable Development 
Interviewer: Lindsey Stanberry, FORTUNE

Impact Initiative 2022 - Leadership In Action With Peter Bakker

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Impact Initiative 2022 - Leadership In Action

So one of the central themes of this event and and of today is is reimagining corporate purpose beyond just shareholder value. Our next guest believes strongly that business leaders need to shift their mindsets make capitalism more inclusive, build long term resilience and build truly regenerative business models. Most importantly, he stresses the need for companies to oversee the complete transformation of systems to ensure that purpose and profit align. Please welcome to the stage, peter baker, president and Ceo of the World Business Council for Sustainable Development, interviewed by Fortune's Lindsay Stansbury. Thank you so much, peter for joining us. Let's dive right in. We don't have uh we have a lot to talk about. So the pandemic obviously challenging, but it's given us an opportunity to really rethink things. You've argued that now is the time to reinvent capitalism, which is obviously no small task. Can you talk a little bit about regenerative business model and how you want companies, how companies can move forward? Yeah, thanks. Well, thanks for having me. Um as you can tell, I'm from europe, which is an important disqualifier, where we're gonna talk about reinventing capitalism. Uh so, so I think what we've learned in in covid is that if you look at sustainability, there's really three global challenges out there, One is the climate emergency. The second is the loss of nature or loss of biodiversity, and the third one is mounting inequality which threatens social cohesion and predictability of societies going forward, and if you think about these three big challenges, then you really are talking about system transformation. This is not tweaking on how do we get more efficiency out of energy. This is radically rethinking the energy system, the food system, the built environment system and so on. And in order for those transformations to happen at the base that we need them to happen. We really need to talk about what is the economic incentives that businesses have or that investors will will value to make these transformations happen at base. So we published about a year, a year and a half ago now vision 2050 times to transform, we wrote this with 40 global companies, some of them in the room here in which we said there's lots of transformations, transitions need to move to renewable energy to regenerative agriculture, to electrification of mobility. All these type of solutions are there. But the other thing we said is leaders in business need to come up with a new mindset because if you look in the in the world of behavior change, behavior change will only be effective. The mindset of the people who need to change their behaving is changing. And and the three mindsets that we proposed, leaders should embrace. The first one is resilience and we see that you know climate change this year, the young delta river out of water, the rhine River out of water floods, droughts, forest fires everywhere. The resilience of supply chains is entering a whole new phase and will test all companies on whether their risk and risk assessment covers these type of risk. The second area is we need to move to regenerative mindset, we can no longer have these linear models. We need circularity and again we need regenerative agriculture type things. But the third one is and this I'll whisper it in in the U. S. A. We need to reinvent capitalism and this is not a european hippy telling you that capitalism is bad, I am a capitalist. The problem with capitalism is we only have identified financial capital as the capital of capitalism but there is natural capital, their social capital and depending on who you talk to, there's a few more capitals but let's keep it at that. So what is the environmental impact of a business? You know I'm super I actually I mean I shouldn't advertise for fortune I guess but I'm super impressed that the big brand like fortune in the middle of conversations around E. S. G. And and other political voices is putting forward the impact initiative because that's what this is about. What is the impact that your business has on the environment or your business has on the social aspects and what can we do to reduce that impact if it's negative or to be more positive and impact by these big transitions that are coming up there is this this is the shock to some particularly if there's investors in the house. There is no I. R. R. To make the world sustainable. There is low hanging fruit energy efficiency. You'll have a business case quite quickly. But if we truly want to get to a net zero world, if we truly want to move to the deep transitions that the world has, we need to find a way to really look at what do we value and what is the valuation model of the future? So this is where E. S. G. Disclosures come to town. You know, what is the environmental performance or the social performance of your business? What are the metrics that we're going to hold each other accountable for that? That is a growing conversation I know here in the in the U. S. There's a lot of talk about is the sec ruling the right one or not. But give it three years. I. S. S. B. Will become the global baseline by which all companies will be asked to disclose their their impacts. Um Then you'll see more and more comparable materiality based data coming out of business towards capital markets. And then you look at the capital markets. What do they do they value a company based on discounted cash flow analysis which is you know, I've been a CFO in my career for a while. The only book on my desk was to book valuation by Mckinsey in that book. That's the bible for discounted cash flow analysis. But there is no opportunity to say the