ESG and Stakeholder Capitalism: Seeking Value for All

This article was first published in Outlook India on May 09, 2023. Co-authors: Moksh Garg, Sougata Ray; https://www.outlookindia.com/business/esg-and-stakeholder-capitalism-seeking-value-for-all-news-284879

Nobel Laureate Milton Friedman, in his famous essay "The Social Responsibility of Business is to Increase its Profits," published in the New York Times magazine in 1970, famously wrote, "There is one and only one social responsibility of business--to use its resources and engage in activities designed to increase its profits..."

Compare this with the Statement on the Purpose of a Corporation adopted by 181 CEOs of America's largest companies in 2019. The Statement declared, "…companies should deliver long-term value to all of their stakeholders – customers, employees, suppliers, the communities in which they operate, and shareholders."

Post the Covid19 pandemic, calls for "stakeholder capitalism" has further picked up the pace. Gone are the days when economic profits alone determined a firm's success. The for-profit entities are being held responsible not only for the bottom line but also for the activities through which they create shareholder value and the value they create for other stakeholders. As a result, it is no longer surprising to see them getting mired in controversies or even attacked by their shareholders over broad-ranging social issues. This has led shareholders and the wider investor community to take stock of businesses beyond traditional metrics.

Measure accurately and improve

The method to measure economic profits has been established and standardised for long. However, measuring stakeholders' value creation is still in its infancy. And, what cannot be measured, cannot be improved, managed, or controlled. Therefore, combined with changing social dynamics and the issue's salience, many rating agencies and data providers started providing ESG ratings for companies.

At the most basic level, ESG ratings aid investors in comprehensively evaluating a firm by analysing it across its three major dimensions: environmental, social, and governance actions and impact. While ESG, in spirit, is a step in the right direction, it has been wrestling to drive a commensurate impact worldwide. There are significant roadblocks impairing its overall uptake and effectiveness. Two major hurdles are the lack of standardized disclosures by corporate and inconsistent measurement criteria employed by the ESG rating providers (ERPs).

Disclosure: Our research at the Thomas Schmidheiny Centre for Family Enterprise, Indian School of Business, suggests that less than 4% of the total publicly listed Indian firms have been assigned ESG ratings between 2014 to 2021. We arrived at this figure by consolidating three different ERPs, i.e., WRDS Sustainalytics, Thomson Reuters, and CRISIL. The reason for the low coverage of companies by ERPs is that ERPs rely on publicly available data to make assessments. However, most companies – especially the medium and small-sized ones – do not track their ESG activities, let alone disclose them publicly. Even companies that make complete disclosures do not follow any standard procedure, making their interpretation subjective and comparisons across companies challenging.

Measurement: While comparisons across companies are difficult due to a lack of standardised disclosures, how information for the same company is compiled, measured, and converted into an aggregate score differs quite a bit from ERP to ERP. A study conducted by researchers from MIT, published in the Review of Finance, reported steep inconsistencies in the ESG ratings assigned to a business by different agencies (Berg, Koelbel, & Rigobon, 2022). In many cases, firms are assigned highly inconsistent ratings by different ERPs owing to differences in methodology, scope, or weights (importance) assigned to attributes. The divergent estimates about the same underlying entity add to the confusion and defeat the very purpose of these ratings.

Sample: The number of firms assigned an ESG rating in India (by the three ERPs cumulatively) is a minuscule percent of all listed firms (4%). Further, because we cannot compare the ratings across ERPs, research must be done using the data from just one ERP, reducing the number of companies that can be studied even further. Additionally, the number of years of data available for each ERP varies. In such a scenario, the reliability and generalization of research become questionable.

ESG ratings and their effectiveness are subject to substantial political debate in the West. The opposition has openly attacked ESG for its overly ambitious vision but deeply flawed implementation. Some critics have even questioned the morality of ESG by calling it a fabricated tool to legitimize greenwashing. However, in our opinion, although ESG is undoubtedly far from perfect, it remains one of the most potent ways to reimagine businesses in a society fraught with grand challenges.

