What does it take to run a responsible business?

0:29We can't do business on a dead planet. that brings together experts from around the globe to figure out what business could and should be doing to tackle some of the biggest issues facing the world. I'm Femi O 'K, a broadcaster and journalist. And I'm Lizzie O 'Leary, a podcaster and journalist. Today, what does it take to run a responsible business that also serves its shareholders?

0:57Business leaders are facing the ultimate balancing act. They want to be more sustainable, make money, keep their shareholders happy, serve the customer, and the timeline to do all this is becoming shorter and shorter. It's enough to make anyone's head spin. So how should business leaders balance the need to make money and be sustainable? To find out, we'll be talking to Charles Kahn, the chairman of Patagonia, a company that calls themselves a responsible business. But first, to help us understand the pressures sustainable businesses are facing, we're joined by Colm Kelly, global leader, corporate sustainability for the PwC Network.

1:36Hi there, Colm. Hi there. Colm, to get us started, what are companies telling PwC about the way climate change is impacting their businesses right now? Well, I think there's probably three areas. The first is a growing recognition that climate is impacting on the business, on the value chain, on the supply chain. We see lots of issues over the last few years surfacing all over the planet, frankly, in terms of all kinds of weather events which impact on businesses negatively. The second, by definition, is entirely related, which is that businesses are increasingly conscious of the need to respond to that threat by decarbonising.

2:14And I think the third area is where we see the expectation that businesses will be more transparent about reporting on their performance in relation to non-financial metrics in the sustainability space. So they're the three areas that I think businesses are very conscious of. Colm, how are those conversations, those discussions influencing the way that businesses think about their future? Well, I think most businesses which have taken a look at the way in which the climate change challenge is unfolding are figuring out pretty quickly that we're on a very challenging path, to say the least. And at a minimum, the changes which are already baked in, frankly, are going to, in some cases, have quite material implications for many businesses, never mind our communities and our societies.

2:58So you have this general context within which the conversation takes place, which quickly moves then to the so what question. What should business do? What can business do? and how do we get that done? Colm, stay with us. We'll come back to you soon. But first, Lizzie, you spoke to someone who has been leading the way when it comes to responsible business practices, right? Exactly. I was really excited to speak to Charles Kahn, the chair of Patagonia. And I began by asking him about how he got into running sustainable businesses. My dad was someone who loved the outdoors. And so from as long as I can remember, we were in Maine and Nova Scotia And I remember vividly looking at pond water under a microscope in third grade and just feeling like protecting the world was important.

3:47But by the same token, I was also trained in, you know, what was called shareholder capitalism, which said externalities aren't that important. Maximizing shareholder returns is what's important. And then we'll let shareholders decide what they give their money to. And I went to fancy business school. And I think what happened over time is you can't help but notice the little changes that actually our own behavior does matter. And I think that gradual raising of consciousness made me a much more activist person around sustainability. Well, at Patagonia, you call yourselves a responsible company, not a sustainable company.

4:28Can you explain that distinction? Yeah. We're not yet a sustainable company. We're on the journey to being a sustainable company. What we are is responsible, taking full responsibility for everything that goes into making a garment. Not saying, we run our own shop cleanly. We don't know where the dyes come from or where the fabrics come from or the terrible conditions under which these clothes were actually put together. And that's where the social and environmental consciousness of Patagonia comes from. You mentioned this journey, right? The company's journey. And I think it's fair to say that one of the biggest parts of that is the decision by founder Yvonne Chouinard in 2022 to transfer ownership of Patagonia into what's called a purpose trust, where the beneficiary is a purpose rather than a person.

5:17Why do it that way? I date this decision back to 2018, when Yvonne changed the mission of the company to, we're in business to save our home planet. And all of us who are involved in the company thought, that's incredibly inspiring. But what do we do? Like, how does it change what you do on Monday morning? And I think it did begin this really important shift. But simultaneously for the shareholders, that's Yvon Chouinard and his family, they had to decide what did it mean as a shareholder. So we looked at the idea of doing a direct listing, but keeping control of the company with dual class shares.

