Ep 3 - Alexander Rhodes - Purpose in Business

Introduction: 

Hello everyone, and welcome to ESG in VC podcast, where we try to entangle all aspects of ESG-related topics and dive into complex issues associated with environmental, social, and governance measures. I'm your host Oksana Stowe. In this podcast, you will hear from Alexander Rhodes. Alexander is head of Mishcon Purpose.

Mishcon de Reya’s dedicated sustainability business. He works and visits a variety of clients and helps them navigate a rapidly changing commercial, legal, and regulatory environment. He's a fellow of the Royal Geographic Society and a conservation fellow of the Zoological Society of London. He has done a lot of work supporting African governments in combating the illegal ivory trade and elephant conservation. In addition, Alexander sits on the advisory board of the essence democracy forum. Let's jump right in. 

Oksana: 

Hi, Alex. Really good to have you with us. I would love to kick off with your current role and why your firm decided to create a purpose division. And what is your favourite part of your job?

Alex: 

Hi, thanks so much for inviting me to join you. It's really exciting and I'm looking forward to our conversation. 

So Mishcon de Reya is a law firm and the reason we set up Mishcon Purpose, which is the division I run, is because we believe really in two things I think. The first is we really believe in the value of purpose-led business and that businesses that have a clear idea as to what their purpose is, which is broader than just making money for the people that own the business, are businesses that bring value, that grow value in many dimensions and that are the most successful, particularly in a world, which is changing very, very fast. 

The second reason that we set it up is because we see very clearly that the law and that lawyers have a very important role to play in accelerating the transition toward a more sustainable way of living and towards addressing a number of the negative externalities that have arisen through the ways that we've decided to organize ourselves and run our economies over the last few years. 

Oksana: 

And your favorite part of the job? 

Alex: 

My favourite part of the job is working with clients to create value. I think the really exciting point that we're at now, particularly in relation to environmental challenges, and my history is in conservation and sustainable development, is that for the first time, there are really concrete, economic reasons for businesses at large to reposition the way that they work and to pivot towards delivering concrete environmental benefits, whether that is for example, and most high profile, of course, in relation to climate change, looking at reducing their emissions, looking at new ways of operating, looking at working with people managing landscapes, to see if in partnership, they can drive the regeneration and regrowth of areas.  Or indeed in relation to biodiversity, for example, where it is possible to really closely look at increasing biodiversity through commercial activity. 

Oksana: 

Understood. So if we come back to the word purpose, which many, many people use, some thoughtfully, some more loosely, how do you define purpose? Maybe you could give us a few examples, how your clients take practical steps to be truly purpose-driven. 

Alex: 

Yes. The way I will answer this in my capacity as a lawyer, and so this will also explain why we see this as an important approach of one where we add value, fundamentally the transition that we're looking at at the moment towards ESG, if we articulate it like that, is to do with a change in expectations. Expectations of the public, expectations of capital providers, expectations of the markets of what we're trying to achieve. 

The global agenda is set out in relation to development by the sustainable development goals. The global agenda in relation to climate, which falls within those of course is set out through the Paris Agreement and the climate convention that follows from that. Governments are struggling and the international community is struggling to deliver on that agenda.

So more and more, businesses is being asked and is expected to lead the way in taking action on these things. Now, what that means is that expectations around the purpose of business are changing. Everybody talks about Milton Friedman's famous article in Time Magazine in 1970, where he said the purpose of business and the social purpose of business is to increase profits for shareholder, full-stop. 

Where we are today in terms of thinking about the purpose of business is so far away from that. Whether you're looking at the commitment made before COVID by the members of the US round table on business, whether you look at the work that's been done by the Royal Academy, where they define the purpose of business as profitably solving problems of people and planet and not contributing towards them. 

That is really where we are with the purpose of business and the expectations of all these different stakeholders on business today. It's a transition that has led us there. So from our perspective, that's where we see purpose and as lawyers and where this really where actually purpose really, really matters is that as the purpose of business changes, so do the fiduciary duties and expectations of directors.

Who are responsible for running those businesses? And that's important because it means now that your obligations as someone who runs a business are completely different than they were even 10 years, even five years ago. The context that you're operating in the expectations, and that isn't just a matter of what your customers and your consumers are thinking, or the people who are funding your business thinking, or indeed your shareholders are thinking, but it's also where the regulations are moving, and it's where courts are beginning to make decisions around the extent of the obligations on board to take account of these environmental, social, and governance factors and how they respond to. 