In line with the old saying "do not throw the baby out with the bathwater," we expect that in the Indian context, SEBI's mandate for BSE Top 1000 companies to report their ESG activities as part of the Business Responsibility and Sustainability Reporting (BRSR) shall alleviate some of these concerns. However, it is time that companies understand the spirit of ESG, and even those companies that do not fall under the purview of BRSR voluntarily disclose the steps taken toward a more sustainable future. Let us actively work towards addressing the pitfalls, bringing more standardisation to disclosures and objectivity to measurement.

Blockchain applications: Bringing in the next wave of new technology jobs

This article was first published in Business Today on November 6, 2019. Co-Author: Sanjay Fuloria; https://www.businesstoday.in/opinion/columns/blockchain-applications-next-wave-of-new-technology-jobs-forget-analytics/story/388743.html

Blockchain applications are suitable across industries due to their security, immutability and decentralised properties. This means the next wave of new technology jobs would come from blockchain.

Blockchain is hot news these days. There was a time, in the not so distant past, when working-age people were going after analytics courses. People's inboxes were flooded by emails from sundry institutes and organisations offering analytics courses, degrees and diplomas.

Everybody wanted to get into analytics. While the availability of data is huge and the requirement to analyse and make sense of it is still there, analytics doesn't seem to be so popular now. Blockchain seems to be the next analytics.

As per Yli-Huumo etal, the idea of Blockchain started in 2008 (Yli-Huumo, Ko, Choi etal, 2016). Blockchain is defined, as the name suggests, as a chain of blocks of information. This is stored in a database. Merriam Webster defines blockchain as "an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way."

Blockchain is also defined as "a digital ledger of economic transactions that is fully public, continually updated by countless users, and considered by many impossible to corrupt." (Carlozo, 2017). The use of cryptography makes the blockchain transactions trustworthy and secure (Holbl, Kompara etal). All cryptocurrencies including bitcoin have the blockchain technology at its base.

The above properties of blockchain make it applicable across industries. As usual, banking was the first industry to make use of blockchain technology. The banking industry has always been the first mover when it comes to the latest technology. Barclays and UBS are trying the blockchain technology to speed up settlement and their other back-office functions.

This could lead to an annual saving of $ 20 billion in costs. Middlemen could be eliminated just like that. Payment collection and automation of digital invoices are other applications in the banking industry. Crowdz is a B2B startup that is blockchain-based.

Barclays bank has invested in Crowdz in May 2019. JPM Coin is being launched by JP Morgan to enable transactions between one institute and the other. JPM Coin is based on blockchain technology.

Blockchain technology is slated to revolutionise messaging. It is going to be used to build an improved and secure communication infrastructure. The security expectations would be uniform across platforms. Currently, different platforms have different protocols which might compromise security.

SuchApp is working at creating a "5G ecosphere" using blockchain. Commercial transactions would also be possible on SuchApp. Then there is BlockMesh. This will work outside the range of cellular towers. It will work on the concept of peer to peer networking.

Telegram Open Network (TON) is being developed by the popular social networking app Telegram. They are planning to get into censor less browsing, payments and file storage. Other chat platforms like Kik are also raising money via Initial Coin Offering (ICO).

Kik is into in-app currency. There are other nuances which some companies utilise to make themselves unique. There's an app called Echo that uses a different protocol named Interplanetary File System (IPFS) which leads to quicker messaging. Echo is unique because other apps require the interacting parties to access the blockchain directly whereas Echo bypasses this by using the IPFS client.

Ride-sharing services have started using blockchain technology in a big way. Although we hear a lot about ride-sharing, according to a U.S. report, only 1% of the Vehicle Miles Travelled (VMT) (standard terminology in the ride-sharing industry) are accounted for by the ridesharing services.

There is a huge opportunity in rural markets. Blockchain technology can help by removing intermediaries between the driver and the rider. Driver vetting is another advantage of blockchain technology. Smart contracts make the rules and regulations transparent. These can be viewed by any stakeholder of the platform.

Any variations would be accomplished by enforcing smart contracts. The drivers' traffic record could be added to the blockchain to be used later for feedback and corrective measures. An Israeli company is working on a community-owned transportation platform that utilises any unused capacity for the benefit of the rider.

They are using the blockchain technology to device a ''fair share" reward system for all the stakeholders. There's another example of Arcade City that uses blockchain technology for all transactions. They permit drivers to set their own rates, build their own clientele of riders, and provide other services like delivery.