5:56We looked at selling partial interest to a like-minded private equity firm, one of these permanent capital firms, as ways of releasing a lot of value to put against the environmental crisis right away, Yvonne rejected each one of them. Because each time he said, this sounds good, but this is the beginning of the destruction of what Patagonia is. And so that's when we tried to come up with a structure that was essentially making the earth our shareholders. I want to push you on that a little bit, though, because it seems like there is a fundamental challenge at the core of this. which is if the earth is your shareholder, right, if the focus is the climate crisis, you're also making and selling stuff.

6:41Isn't there some conflict there? Yeah, of course there is. And that's why we say we're a responsible company that owns the conflict. It's very hard to be in any kind of a business without having some damage done to the planet. What Yvonne would say is that's why we need to focus on being responsible and we need to work with our customers so that they only take what they need. They only purchase what they need. You'll remember the famous ad we did in the New York Times, which is don't buy this jacket. We meant it. Well, let's talk about that customer, right? Because you can do all of these things, and yet it's possible that your customer is absorbing higher costs or slower delivery times, less stuff.

7:25I'd imagine if you are an executive listening to this thinking, yeah, that sounds great for Patagonia, but I don't know how to do that with my company and my product. How do you thread that needle of being responsible and also meeting your customers' needs? Yeah, I think the first thing I'd say is we can all do a lot better than we think we can, right? And the second thing, there's a lot of easy excuses that people use, like Patagonia is a special case. But I think we need to challenge both public and private company leaders and owners to say, how can we do better? And so there is an inherent conflict in capitalism, and we can't wish it away with a wand, but we can do better.

8:09What do you do with the growing pushback against ESG within businesses? And you'll have business leaders saying, we are not going to create as much value, we're losing focus. How should business leaders deal with that? Yeah, I think it's easy for people to bundle a whole bunch of stuff in that actually isn't essential. And sometimes that's what gets an ideological reaction. And so sometimes there is actually benefit in stopping and saying, huh, I wonder which part of this message we should really lean into in order to gain acceptance on what's most important, not what's perfect in the moment. And I think we just need to recognize that this is a forever journey, not a get it done journey.

8:54Yvonne says we can't do business on a dead planet. There really isn't a trade-off at the end of the day because we only get to do those things if we live in a way that ultimately is sustainable. Let's talk about public companies. Because if you're listening to this and you work at a publicly traded company, a more conventional one, say, and you want to make that move toward being a more responsible company, but you have a fiduciary duty to your shareholders, you're trying to figure out how to make all these things intersect. Is responsible business in the framework that you've laid out compatible with doing business in public markets?

9:35Absolutely. This is a debate that we've been having and will continue to have, no doubt, for the next 50 years. But already institutional shareholders and the people who control the wealth behind them are demanding different behavior. And so institutional capital is already saying to business, do good things, but also do it well. I think it's terribly important that we take responsibility to the communities in which we operate. And that doesn't just mean our employees. It means all the people who live in the communities in which businesses operate and to the resources that we use from the environment.

10:14So far-seeing leaders already recognize that we need to build that into the calculus. So on a brass tacks level, if a C-suite executive is listening to this and they want to do this, where do they start? The most important thing you can do to start is to actually measure, because we can't manage anything about our impacts until we know what our impacts are. And so I would say to executives at companies big and small, get out in front of that by starting to do your own measures ahead of time. And then what you're going to find, and we certainly find this at Patagonia, which is there are some things that are relatively low-hanging fruit where you can make quite remarkable change in your business impact.

10:59Like what? That's often with energy use. It often has to do with sourcing relationships. You'll find shortening supply chains, which are very deep at the moment, allows you better visibility into what's going on. There are many things you can do in terms of changing your own behavior quite quickly. and then working on the larger aspects of your supply chain where you have people who are ready and willing to work with you. Ten years ago, if you went to a factory in Vietnam or a factory in Bangladesh and you said, I need you to change your energy usage to solar, you wouldn't have had a hearing. Today, they're used to hearing that because the biggest manufacturers are being required by their investors and by regulatory standards to take account of their impacts.

11:44Is there one thing that every business leader should do when they think about making their business more responsible? We talked about an obvious thing, which is, you know, start by making sure you understand what your impacts are. But I think the next most important thing, and probably it's more important, is that we set high aspirations for where we want to go. It doesn't mean we need to achieve those tomorrow, but I think we'll be more inspiring to our customers and much more inspiring to our employees and the other people we impact if we set high aspirations. Setting high aspirations that align with company purpose is good for business.