Oksana:

And coming back, this will be my last question around your role, is how do you measure success for yourself and for your team? So when you sort of reflect on what has been done over a period of time, how do you measure it? Because measurement is quite an interesting part of this whole equation. 

Alex: 

So Mishcon de Reya is 85 years old as a law firm since it started. It was started by a chap called Victor Mishcon as a one-man band shop in Brixton. It's grown from that to the firm it is today. We're more than a thousand people. Sound crazy. 

Our main office is in London, office in Singapore, office in Hong Kong, footprint in Dubai, a whole series of non-legal businesses. We’re looking at listing the business to raise more capital to come in so we can grow it further.

All of that growth has been driven by, or certainly over the last 20 years, and all of the time that I have been at the firm, the culture of the firm has been maintained by a very active use of a set of core values that were developed by the management. It's difficult when you grow a business, particularly if you grow it quickly, then you bring in people naturally from other places, it's great because it enriches the place and you bring in different experiences and all these different things, but if you're trying to maintain your culture, you really have to actively work on that. The firm used this set of core values to maintain our culture and to articulate what it means.

Now, that is something that explains who you are. What we've really been focusing on over the last number of years is our purpose, and through the lens primarily of impact. So when you start looking at that aspect, you asked the question why we are. Different question, why do we exist? What is our purpose of being?

Through that process and through those discussions, we decided to include a change to our constitution and change our LP agreement, the partnership agreement between us all. And as a group of partners, we came together and said, we're going to include into our objects clause, a commitment to having material positive impact on society and the environment and we will commit then to reporting on that. 

Having done that we then progressed to think about organizationally, how do we deliver on that promise? And our commitment is to deliver on that promise in everything we do in how we run our business. We've been through a really big internal program of putting impact to the heart of everything from building it out from the core values and from our core behaviours, which were already really strong in the business, into focusing more on the impact that we're having.

That includes looking at how we run our business. As I said, looking at diversity, looking at opportunity and looking at equity within the business, looking at all the things that you would normally think if you're thinking about ESG all the way through to climate change and energy efficiency and supply chain relationships all of these kinds of things, it also has led us into reviewing our pro bono approach, reviewing our volunteering, which is a really core part of our social contract within the firm, and reviewing our corporate giving our charitable giving as business. This has to do with how we enable our people to have an impact. 

We then created Mishcon Purpose, which is the business that I run externally, which is to really enable our clients to have an impact. How do we measure success for that advisory business? The answer is obviously we measure it in financial terms. So like any other bit of the business, because it has to run commercially, otherwise it doesn't fit within the firm. But outside and beyond that, we look at how the metrics we use are the same for all of our other activities in terms of how the firm runs as well.

So what we have started to do, and we're on our own journey in this, I think as everybody is, is to look at how do we measure the positive impact that we have of our advisory work. How many people are benefiting? What kinds of clients are we advising? Are we focusing more on purpose-led businesses? And we have been just launched a thing called the purpose hub, where we're building a community of purpose-led businesses.

For the last six years, we've been working with B Corps to support that community and doing the legal change to its articles and understanding that change of fiduciary duties and so on. We included that into building that community of purpose led business. So thinking about the value of that, the size of that, the impact that that then has, and then in a very specific way, looking at how we are driving change using the law, whether that is through litigation, whether that is through advising clients, in terms of changing the way that they're operating and actually measuring the impact that we have.

So all the way through, from try to look at models where we think about the degree of opportunity that is increased, the degree of carbon that is reduced, the degree of biodiversity that is increased in specific cases. And that is what we're working towards. How do you measure that systemic change and the value of that systemic change that you can bring for clients and more generally for society by using the law. 

Oksana: 

Understood. Quite an elaborate answer. And circling back to what you said in the beginning about the role law will play in ESG, how do you see or ESG adoption, where do you see the sort of the challenges and how it will play out? What will be the role of litigation and law in all the frameworks that are emerging?

Alex: 

There are so many different frameworks that are emerging to do with ESG. 

Oksana: 

Tons, you can get lost.  

Alex: 

You can get very lost. And you can get very trapped. And the reality is that ESG is a bundle of three completely separate ideas or groups of ideas and factors that have been put together. Environment. What does that mean? Broadly it means climate change and the natural world, including waste and things.  Society.  Really what does that mean? Normally it means your workforce and then human rights more broadly. And governance is broadly thought of as corporate governance and integrity. So normally you can only think about addressing your environmental and social impacts through the lens of governance as a business.

So as a lawyer it won’t surprise you, particularly as a lawyer that runs a business called purpose, that my view is that getting the governance piece right is absolutely fundamental to delivering on any kind of articulation of a purpose or an impact. That means at the other end that you have to be on top of your data.

