Grow The Pie Book

Alex Edmans: For everyone to receive a bigger slice, capitalism has to grow the pie

As published in Scotland on Sunday on 15th March 2020 as a preview to Prof. Alex Edmans presentation at GEFI’s inaugural Radical Old Idea event in Edinburgh. Please click here to read the original article and click here for details of the event. 

The consensus among politicians, citizens, and even executives themselves, is that capitalism serves only to enrich the elites while ignoring ordinary people. Companies are making outsized profits and CEOs are raking in exorbitant salaries, while paying scant attention to – and even exacerbating – the world’s major social problems in 2020. Climate change, income inequality, population growth, resource usage, automation – the list is endless.

So it’s urgent that companies take action. If they don’t, not only may customers and workers walk away, but also politicians may pass regulations that overturn capitalism as we know it – as Bernie Sanders is currently proposing, and winning support for.

But many popular proposals to reform business may not actually be in the best interest of society. Many are based on the pie-splitting mentality. They assume that the value that a company creates is a fixed pie. Then, the only way to increase the slice enjoyed by society is to reduce the slice that goes to business – slash CEO pay, restrict dividends, and donate profits to Corporate Social Responsibility initiatives.

But viewing the relationship between business and society as a fight between “them” and “us” is deeply flawed. Profits don’t just go to nameless, faceless capitalists but pension funds investing on behalf of citizens – not “them”, but “us”. So while it’s critical for companies to take seriously their responsibility to society, they also have a responsibility to deliver profits.

That’s the power of a different approach to business – the pie-growing mentality, which stresses that the pie is not fixed. The implications are profound. For CEOs, the best way to increase profits is not to take from society (cutting wages or price-gouging customers) but to create value for society – higher profits then arise as a by-product. For citizens, high profits need not result from value extraction, but successfully serving a social need. A company may improve working conditions out of genuine concern for its employees, yet these employees become more motivated and productive. A company may develop a new drug to solve a public health crisis, without considering whether those affected are able to pay for it, yet end up successfully commercialising it.

Importantly, the idea that both business and society can simultaneously benefit is not wishful thinking, but backed up by rigorous evidence. On 24 March, I will present this evidence – and the new approach to business underpinned by the pie-growing mentality – at the Global Ethical Finance Initiative’s (GEFI) inaugural Radical Old Idea event in Edinburgh.

The Radical Old Idea is a discussion platform inspired by the historic Scottish Enlightenment. By bringing together business and financial services representatives, it explores innovative ideas that deliver positive economic outcomes for the benefit of society. Indeed, solving the world’s major social problems of 2020 involves working with capitalism, not against it. Successful businesses design products that transform customers’ lives for the better, provide employees with a healthy and enriching workplace and preserve the environment for future generations.

But an idea can’t just remain an idea – it must be put into practice. I will present a framework for implementing responsible business, and tackling the difficult trade-offs that often hold companies back.

Leaders of today’s companies are in a privileged position, as their global scale gives them more power to create social value than ever before. But they’re also in a challenging position, because the world’s social problems are more serious than ever before.

Yet the idea of serving both business and society is not a too-good-to-be-true pipe dream, but realistic and achievable. We have the evidence to back us, the examples to inspire us, and the tools to put it into practice. Let’s make this vision a reality.

Alex Edmans is Professor of Finance at London Business School and author of the book Grow The Pie: How Great Companies Deliver Both Purpose and Profit.

by GEFI

Round Table: Path to COP26 - Financing a Green Future

The Ethical Finance Round Table ‘Path to COP26 – Financing a Green Future’ was held on Feb 27th at Baillie Gifford in Edinburgh. Following a short welcome, Omar Shaikh, GEFI Managing Director outlined GEFI’s plans for 2020:

This was followed by short presentations from Jonathan Taylor, former Vice President of the European Investment Bank for Environment and Climate Action, and Gary Lapthorn, Head of Sustainability & Responsible Business, Commercial Banking at Lloyds Banking Group.

Jonathan Taylor outlined the history of climate change action, through initial scientific warnings, to the establishment of the United Nations Framework Convention on Climate Change (UNFCCC) at the Earth Summit in Rio in 1992, and the first landmark international treaty agreed at COP3 in Kyoto (1997). Experts from the International Panel on Climate Change (IPCC) then warned that, despite the Kyoto Protocol, global warming was still set to worsen, leading to the all countries agreeing at COP21 in Paris (2015) to a global framework designed to avoid dangerous climate change by limiting global warming to well below 2°C and pursuing efforts to limit it to 1.5°C.

Coming 5 years after COP21 and the Paris Agreement, COP26 in Glasgow event offers an opportunity to take stock of progress since Paris and update the Agreement where necessary. In particular, countries will present their plans and progress beyond current declared intentions, which IPCC calculate will lead to 2.6°C – 3.2°C temperature rises.

More attention than ever is focused on the role financial services can play in the fight against climate change, acting as an enabler and transition mechanism for policy, risk management and liquidity. There has been optimism around the UK’s leadership on climate-related regulation in finance, particularly through the Bank of England’s Taskforce on Climate-related Finance Disclosures (TCFD). Ensuring Glasgow is a success will require the right template to be in place for all parties to work and agree upon, and this can only happen with significant bilateral diplomatic efforts. The Global Commission on the Economy and Climate calculates that, while a lack of progress poses huge risks to the world economy, bold climate action could deliver at least $26 trillion in economic benefits through 2030.

Gary Lapthorn next outlined Lloyds Banking Group’s commitment to supporting the UK’s transition to a low-carbon economy through leadership in financing sustainability in businesses, homes, vehicle fleets, pensions, insurance and green bonds. One issue found at Lloyds was lack of knowledge and education. Many experienced financial professionals are keen to act and support the transition, but lack confidence in their ability to lead on environmental issues. To address this, Lloyds partnered with the Cambridge Institute for Sustainability Leadership to provide training.

Lloyds is making concrete commitments in terms of both its own operating emissions and those associated with its loan book. It has pledged to halve emissions associated with its loan book by 2030 and to cut operating emissions by 60% over the same timeframe and is currently ahead of schedule. It has also pledged to move to its energy consumption to being 100% derived from renewables and its vehicle fleet to 100% electric. In addition, Lloyds provides financing for a number of environmentally beneficial projects, such as £273m of direct funding for the worlds biggest offshore windfarm, Hornsea Project One.

The presentations from the two speakers were followed by a lively audience discussion, in which participants and speakers explored the practicalities of combatting emissions through finance. The discussion centred on:

  • The extent to which financial institutions are making explicit trade-offs between profit and purpose – Lloyds are willing to accept slightly lower returns when companies agree to do the right thing
  • Whether looser capital requirements can be used to encourage climate-related lending
  • The role of innovation, and specifically financial innovation, in addressing environmental challenges
  • Executive renumeration, and the extent to which commitments are enshrined in incentives for decision-makers
  • Whether moves towards sustainability are making financial services an attractive career for graduates again, moving on from the “lost decade” experienced after the global financial crisis

by GEFI