Cases

BlackRock: Linking Purpose to Profit

Larry Fink, Chairman and CEO of BlackRock, called for business leaders to focus on corporate purpose under the considerations of environmental, social, and governance issues.
- To Fink, long-term ESG issues have real and quantifiable financial impacts
ESG issues link to profits because they link to financial risk from stakeholders, and assessing risk has been a core competency of BlackRock.
- Social risk from NGOs
- Political risk from the threat of increased regulation
- competitive risk as customers, investors, and employees have heightened social responsibility expectations for the companies that they work for
Fink argues that corporate ESG goals are about profits
- stakeholder capitalism is not about politics. it is not a social or ideological agenda. it is not woke
- we focus on sustainability not because we’re environmentalists, but because we are capitalists
More importantly, ESG targeting is about long-run profitability
- it is through effective stakeholder capitalism that capital is efficiently allocated, companies achieve durable profitability and value is created and sustained over the long term
BlackRock operates as an index investor, which will be more supportive of long-term ESG value creation
- Creates a fund from a diversified portfolio of assets that mirrors a market (or index) to create longer-term returns
- considered passive investing, as performance si simply based on price movements of the individual stocks in the fund and not someone actively trading stocks (can vote in annual shareholder meetings)
Activist investors (which BlackRock is not) may not care about creating sustainable corporate value over long periods of time
- purchases a large number of shares in a given public company strategically to obtain board seats, change management, and influence operating strategy to create shorter-term returns
- Can seize control of a given company
BlackRock’s call for linking profits to purpose can be good for business because more deliberate planning and messaging around ESG will allow firms to:
- 1. better integrate social externalities, thus mitigating social and political risks
- 2. improve employee recruiting and retention, increase productivity and innovation, and offer higher quality products with improved customer service
- 3. tap into ESG-focused investor pools that search for companies that are well managed for sustained social and financial returns
- 4. attract ESG-focused consumer segments enhancing loyalty and increasing the ability to engage in market power pricing
BlackRock’s call for linking profits to purpose can be bad for business because targeting new metrics of social impact may:
- 1. come with high opportunity costs if the social issues that receive investment of the firm’s resources are peripheral to meaningful stakeholder engagement
- 2. be dependent on non-profit partners that control too much of the agenda, causing profits to suffer if the partner drives for social impact at any cost
- 3. incentivize firms to greenwash-signal ESG purpose before they have achieved any ESG substance - which threatens reputation
Non-standardized ESG disclosures lack:
- Materiality- the magnitude of the information matches that of the issue
- Relevance- the information has feedback value based on past actions, and predictive value of future events
- Reliability- the information can be independently verified
- Comparability- the information can be easily compared across companies and benchmarks
- Consistency- the information retains value over time so that progress and trends within the same company can be evaluated
Without standardization, firms can individually tailor their ESG metris and terminology to put their best reputation forward (strong claim) without incurring the costs to back up their claim (weak action)
- It is hard to call out greenwashing without a standard point of comparison, so it has a low risk and high reward in the short term
So BlackRock’s investment strategy is based on the notion that the firms that mitigate their ESG risk will benefit from enhanced financial risk mitigation.
- Clearly, it is important for BR to identify who is actually taking ESG action and not just claiming to because the firms with ESG substance make more attractive long term investment targets
So BR’s investment strategy would benefit from having more standardized and decision-useful ESG disclosures, and thus they may want to lead the standardization movement
- However, BR will have to walk a fine line with direct engagement
BR must find the right balance of direct company engagement when stewarding the market towards ESG standardization
REWARDS:
- client loyalty: BR’s clients are expecting that BR works with companies to back up its demands for more integration of ESG purpose
- index performance: managing social risk will reduce financial risk and produce more long-term returns for the companies included in BR’s indexes
RISKS:
- Opportunity costs: investing more resources in direct company engagement, which has been peripheral to BR operations, will take away from those resources going towards the core competencies of BR
- Antitrust accusations: having large ownership of multiple companies within one sector, and then forcing/incentivizing cooperation in that sector may raise anti-competitive issues

