Stakeholder capitalism: the sustainability of corporate value

As companies pursue long-term success, there’s a growing focus surrounding the relationships that they foster across a range of stakeholders. What does this dynamic mean for the future of investing and indicators of company performance that go beyond traditional financial metrics? BlackRock’s systematic experts discuss how they use sustainable investing and a data-driven approach to identify characteristics that seek to benefit both shareholders and stakeholders in pursuit of investment opportunities.

An investment’s environmental, social and governance (“ESG”) strategy limits the types and number of investment opportunities available and, as a result, may underperform other investments that do not have an ESG focus. An investment’s ESG strategy may result in investing in securities or industry sectors that underperform the market as a whole or underperform other investments screened for ESG standards.

The business of business is (more than) business

For decades, the topic of capitalism has sparked discussion over what’s at the core of long-term value creation for companies and societies. In an increasingly interconnected world, there’s greater demand to understand how companies foster relationships across employees, customers, and communities alongside asset owners. Larry Fink emphasized the power of this dynamic in his 2022 Letter to CEOs, explaining, “a company must create value for and be valued by its full range of stakeholders in order to deliver long-term value for its shareholders.”^¹

This evolution in how we think about market economies has sparked interest in sustainable investing as a way to incorporate positive stakeholder impact across businesses. Investor flows and company commitments have followed, with sustainable assets exceeding $4 trillion globally² and firms increasingly acknowledging the importance of social and environmental factors to their business. It’s also elevated our analytical approach as systematic investors – providing new data and powerful insight into which firms are poised to outperform as the economy evolves.

Over a decade ago, we began exploring the role of sustainability as not just an ethics-based allocation decision, but an additional lens to evaluate investment opportunities and economic behavior. We found that sustainability provides a clearer view of company characteristics that can be used alongside traditional financial metrics. Like all fundamentally sound investment insights, the effectiveness of sustainable analysis as a predictor of investment performance will fluctuate based on the market environment and several other risk factors. However, over the long-term, these insights can help determine a company’s potential shareholder returns and influence on stakeholder groups – solving for what we call the double bottom line

The intersection of sustainability and tangibility

Sustainable insights help uncover potential indicators of company success that can be associated with long-term value creation. The challenge investors face is ensuring those insights are validated and tied to material results. Common ESG metrics and standards often lack substantiated evidence of business impact or fail to demonstrate a link with key stakeholder groups and social issues. As a result, investors may not be effectively capturing the intended benefits of this added layer of analysis.

In our view, harnessing the potential of sustainability requires a data-driven approach with robust analytical capabilities and validated insights. Our research seeks to reveal tangible indicators of long-term performance and societal improvements across a spectrum of internal and external stakeholders.

Internal stakeholder example: employee sentiment
While intangible assets remain difficult to measure, human capital is typically the most important asset of any organization. Employees play an instrumental role in impacting business success. They drive new innovations, set the pace of productivity, and act as brand ambassadors to the public and to potential employees. We’ve found companies with more satisfied workers tend to experience lower future employee turnover, further benefiting company results. Employee perspectives provide an inside view of a firm’s overall strength and potential to outperform relative to peers.

Our systematic capabilities allow us to extract insight from granular employee views at scale. Collecting data from public networking and employee review sites, we apply natural language processing techniques to gauge sentiment and satisfaction. Machine learning capabilities help us capture greater detail, associating key words with broad themes such as innovation, teamwork, and respect. Shown in the chart below, our research reveals there may be a connection between high levels of employee sentiment and long-term excess return potential. It’s important to note that there may be periods where this relationship doesn’t hold true and firms with high employee sentiment underperform due to market conditions or inherent investment risks.

Firm performance and employee sentiment
Cumulative absolute returns of companies with the highest and lowest employee sentiment

In Larry Fink’s 2022 Letter to CEOs, he discusses how workers are demanding more from their employers – a feature of capitalism that’s fostering competition and pushing companies to be better.³ Companies who prioritize relationships with their employees are working towards a more engaged and satisfied workforce (stakeholder outcome) while potentially contributing to improved company fundamentals when analyzed alongside several other metrics (shareholder outcome).

External stakeholder example: consumer financial protection
The financial well-being of consumers is at the center of a thriving economic system. Companies committed to building mutually beneficial customer relationships may stand to benefit from better business results.

Our research on consumer financial protection has shown a connection between real-time consumer feedback and the strength of financial companies. We collect alternative data showing geographically tagged consumer complaints on financial products through online public-facing data portals from the US Government.⁴ Our research has shown higher levels of complaints are tied to worse debt-to-income levels across counties⁵ and higher non-performing loans for financial institutions controlling for total deposits.⁶ Banks that receive more complaints and negative feedback may not be fostering consumer well-being (stakeholder outcome) and may be at risk for experiencing negative long-term financial results when analyzed alongside several other datapoints (shareholder outcome).

Long-term value via the double bottom line

Within the BlackRock Sustainable Advantage Large Cap Core Fund (BIRIX), we leverage these sustainability insights alongside numerous other indicators of firm success. As companies strive to create long-term value, they’re tasked with considering the scope of their impact across a broader range of stakeholders. How does the sentiment of employees dictate productivity and innovation? How does the financial health of consumers impact their ability to do business? These are just a few of the questions at the center of how we evaluate investment opportunities.

Through a robust systematic process enhanced by big data and scientific testing, we analyze complex stakeholder relationships with precision and scale. These insights can contribute to a more complete understanding of shareholder and stakeholder results, capturing better outcomes by solving for the double bottom line.