NO EXIT STRATEGY

Entrepreneurs have the mindset we need for corporate sustainability because, contrary to popular belief – and the capital-market incentive structure – they are in it for the long haul, says Erika Karp.
Erika Karp
Founder & Chief Executive Officer
Cornerstone Capital
“There’s a perception that sustainability is just window-dressing or greenwashing, and the investment world will sort that out very effectively.”
Erika Karp

We could really learn from entrepreneurs. That point in itself is perhaps rather trivial, even overused, but Erika Karp adds an unconventional slant to it. What she believes we can learn from entrepreneurs is not the bubble economy’s rush to get rich fast or die trying. It is rather the opposite. “If we are to develop a business culture that nurtures long-term thinking and sustainable business practice, we really need to look at how entrepreneurs work,” she says.

“There is no one, no business, whose vision is more focused on the long-term outcomes than an entrepreneur. Large organizations have a lot to learn from smaller entrepreneurial organizations. They are all in,” she says.

Karp might herself fall into the entrepreneur category. Just 18 months before this interview, she started Cornerstone Capital, a financial services firm, with the ambition of bringing the discipline of sustainable finance to mainstream capital markets. The timing is just right for that, she believes. However, while the timing for entering the market is crucial for entrepreneurs, she believes there is an excessive focus on exit strategies.

“It makes me so crazy when people think that entrepreneurs all hope to build a company fast and sell it. When you are truly and deeply an entrepreneur, you are absolutely trying to make profits and create value, but you are doing so with a purpose. It’s not about a short-term exit,” says Karp. She points out that she speaks not only for herself but also for the social entrepreneurs with whom she works and has a “wild respect” for. However, being an entrepreneur with a purpose can be hard when the first question you are asked by a prospective investor is: “what’s your exit strategy?”

“Wait a minute, I’m trying to build a business here. I don’t need to think about an exit strategy now,” she says with a laugh. However, behind the humorous tone of voice there are real issues to be handled.

To Karp, this is a perfect example of why sustainability has been slow to take root in business practices in her area of business, the capital markets; the incentives are  misaligned for that.

“You have an incentive system across the various capitalmarket functions that tends to support short-term thinking, and that is problematic,” she says.

“Moreover, even though some of the larger and more forward-thinking corporations are making huge progress, most companies are still lagging behind in terms of adopting sustainable business practices. And when investors don’t really reward a focus on sustainability, there is too little will to change,” she says.

In her view, the problem stems from a lack of understanding of how sustainability initiatives can be translated into the things investors care about: predictive insight based on good data that is reliable and allows for projections.

“Many companies will go out and say: ‘Corporate sustainability initiatives enhanced our reputation’. Now, I will tell you that the investment community doesn’t care much about that because they know that reputational strength and resilience are an outcome of the actual fundamental work done in the organization. So if you are a company and start a conversation with an investor with ‘we want to build our reputation through sustainability’, there’s a perception that this is just window-dressing or greenwashing, and the investment world will sort that out very effectively,” says Karp.

She believes that what we need to develop are coherent sustainability-reporting standards which are pragmatic, so companies can actually report precisely, and at the same time make sense to investors. We need tools and metrics that effectively articulate how companies are moving towards their sustainability goals and what this means for the value and future value of the company.

“I would argue that we need a much better understanding of the productivity of sustainability initiatives. The starting point for many companies has been an analysis of the reputational risks associated with not adapting to sustainability, and that is a start, but if we focus only on risks you are box-ticking rather than looking to the future. The focus needs to be on both risk management and opportunities to get the full profitability and growth outlook that investors seek,” says Karp.

We are still far from having those tools at hand, but things are starting to happen. Financial institutions are slowly moving towards long-term compensation programmes and Karp is essentially optimistic – perhaps another entrepreneurial trait. “I wouldn’t have started this company if I didn’t believe the timing was absolutely right,” she says.


WHAT’S NEXT?
MAKING NEW TOOLS

The corporate world and investors need to work together to develop a set of standards and metrics that can highlight the value coming from sustainability initiatives, says Erika Karp. When these two sets of players agree, things can really start moving.

“Those two stakeholder groups need to get closer together to create a more focused approach to reporting and transparency in which the financial metrics that are adopted are really those that are required by the investment community and are at the same time pragmatic to use for the companies,” says Karp.