Case Update:

In theory: if we measure it, then we can better manage it
In practice: increased ESG reporting has not led to better ESG impact management
- Example: even though the number of companies publishing sustainability reports has increased, CO2 emissions have continued to rise
The problem is that ESG reports have not become more decision useful as they have not become more material, relevant, reliable, comparable, and consistent
Without a strong regulatory framework forcing industries toward ESG standardization, we see that greenwashing is still prevalent in ESG disclosures that are tailored for each firm
Even Fink has cooled on pushing for ESGs given the lack of usefulness in locating ESG leadership from greenwashed disclosures
- BlackRock is now focused on transition investing - targeting companies that are moving us to low-carbon technology and energy, with more verifiable results
- Focusing on actual transition investments, rather than ESG claims and promises, allows BlackRock to locate industry leaders

Hitting the Wall: Nike and International Labor Practices

The four labor criticisms against Nike were:
- Low wage- pay was not high enough to support living conditions
- Low age- young workers were considered child labor from a western activist perspective
- Poor working conditions- forced over time in an environment of serious health and safety violations
- Unfair profits- profits were reinvested in the brand, not in the communities that were producing the Nike apparel and shoes
Nike’s initial response was to deny accountability and point the finger at the contracted factories and the governments that regulate them
- Aggressive-Defensive Posture: At the same time that Nike denied accountability, the firm increased its advertising to demonstrate that the brand was not vulnerable to the activist’s accusations
The labor activists did their homework and pinpointed key stakeholders of Nike to leverage in a boycott
- College athletes, coaches, and athletic directors
- Celebrity athletes that endorsed the Nike brand
By sharing information on the labor abuses found in Nike contracted factories with Nike’s key customer (college athletes), the labor activists were able to reduce Nike’s profits
- The college campus boycotts hurt Nike’s sales and market share
- The informed demand for Nike shoes was to the left of the uninformed
Furthermore, tarnishing the brand image with college students was weakening Nike’s ability to recruit new employees
- The informed supply of labor to Nike was to the left of the uninformed
Nike’s monitoring efforts to try to alleviate the crisis:
- Nike hired Dusty Kidd into its Public Relations department to draft a new internal code of conduct and lead its labor practices department
- Nike hired EY to conduct an internal audit of its overseas factories
- Nike brought in Andrew Young to conduct an independent evaluation of its overseas factoriws
- Nike arranged for Dartmouth’s Business School Students to independently survey its overseas factory workers on the sustainability of their pay and benefits
Phil Knight: “the Nike product has become synonymous with slave wages, forced overtime, and arbitrary abuse”
Knight announced a series of changes:
- US labor ages adopted
- comply with US OSHA standards, max 60 hour weeks, better train managers
- Micro loans available to workers
- Nike led the industry effort in the apparel industry partnership
  - Followed by leadership in the Fair Labor Association
When activists accused Reebok of violating workers’ rights in Indonesia, the company responded proactively with new labor guidelines
- Included explicit language of human rights
- set forth specific standards for the company’s contractors and promised to audit these contractors to ensure compliance
Proactive engagement from Reebok took away activist leverage

Nike’s CSO - Chief Sustainability Officer, who works directly with Nike’s COO, assesses social risk of NIke’s factories worldwide

From 2010 forward, Bangladesh established itself as one of the largest clothing hubs in the world due to low costs
wanted to follow market to Bangladesh but CSO resisted bc of social risks
only contracted 4 with highest standards
- Good thing bc a building collapsed and bad for business but not Nike
- Accord on Factory and Building Safety in Bangladesh