Education Industry has a lot of potential for the use of blockchain technology. Academic credentials could be added to the blockchain. This would make the verification process easy. Any fraudulent claims could be nipped in the bud.

There is a U.S. based startup, Learning Machine, that has created a toolset called Blockcerts that can be used to prepare, provide, view, and verify blockchain-based certificates. Student records can be shared and secured using blockchain. There are a lot of education apps and services available nowadays. Identity management for these services is a major problem. There are blockchain-based platforms available that help users carry their identity around the internet.

Internet of Things (IoT) could use blockchain technology for its advantage. A new concept christened as Autonomous Decentralised Peer-to-Peer Telemetry (ADEPT) uses a technology similar to blockchain to let devices (things) to communicate with each other directly without the presence of any mediator.

Data security is a major challenge with IoT as multiple devices get connected in real-time. If the data gets leaked or it is in some way not secure, it could be detrimental for all the concerned parties. The security aspect of blockchain could be utilised to its full potential when dealing with IoT.

Real Estate industry is another where blockchain technology could play a pivotal role. There are software as a service (SaaS) platforms where property information could be put in and documents could be recorded.

Blockchain applications are suitable across industries due to their security, immutability and decentralised properties. This means the next wave of new technology jobs would come from blockchain. Get ready to be swarmed by promotions from organisations/institutions offering blockchain courses. Working knowledge of blockchain could be the next great differentiator.

Social Media Analytics and Its Place in Management Education

This article was first published in GARP, Risk Intelligence on August 30, 2019. Co-author: Sanjay Fuloria; https://www.garp.org/#!/risk-intelligence/technology/data/a1Z1W000003mAbvUAE

Business schools can teach the power of the technology and stress its ethical application

There is a surfeit of social media data available for anyone who cares to generate insights and use it for legitimate (or illegitimate) purposes. However, to capture the data in the best possible manner and to get the desired outcome, one must know what to look for and where.

Space, time, content and network are the four key dimensions of data collected or information disseminated through social media. But how does one capture and analyze these? Are the management graduates and post-graduates of today equipped to make the most of this data? The point we will try to make is that social media analytics can be used for making positive impact on business outcomes and hence must be introduced in B-schools as an elective.

Calculating the impact of company marketing campaigns is one such use. In order to do this, questions about the brand could be asked on any of the social media platforms such as Twitter. These questions could generate a lot of discussion about the brand. Then, the company that has launched the product can measure sentiments through the discussions. Twitter metrics like engagement rate, potential impressions, geographical locations, tweet frequency, hashtag usage, top tweets, and followers' activities can be measured. All this would give a fair idea about the success or failure of the marketing campaign.

Social media analytics can help organizations learn from their competitors. By analyzing the social media activity of competitors, organizations can understand what new product launches are happening, how the customers are reacting, what are the good/bad product features, the kinds of complaints customers have, etc. This analysis could lead to prevention of similar mistakes by the company that is analyzing the data.

The use of social media in trading and investing is well documented. In financial markets, information and the speed of information is the key. Short-run movements in the Dow Jones average can be quite accurately predicted through the sentiments expressed in tweets, thereby giving an edge to traders able to make such predictions.

Soft and Hard Skills

On the jobs front, analysis of social media sites like LinkedIn could help users comprehend the types of jobs that are aplenty. They could also help indicate supply and demand for various skills in the jobs market. This kind of social media analytics could be most useful to MBA students who are about to get into a full-time career.

A quick search on the internet for most sought-after soft skills that companies are looking for in 2019 are creativity, persuasion, collaboration, adaptability, and time management. The most in-demand hard skills are cloud computing, artificial intelligence, analytical reasoning, and user interface design.

Another important aspect of business that could be strengthened by the right use of social media analytics is problem resolution. If a customer complains about a product or service on social media, the company should try to resolve the issue in a timely manner, in real time if practically possible. If the social media analytics reveals a sizeable number of complaints about the same service or the same feature, then the company can take stronger action to rectify the problem: changing/correcting the feature, replacing the person handling the issue, or maybe even re-launching the product/service with improved performance.

Management Initiative

In all this, the management professionals in any organization would play a key role, as they are the decision-makers. If they understand how to use social media analytics, then the job for any organization would become easier.