12:24And it helps us remember that this is not just a trade-off between profit and doing good, that ultimately profit comes from doing good. But doesn't that mean, and I think this is key, being okay with not being loved by everyone. Yeah, it does. And I think that's true. Because I think a lot of executives are nervous about that. Well, you know, we're not nervous about it at all. We are not afraid in Patagonia to offend some people. And when you stand for something, when you stand for purpose, there will be some people who stand against you. We don't need that purpose to be one size fits all. And in terms of what you expect as a return on your investments, how does thinking about responsibility change how you measure your projects and what you're doing with your money?

13:16We view the businesses that we start and the new lines of businesses that we start through the lens of how they help us achieve our purpose. And so it includes the financial sustainability, but also the impact that we have toward being in business to save our home planet. So recently, the last 10 years, we entered the food business in a relatively small way. And we did it because Yvonne said food is the biggest business in the world and it has much more impact on both climate and species eradication. And so we're going to be in food. And right from the very beginning, we built into the goals for our food business, how that creates regenerative, whether it's fishing or regenerative agriculture, right at the very core of what we're doing.

14:04And that's not something you measure in a hurdle rate. It's something you measure in the complex ways that you assess a growing business. You cited that New York Times ad, don't buy this jacket. Do you think less consumption has to be a part of the solution to a sustainable global economy? Yeah, Lizzie, I do. I think we're all going to have to come to terms with consuming less. And I think, you know, we've created a society over the course of the last 50 or so years where excess consumption has been part of all the messages delivered to us. And I think if you look back even 50 years, you'll see that that actually, that isn't in our DNA.

14:45People in 1940 thought that houses of 1 ,300 or 1 ,400 square feet were perfectly adequate. And people of a few years before that thought that having two sets of clothing was adequate. Now, I don't think we're going back there, but I think we'll build happier lives when we stop looking for our fulfillment in gift shops to steal a line from Kurt Vonnegut and actually start finding our meaning in things that don't require the using up of the planet, but actually enjoying the planet. Lastly, what haven't I asked you that is important for someone who is tentatively taking these steps or thinking about how to reach their employees with real meaning around being a responsible company?

15:33What should they hear? I think at the end of the day, we have to look to leadership of companies and other organizations to provide the aspirations and inspiration for these complex social organizations that are companies to actually move forward. And so a lot is asked of our CEOs and senior management teams to bring this on board. And, you know, the benefit is our kids get to have the same kind of quality world that we grew up in, or hopefully better. All of us have benefited enormously from this technology, science, and industrial revolution that's been going on for the last 100 or 150 years.

16:20All of our lives have become better in healthcare and in every other measurable way. And if we want to continue to have these incredibly advanced lives, we have to change how we're doing it. And business is the most nimble of all the players. You know, there's governments, there's supranational organizations like the UN. Business is the innovative and nimble engine here. It does call upon all of us who are business leaders to be in the vanguard, not to wait to be dragged along by our chain. It's on us. Charles Kahn, thank you so much. Lizzie, it was a great pleasure to spend time together. Kahn,

17:07what are you telling clients when it comes to being sustainable or responsible and whether there's a difference? Well, I think there is a difference and I think Charles described it very well, actually. I think it's very challenging and very debatable to suggest that an entire business throughout its value chain is, in inverted commas, sustainable. However, it's entirely possible and indeed appropriate that a business can be responsible in all of its decision making. Let's talk about challenges and solutions. So what are the biggest barriers to companies making responsibility the most important part of their business?

17:42And then how do they get over those barriers? The most significant overarching barrier which most businesses face is the tension between delivering on the sustainability goals, which they have set for themselves, versus their financial performance over that period. And those periods to achieve those kinds of goals can actually be very long. And that tension is very real and I think has to be very openly part of the conversation with shareholders, whether it's a privately owned trust or whether it's a publicly owned company. So I think that's key. The first is to really engage with shareholders, to be very clear about what the objectives, the impacts, the sustainable impacts, the targets are, and what are the financial consequences of that journey to achieve those outcomes.