Facebook

The So Coal Network video was launched on Facebook’s own platform and it jump started Greenpeace’s campaign against Facebook
Greenpeace using Facebook’s own platform against itself was a creative tactic of the NGOs campaign
- Social media often increases the reach, scale, and effectiveness of NGO campaigns
Greenpeace used kid-like animation and narration to break down the complex energy issues into a simple message that even a kid could understand
Global telecom and data centers would rank 5th behind the US, China, Russia, and Japan in energy use in 2007
By 2020, Facebook was predicted to consume more energy than France, Germany, Canada, Brazil combined
- Greenpeace thinks Facebook has a responsibility to use more renewable power, given the scale of its operations
- Problem: PicifiCorp was slated to provide energy for the new data center and it was fueling 60% of its energy from coal (higher than average)
Precedent: Greenpeace wants Facebook to set the tone for the industry’s movement towards renewable energy
Facebook’s choice of where to build a data center is largely going to be driven by:
- Cheap
- Low taxes and govt regulations
- talented workforce with low bargaining power on wages
- robust city infrastructure
Greenpeace wants to choose based on available renewable energy
Prineville, OR
- climate keeps data centers cool, cutting down on energy use
Barry Schnitt- Facebook Director of Policy Communications- offered initial defense of Facebook’s OR location
- efficient building and climate
- FB does not control the energy grid and choice of power sources, the power companies and government regulators do
Facebook is valuable as an independent social media platform
- Actively advocating for one social issue may compromise the independence of the platform
- Activists may pressure the platform to advocate for other social issues, further compromising the platform’s indeependence
FB users were not overly concerned with the environment
Greenpeace’s demands differed in feasibility
- 1. Increase clean energy to make Facebook coal free
  - Increasing clean energy is the demand that is the least within the direct control of FB
- 2. Develop a plan to make FB coal free by 2021
  - Even though the timeline adds to the expectations of this demand, firms set goals and make plans based on best intentions and then change those goals and plans as markets evolve
  - However, the risk of being labeled a greenwasher - makign a plan but taking no action - is real
- 3. Educate users on Facebook’s power sources and carbon footprint
  - Allowing users to make information available to others is a core competency of the FB platform
  - However, educating users on your carbon footprint and energy mix is risky without a plan to manage them
- 4. Advocate for clean energy
  - Policy makers have not incentivized energy producers (like PacificCorp) to move away from fossil fuels, so FB could elevate the visibility of renewable energy advocacy groups
  - However, “issue-creep” is a risk to actively advocating for clean energy, given that other activists might demand FB advocate for other issues
Greenpeace left its demands open-ended and largely negotiable to not back FB into a corner where they have no control on how to comply
- Firms are more willing to agree to change when they can control some of the agenda and minimize their compliance costs
Facebook Sustainability: From 2020, Facebook’s global operations will maintain net 0 GHGs and be 100% supported by renewable energy.
- Facebook’s net zero GHG plan is supported by direct investments in increasing renewable energy capacity through purchase power agreements with energy providers that build new wind and solar farms and gain emission credits.
- FB buys emission offsets to achieve the rest of their net 0 goal
Focusing on renewable energy makes good business sense as inputs are free once the tech is built
FB launched the Climate Science Information Center to connect community with factual resources from leading climate experts
- This seems to be passive education, as the site simply makes information available if the user seeks it out

Starbucks

Starbucks is CSR
- people first, profit last
Increased standards come at higher costs, but it can help
- Differentiate Starbucks coffee: sell more, at a higher price to loyal customers
- Increase employee satisfaction (more productive, less turnover)
- Expand investor base and gain capital inflows
TransFair USA defines Fair Trade Coffee according to the following five
Principles: (page 11 of the case)
• Fair Price: Producer cooperatives are guaranteed a fair price (price floor of
$1.26/lb)…
• Democratic Organization: Producers must belong to cooperatives that are
transparent and democratically controlled by their members…
• Direct Trade and Long-Term Relations: Importers must purchase directly from
Fair Trade certified producers and agree to LT and stable relationships…
• Access to Credit: When requested by producers, importers must provide pre-
harvest financing or credit…
• Environmental Protection: Producers must implement integrated crop
management and environmental protection plans…
Leader in the industry