Any analytics starts with defining objectives clearly, asking the right questions, collecting the right data, analyzing the data and, finally, gathering insights from the analysis. The two most important links in the analytics value chain are clear objectives and asking the right questions. If these two aspects can be somehow hard-wired into the brains of management professionals, right from their MBA days, the outcomes would be better.

MBA curriculums have many analytical subjects these days. Introducing social media analytics into the curriculum would be an added advantage. The topics to be covered should include open-source programming languages like R or Python.

However, it needs to be realized that there are two sides to every coin. Social media analytics can also be used to influence outcomes illegitimately. Cambridge Analytica, a London-based election consulting firm, was in the news for analyzing data from an estimated 50 million Facebook profiles for insights that were used to influence election results in the U.S. and other countries. Online materials favoring candidates were delivered to individuals based on their psychographic profiles. This was a wrong and sinister use of social media analytics that compromised personal information and wrongly influenced election outcomes. Hence, the study of social media analytics must have an ethics component as well.

The Power of Democratized Data

This article was first published by Global Association of Risk Professionals, Risk Intelligence, on September 21, 2018. Coauthor: Sanjay Fuloria

https://www.garp.org/#!/risk-intelligence/technology/data/a1Z1W000004B9QmUAK

How readily available data sets and crowdsourcing can promote problem-solving and policy solutions

While reading a post on the Reddit social news aggregation site, we were amazed by a link to download government data. The data pertained to parking tickets issued by the Chicago Police Department over a decade. The data was anonymized but had all the details regarding the reasons for the tickets and demographic details of the violators.

The local government put this data up in a comma separated value (csv) format to invite inputs from researchers and intellectuals for help in policy formulation. This would improve the performance of the police department. They could answer questions, for example, about gender or racial bias in issuing parking tickets.

This approach should be used by the Indian government at the Center, and by state governments and local civic bodies. Anonymity is important to maintain, but other than that, there is no reason why this data should not be made available to the public at large for analysis. While the government has started data.gov.in, the amount of data available there is pretty limited.

Apart from that there is this need for accuracy. We compared the actual seasonal rainfall data for the state of Telangana on two government websites, www.imd.gov.in and http://www.tsdps.telangana.gov.in/. 

They were not the same. As per IMD, the actual rainfall to date was 665.8 millimeters as of September 5, 2018, which is 6% in excess of the 50-year Long Period Average (LPA). The other website showed rainfall of 584.8 millimeters as of September 7, 2018, which is a 7% deficit. 

IMD publishes data weekly, whereas the Telangana data is daily. Which to believe? It looks like the two agencies don’t talk to each other. No wonder the forecasting models used by these government agencies are far from accurate.

The data availability would enhance the scope for better inputs to shape public policy. The areas could be as diverse as traffic management, crime control, queuing in hospitals, school admissions, etc. The government could in fact have contests, with prizes given for best policy recommendation or for the best machine learning algorithm to solve a particular problem.

Downloadability

The government could take a cue from the likes of Kaggle, where such contests are the norm. On Kaggle, a lot of companies provide their data free of charge to solve their problems. The only requirement is the availability of data in an easy to download format.

The census data available through www.censusindia.gov.in is very difficult to download. The navigation of the website is itself a bit challenging. The data sets are distributed into different files. The best alternative would be to make it available in one file and at the village level. Such granularity is needed for analysis and to make sense of data.

Census data, if easily downloadable, could lead to a lot of analysis. Much of it would be superficial, but some would definitely be meaningful and could be used by the government to inform its policy choices. 

As James Surowiecki says in The Wisdom of Crowds, “A diverse collection of independently deciding individuals make better predictions than individuals or even experts.” The wisdom of crowds can be leveraged.

While financial data is made available by the government, data on other socially relevant fields can be hard to come by. With so many open source tools available for handling the data, it has become relatively easier to make sense of data. Moreover, there are many MOOCs (Massive Open Online Courses) available to whoever is interested in learning data handling.

With the democratization of education, it is high time the government thinks of democratizing data. We are not saying data privacy is not important, but as long as the details don’t identify an individual, it should not be an issue. Let a hundred flowers blossom.