non financial information like environmental or social impact, how do we get that in the valuation model? We can't do it because you don't have many monitor here in the room. But anyone I would challenge anyone to disagree with the statement that a more sustainable business should attract a lower cost of capital. That's really the long term shot. We're all after anyone in the sustainability space. That's the thing we need to believe, because sustainability is now at the point that it's gone mainstream. It's not CSR at the side of the head office anymore. It's deeply integrated in strategy and transformation plans in in actually holding companies accountable for their impacts and the better you are at managing your environmental and your social impacts to lower the environmental and social risk exposure for the company is, and therefore the lower the cost of capital ought to be. So, I'm curious does anybody disagree with him to put you all on the spot? That would be cool, good. So we all agree that this is a vision, or at least nobody has spoken up to the contrary, but we do not have the language or the economic incentive system to make that vision come true? And that's fundamentally what I mean, was reinventing capitalism. It's not capitalism, capitalism is bad. Something else is better. It is. How can we integrate the environmental and the social impact into the valuation model, into the capital allocation model, because if we're able to do that, then every ceo and top leadership in the world will have an incentive to be more sustainable because it will improve their p. Or lower the cost of that. Do you think that there's any ceo out there who are already leading by example that you point to as really stand out in this space? Yeah there's there's there's a growing number of great experiments out there. I mean the caring group, the luxury brand group I think had offices in Paris. Um they have already since I think 2014 what they call the E. P. N. L. The environmental P. N. L. Where they measure six environmental impacts and have monetized it of course on a non cash basis because mother Nature doesn't send invoices. But they look at the environmental P. N. L. So one of their brands puma made about $300 million. E. B. T. A. The environmental P. And L. Was minus 245 million. Waste leather land use was a big part. They have then subsequently said well if we're gonna look at R. And D. Where we want to innovate, let's not aim at where can we grow faster? Let's aim at where can we reduce the environmental impact of the E. P. And L. Impact? They've now done that for four consecutive years. They've more than half the negative environmental impacts as a result of that. So there are beginning of experiments out there. Uh Other companies a company D. S. M. Food supplements, vitamins that type of business. They they're probably the furthest where the top team have 50% of their incentives linked to their E. S. G. Performance. So that's an experiment where companies are beginning to say okay well these are an E. S. E. S. Maybe it's an impossible name anyway but they have identified in their risk assessment what are the most material impact areas And for those they have set targets and put it for more than 4 50% of the bonus system into the targets of the top X. X. I'm curious does anybody have any questions for Peter? Oh there's a microphone for you and if you don't mind introducing yourself, I'm sure about from captive and I thank you peter, quick question. Out of curiosity. The puma, you talked about the E. P. N. L. Improving what happened to the real Piano during the same time? Up and down as as business does but continue to do well uh continue to do well good growth. Um And in these type of brands what they have, what they are experimenting with but where we see companies be relatively shy is how much of that story do you actually tell to your consumers? So that's that's another interesting area which I'm sure people will talk about in the meeting tomorrow as a lot of sustainability efforts today and companies are kind of, I call them the supply side of sustainability now. How can you Dick carbonized your supply chain. All these things, not so much of the effort is how do we actually change consumer behavior? Um, I don't know who's precisely in the room, but I talked to the ceo of Unilever and Procter and gamble all the time. Companies that spent $8 billion $8 billion dollar do you use to convince consumers to make more sustainable choices in your own product portfolio? And then the answer is, well, maybe 10% of two? Well why not? 100%. Well, we're not into choice editing of consumers. Well, but isn't that the whole point of your advertising budget anyway? That's one I can never win. But I think consumers is a big question that a lot of people have. I have time for one more question. I'm just curious how do we make sure that people aren't left behind at this journey as we make these big changes. Yeah, well there's two types of so the answer to that is by focusing on just transition, which means two things your company depending on the industry you're in, will go through massive transformation your in an automotive company, 100 years of building combustion engines. That business is that stranded assets will not happen after 2030 we're going to build electric vehicles? How do we take people on the assembly line and in the supply chain along with that, How do we re skill them? That's one big question. The other big question, of course, is is more macro climate will get much worse even if we were able to stay below 1.5 to Greece. And the most vulnerable countries in the world will suffer much more than probably in the country like here. That has a big risk of refugees. So how do we get economies to be inclusive? Also there. So also there create just transition. Thank you so much. I really appreciate this conversation. Thanks so much.