BUSINESSES the world over are striving to transform themselves to align with an evolving economic system that places sustainability at its centre. The core of this movement is the shift from shareholder primacy to value creation for all stakeholders - that is, shareholders, employees, customers, business partners, the community and the environment.

Shareholder capitalism, which focuses exclusively on maximising profits for shareholders, is, in our view, unsustainable. Shareholder capitalism has, over the years, made significant contributions to economic growth, job and wealth creation, living standards and scalable innovation. However, this narrow approach has led some players to favour short-termism and extractive practices, which come with enormous costs such as social unrest around inclusion and workers' rights; human-caused climate change and nature loss; and the increase in public spending to address these issues.

For businesses to thrive and mitigate the potential harm of their business practices, we need an inclusive, equitable, resilient, and prosperous economic system, which stakeholder capitalism aims to build. As Alex Edmans, author and professor of finance at London Business School, explains in his book Grow the Pie - How Great Companies Deliver Both Purpose and Profit, stakeholder capitalism generates sustainable profits only through creating value for society. This should not restrict shareholders' rights and potential gains, as some might assume it would.

A deeper look at what stakeholder capitalism comprises and what it takes to achieve it, shows investors that their investments can create mutual benefits for all and that now is the time to act.

Key pillars

The World Economic Forum's International Business Council (IBC) has identified 4 key pillars of stakeholder capitalism metrics: principles of governance (agency, accountability and stewardship), planet, people, and prosperity (both economic and social).

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These 4 pillars are highly interdependent. Applying a multi-dimensional approach can create a ripple effect. For example, applying a gender lens in climate investments can boost board diversity, reduce the disproportionate climate risks women face, increase the number of green economy jobs for women, and enhance female empowerment and income on top of the environmental benefits.

These 4 pillars are aligned with 2 other essential elements of the United Nations Sustainable Development Goals - Peace and Partnership. Stakeholders are likely to have diverse and biased priority interests. It is important for companies to engage and build trust with the stakeholders and understand the most material issues to avoid potential conflicts and trade-offs among them. For example, as we transition to a low-carbon economy, we need to ensure it is a just and harmonised transition, with considerations of workers' rights, working conditions and livelihoods.

The paradigm shift to stakeholder capitalism is a systemic change that requires a holistic approach with collective effort from players across the ecosystem. A combination of adequate regulation (eg mandatory disclosures, a tax or penalty on negative externalities); economic incentives (eg a subsidy for positive externalities, value-aligned key performance indicators and renumeration); innovative financial solutions that channel both public and private capital hand in hand with technological advancement; and many more are required to drive this movement.

Purposeful business

The principle of stakeholder capitalism calls for business leaders to have a clear purpose beyond generating profits. In America, over 180 chief executives have signed the Statement on the Purpose of a Corporation, issued by the Business Roundtable, to pledge their commitment to building long-term value for all of their stakeholders.

A pledge is an empty promise if there is no concrete action plan to achieve it. The purpose has to be fully integrated into the company's strategy, operations and culture to ensure a balance between profitability and sustainability, and among stakeholders' diverse interests. An imbalance could lead to attacks from activists, as happened to Big Oil and Danone.

To check whether companies are walking the talk and making progress, we need new tools to assess overall corporate performance. Emerging frameworks such as impact-weighted accounts that reflect a company's overall net internal and external financial, social and environmental impact, may prove key.

Certified B Corporations (B Corps) provide relevant examples of stakeholder values' potential to complement shareholder value through conferring competitive advantages such as cost savings through resource efficiency, positive consumer associations and greater desirability as an employer. B Corps are purpose-driven organisations whose fiduciary obligations extend to stakeholders, as proven by verified high standards of transparency, accountability, along with environmental, social and governance performance.

According to the 2020 B Lab Annual Report, there are over 4,000 B Corps globally including Natura, Warby Parker and Coursera. The report shows that, compared to non-B Corps, B Corps were 1.6 times more likely to be carbon neutral, 65 per cent more likely to conduct pay equity analyses and at least 80 per cent more likely to offer healthcare benefits to part-time or transgender employees. In 2020, two-thirds of all B Corps saw increased revenue; and among this group, 77 per cent also gained employees despite a challenging year.

Investors can play a part

According to Global Sustainable Investment Alliance's Global Sustainable Investment Review 2020, global sustainable assets reached US$35.3 trillion in 2020 - growing 15 per cent in 2 years. This rapid surge is an indicator of investors' quest for long-term shared value and their optimism in the future of stakeholder capitalism.

Investors play a critical role in this transition and there are many ways for investors to contribute their financial, human and intellectual capital to manifest a more sustainable and equitable economy, such as:

• Make sustainable investments that address both financial and sustainability objectives.

• Exert influence on companies by participating in proxy votes and demanding transparency from investment managers or portfolio companies on relevant metrics reports.

• Use catalytic capital to support ecosystem and capacity building, such as supporting the early development of novel green technologies and promoting public-private partnerships through blended finance.

• Create momentum by joining relevant investor networks, encouraging other investors to take collective action, and sharing experiences with peers.

• Consider sustainability when acting in different capacities. For example, purchase eco-friendly and ethically sourced products as a consumer.

The key question now is not about whether we can have both profits and purpose but how to have it all. The need to have it all will help us rebuild trust in our economic system and overcome the unprecedented pressing challenges that the world is facing today.

• The writer is Asia-Pacific sustainable investing specialist, Citi Private Bank.