Faraz Khan CEO and partner of global sustainability advisory and technology company SpectrEco. ... [+]
The opportunity for corporations to make the world a better place and also be more profitable has never been more contradictory. On the one hand, there’s ample evidence that corporations can benefit from helping to solve the United Nations Sustainable Development Goals. On the other hand, ESG has become a flashpoint for politicians and investors who believe that mitigating climate risk and solving social problems is a distraction from delivering value to shareholders.
Making decisions in this context isn’t easy. For example, the private sector is under growing pressure to close the growing emissions gap and help meet the goal of keeping global warming below 1.5 degrees Celsius. Yet, despite the fact that Fortune Global 500 companies without a Chief Sustainability Officer saw emissions increase 3% in the past year, more than half of the world’s largest companies still do not have a CSO.
More than ever, employees, community stakeholders, and investors expect that corporations will use their resources to help to solve our most pressing social problems. But today’s polarized political context is has created a situation where the implications of taking action in this space may, or may not, be in their best interests of corporate leaders. In a Pew survey last year, 78 percent of American workers who identified as Democrats agreed that it is good for companies to focus on diversity, equity and inclusion, while just 30 percent of Republican workers thought the same. Despite this finding, in a survey of 194 chief human resource officers published by the Conference Board, none of the respondents said they planned to scale back diversity, equity and inclusion initiatives.
One of the most frequent narratives in 2023 was that companies are putting less priority on ESG. In fact, most corporations have continued to make ESG a strategic priority and understand their important contribution to mitigating risk and creating new business value. For example, ESG reporting among the S&P 500 is now approximately 99% according to a June 2023 study from the Center for Audit Quality.
The tidal wave of new regulations is adding to an already challenging situation for businesses. This year companies in California will be required to report on their engagement with the voluntary carbon market. The EU has new disclosure regulations and the U.S. Securities and Exchange Commission will be introducing an ESG rule to prevent greenwashing. Increasingly, government regulations are making the “E” of ESG a non-negotiable table stake backed by private sector capital while social change priorities are adopted voluntarily and supported through development capital and philanthropy.
In this complex context, I wanted to get a fresh perspective on what corporations can do to be more sustainable and profitable. I turned to Faraz Khan, an impact investor and ESG technologist who has spent two decades pioneering new approaches to using philanthropy, investment capital and technology to alleviate poverty, advocate for diversity and advance climate change.
Faraz is CEO and partner of global sustainability advisory and technology company SpectrEco. He is also the founder of Social, Entrepreneurship & Equity Development (SEED) Ventures, an investment and impact development organization in Pakistan. Faraz was recently awarded an MBE by King Charles III in recognition of his services to strengthen UK-Pakistan relationships in the fields of social impact, ESG, and climate advocacy.
Paul Klein: Tell me about how you came to launch Social, Entrepreneurship & Equity Development Ventures and what makes its approach to linking business and social change so unique?
Faraz Khan: My interest in making the world a better place started from having a grassroots understanding of the socioeconomic dynamics of our rural ecosystem in Pakistan. After I went into banking, I learned how the financial system works and realized that having a job actually is quite restrictive if you want to make a bigger difference in the world. So I established Social, Entrepreneurship & Equity Development Ventures (SEED) in 2007 to create inclusive economic prosperity in Pakistan. SEED works in two ways. First, we develop ecosystems to collaborate with public, private, and development sectors to achieve Sustainable Development Goals. Second, SEED employs a blended capital model to contribute to social and environmental change though impact investments and grants. The results contribute to scalable enterprises that deliver a return on investment and a social return on investment. SEED became a perfect balance between absolute capitalism and non-profit work.
Paul Klein: Making change in rural Pakistan isn’t easy. How has SEED been successful in what must be a very challenging context?
Faraz Khan: Our approach to investing in businesses that benefit the individual needs of women, youth and children in marginalized rural communities is transforming the landscape and has become one of the largest social initiatives in Pakistan. After successfully investing ourselves, we created opportunities for other stakeholders to co-invest and co-authored new legislation in Pakistan that supports the creation of social enterprises and local procurement. We also helped change how corporations are contributing to social change by shifting from conventional corporate social responsibility to corporate impact venturing and co-investment.
Paul Klein: Beyond these accomplishments, what else did you discover about how businesses can have more impact?
Faraz Khan: We learned three important lessons. To attract more private sector investment in social change we needed a better way to demonstrate performance. We also realized that the global ESG ecosystem for businesses was moving from being voluntary to being mandatory. Finally, we learned that establishing and scaling successful social enterprises depended on a better way to address the interests of governments, investors, and community-based programs. To address this, we convened a group of data scientists, mapped every standard social and environmental regulation framework in the world, and focused on three sectors that we believe have the greatest opportunity to benefit from being more sustainable: real estate, hospitality and infrastructure. The result was the creation of SpectrEco to help organizations accelerate all aspects of sustainability.
Paul Klein: What have you found are the best ways to address the skepticism of ESG critics?
Faraz Khan: I believe ESG should be turned into a strategic advantage so that businesses achieve their objectives and make the world a better place at the same time. Most corporations look at ESG as tool to reduce risk but I believe the biggest value comes from uncovering new opportunities for businesses and their shareholders to benefit. For example, climate induced disasters such as droughts in the UK, wildfires in Canada and the U.S. don’t only impact the jurisdiction where they happen. The floods in Pakistan, which took 33% of the country underwater and caused local suffering on a massive scale also disrupted food supply chains and impacted vulnerable people across many continents. Corporations that address the climate crisis are helping communities in multiple jurisdictions and ensuring their products continue to be available for sale.
Paul Klein: Which comes first, shareholders or stakeholders?
Faraz Khan: The main focus of a business is to create shareholder value through return on investment. Because that’s not going to change, corporations need to demonstrate the value of climate change and social change to investors. To do that, they need to talk in the language that investors want to hear and communicate that that transition to net zero is an investment rather than a cost. Corporations should tell their shareholders that increasing stakeholder value will actually increase the value of their investments beyond what they could ever imagine and that they can prove it. That's when the magic happens.
My conversation with Faraz revealed three insights that I believe are important for every business leader and can help make their companies more sustainable and more profitable.
First, contributing to SDGs in a meaningful way, and benefiting from doing so, involves more than money. Making substantive change also requires engaging governments, civil society organizations and other businesses as needed to foster systemic change. Second, transitioning towards net zero targets for businesses is critical and technology and data will play a central role. Data and AI can be used to assess business performance and societal change and navigate the current and new regulations that are setting a new playing field for business and society. Finally, business leaders need better ways to communicate the role and value of community stakeholders to investors. They also need to help stakeholders understand that making the world a better place can only happen when businesses are profitable.
