Lynn Forester de Rothschild (Lady de Rothschild), who has been a driving force for long-termism through the Coalition for Inclusive Capitalism, says the world has reached a critical point in history where “popular opinion of capitalism is low and political pressure against the status quo is building to a crescendo”.
De Rothschild, who is CEO of E.L. Rothschild, the investment holding company, warns this will worsen unless trust between business and the public improve, and for the past three years has been convening the world’s largest asset owners, asset managers and corporate leaders who she describes as “asset creators” to talk about this problem.
Now, the Coalition is leading an ambitious project, involving some of the world’s largest companies across the investment chain, seeking to develop hard data on long-term value creation.
Speaking to Responsible Investor, Lady de Rothschild says: “If we were going to go beyond mere words we need a standardised, useful mechanism for measuring companies that meet the tenets of inclusive capitalism; that take action that not only creates value for shareholders, but for customers, employees, communities, the supply chain and the environment.”
The Coalition for Inclusive Capitalism is leading the “The Embankment Project for Inclusive Capitalism” with expertise from global accounting firm EY, that will develop and test a new framework to better reflect the full value of companies and capture information on intangible assets as drivers of organisational performance.
The project will involve some of the world’s largest companies and investors, including Paul Polman, CEO of Unilever, Hiro Mizuno, Chief Investment Officer of Japan’s Government Pension Investment Fund and Jamie Dimon, Chairman and CEO of JPMorgan Chase & Co.
Combined, the 32 committed members represent $27trn of assets under management, almost 40% of global institutional AUM.
“We have had the Coalition and EY teams meet individually with each of the participants to make sure our first group meeting together is as inclusive as possible of everyone’s thoughts about the project,” she says. “At the end of October, we will be having group meetings with the asset owners, asset managers and asset creators and begin the process of fleshing out the project.”
The group will test the framework developed by EY with “serious teams” within each organisation.“They will take a totally confidential zone of silence on whether this will really work. It is an experiment.
“We don’t know where the facts will lead. But we know that the objective is to create a tool that is fit for purpose for investors making investment decisions because they believe that these activities can be measured against goals and that if goals are met it will create more valuable companies over the long term.”
The framework will build on EY’s long-term value (LTV) model, developed with Cambridge University, as a new way for companies to communicate their long-term value creating potential.
The premise is that investors find little value in the way that companies currently report and EY questions whether accounting principles and practices defined 100 years ago are still fit for purpose today (link).
The LTV model explores what attributes of a new reporting framework are required for 21st century companies and includes looking at how organisations create value in the long term for all their material stakeholders and aligning this with an organisation’s context and purpose.
Mark Weinberger, EY Global Chairman and CEO, says: “Such a framework can supplement currently available financial information. This won’t be easy, and while we may not reach a successful solution applicable to all businesses, in trying we will further this important dialogue, which will be valuable progress.”
Lady de Rothschild says EY have been very supportive of the project that is scheduled to run for 18 months and which will be supported by an advisory council of academics, policy makers and standard setters who are yet to be appointed.
It joins a growing number of high-level initiatives trying to ensure company reporting reflects the challenges and opportunities of today’s world such as the Financial Stability Board’s Taskforce on Climate Related Financial Disclosures.
“If you stand back and think about what we are trying to do,” says Lady de Rothschild. “We are really trying to reform the capital markets so they are not simply a function of backward-looking historical financials which are audited, and financial-only metrics going forward.
“It’s an ambitious objective and we are joined in this with many people from Larry Fink to Jamie Dimon who talk about this all the time. So, we are in this with a lot of great people. It is a very big agenda, tied to where we are as a society and if we believe we can just keep with the status quo, where all activities are for the sole benefit of shareholders only, we are in trouble.”