18:29I would also add something else in the context of those barriers. I think it's really important for businesses which are embarking on this kind of journey to really ensure that they're supportive of policy which delivers a level playing field. And that's one of the real concerns about undertaking a significant strategic transformation journey related to sustainability. Do we have a level playing field? And I think one of the things we would do is encourage businesses to ensure that policymakers are aware of the need for that level playing field and they appreciate the support of businesses to try and implement on that basis.

19:03Are there opportunities for businesses that are responsible and then put sustainability or responsibility sort of at the top of their agenda? And I guess, what are those opportunities? There absolutely are. And I would divide the opportunities into two categories. I think the first is a somewhat challenging one, but it's a recognition of the reality that there are now really material risks in the system as a consequence of climate change and biodiversity challenges and so on. So the first category of opportunity is for business to make sure that they know what those risks are. What are the financial risks to that business of the changes which we now know are going to roll through the system?

19:42They're already baked in. And by definition, the businesses which have the best understanding of that are the ones which will be best placed to manage and perform better. I think the second category is a recognition that the scale of the change that we are now going to go through are very significant. And by definition, they will create opportunities. They create opportunities for businesses to supply new products, new services, to engage with new kinds of customer, to operate in new markets in different ways and so on. I think maybe one of the hardest things here, if you are a CEO, a C-suite executive, is bringing your investors and shareholders along with you on this journey.

20:23Patagonia, a purpose trust, a family run company, that's different. So how, if you are talking to investors and shareholders, do you translate this mission to them? Well, it is very different in practice. But interestingly, when you listen to Charles, he actually describes the same process of engagement. So they developed a strategy at the executive level. They brought variations on that strategy to their shareholder, to the family, to the trust. And ultimately, they landed on an agreement which the shareholders were comfortable with. That principle is exactly the same, even for a public company.

20:59But as you say, it's just a lot more difficult in practice. And so I think it's useful to think about a number of quite specific steps as a business sets out to do that. I think the first is to really be clear on what it means. What exactly do we plan to do in the context of a sustainability strategy and why? I think secondly, that same clarity needs to be brought to the conversation around the plan to deliver. How exactly is the business going to undertake its activities and priorities and so on to deliver on those target outcomes? Thirdly, and critically, what are the financial consequences of adopting that strategic agenda?

21:36And lastly, I would say it's really critical to acknowledge that there are tensions between those two aspects, particularly over prolonged periods of time. And it's really important to have that conversation with investors to be clear about how those tensions are to be dealt with so that there are no surprises on the journey. Colm, how do investors fit into all of this? Because they have a role to play too. Yeah, absolutely. And I think an increasingly pivotal role. The alternative option of business as usual actually isn't business as usual because the world around us is changing because of these issues, which means that the trade-offs that we're making actually may not always be particularly, not just sustainable, but financially appealing.

22:19Com, what does the future of sustainable and responsible business look like for you? I think that we're going to see the consequences of climate change, which is already baked in, unfolding year after year. We've seen it in the last few years. It will continue to deteriorate in the coming years. And I think actually some of the more severe consequences are going to happen sooner than many of us might have hoped. So we've got quite a challenging backdrop and it's not from 2050 onwards, it is from today onwards. This is real today and will unfold over the next five years and then beyond. And I think one consequence of that is that we will see perhaps an ever reducing tolerance for businesses which are or are perceived to be part of the problem on the part of customers, on the part of employees and indeed on the part of governments and regulators.

23:11So I think we're going to see actually a much more challenging environment with much more pressure on businesses and economies to accelerate. Colm, thank you so much for coming on and spending this time with us today. I really appreciate it. Thank you so much for having me. Lizzie, my takeaway from listening to Colm and Charles is how much clarity they had about what responsible business meant to both of them in the fields that they work in. saying, okay, this is what we do. This is how we do it. And they didn't sugarcoat anything. It's going to be hard, but they're sticking with it. And I think the question you asked about the tension between being sustainable and making money was really key because they both seem to come back to, it's not an option that this is happening, that there are significant financial risks for businesses that do not think about sustainability as a key part of their mission.

24:12And I found that incredibly edifying. And responsible business is also making money. Exactly.

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