One of the big challenges for clients is understanding not only what's material, but then being able to measure it and monitor it and turn it into management information because there's non-financial information that has suddenly become very, very material to business and business value in a way that didn't use to be.

Most businesses haven't gone through a stakeholder process to understand what is material and what isn't, and then to really understand and how to build that into their business models. So the risk, I would say of jumping straight to any one of these frameworks is that you don't actually think about the materiality of these factors to your business and of the value proposition that they afford you.

Oksana: 

And just sort of, maybe this will be a very simplistic question, but when you discuss ESG aspects and you partly answered it in your previous answer, but which of these three get the most focus of attention from your clients in particular? You just mentioned that governance is somethings that once you lays the foundations, it gives you a chance to fix E and S. But when they come to you, do they want to fix governance first? It would be interesting to understand how the set of clients you have perceive ESG and what's top of the agenda within three aspects. 

Alex: 

Look, I think broadly clients, corporates anyway, are falling into one of three categories.

Those that have their eyes closed and their ears shut to this whole issue and are hoping that the world isn't going to change so they can just plug on. 

You have those who are looking at ESG in a way that it has been looked at over the last these issues have been looked at for the past 20 years, which is to say it's a compliance issue. It's a cost of doing business. Okay. So we need to report and measure on diversity within the board and within the workforce. We have to do that, so we'll do it. Tick. We have to put in place an anti-bribery policy and we have to run processes to show that we're taking efforts to prevent that taking place within our business. Otherwise, it's a criminal offense and we're in a whole lot of trouble. Tick. Yes, we've done that. And so on. 

And then the third category of businesses are ones sort of saying, hang on a minute, we recognize this fundamental shift of what I was talking about that yet in the role of business. And we see that there are significant risks in that transformation.

It's going to be massive market disruption, as we're already seeing. And during COVID, we've seen massive capital flows toward ESG funds, for example, as an illustration. If you look at the funding and the value of oil businesses, similarly, and those companies are, are the ones that we are primarily working with in areas where, they are looking to build value by becoming market leaders and to raise the ceiling, to head towards best practice and create value for themselves. And that really is a purpose-led approach, and if that is on the advisory side. 

I think the other part of our business model is looking at it from a litigation point of view. And we have developed this idea, which we call purpose litigation. The point of this is to use litigation as a tool to chase up bad actors, to hold them to account, and to drive systemic change through that litigation. And an important component of that idea for us is actually valuing, looking at us and trying to value the broader, positive impact that you will achieve outside the benefits to the claimants in any particular claim by running that. 

Oksana: 

And my next question is slightly looking into the future. I know I'm making predictions is super tricky, especially for a lawyer, but which of the business constituencies you're seeing will be sort of the fastest adopters of ESG and will they provide innovative solutions for the rest of the community? Maybe from the ones who have been the fastest from your experience. 

Alex: 

So I love this question because it goes absolutely to the heart of what the issue is. ESG and the challenges related to those factors are the stakeholder issue. The risk to business and the opportunity to business is how they respond to those with issues within the community.

That's slightly what's different about ESG risks than other risks that businesses are better at dealing with. Businesses typically are good at looking at risk out, like being on the prowl of a ship, looking for icebergs, or we see credit risk, we see market risk, we see these things coming towards us.

The external ESG risks are really more in how you decide to respond yourself to the challenges that are out there. And you can only understand those by looking at your stakeholders and other members of the community. So in terms of where are the main drivers? Capital markets, obviously both from a regulatory point of view because they tend to be regulated and the regulators are moving, but also just because the capital providers themselves are better understanding the risks that are there and they're asking questions and they are therefore responding with the conditions on which they provide or don't provide capital because they no longer want to carry the risk. 

Why should a pension fund put money into a business if that business hasn't bothered to work out whether it has a risk from climate? Of course, the pension fund administrators and those responsible for it, that trustees will be massively negligent in today's world, if they didn't start asking those questions, and they are asking those questions, they have been not for some time.

It wasn't that long ago before that it wasn't even on the page. So that is going to be a massive driver. And of course, access to capital is a huge driver in the economic systems, in the markets that we live and operate in. 

Law and regulations fine. Yes, definitely. Of course, representing the floor in my view.  Normally trotting up behind where expectations have reached. So I think the courts have a very important role in moving things quickly and reflecting the expectations of today. I think regulators are going to need to be on their toes of moving quickly if they're going to continue to be really relevant. The response of some regulators at the moment, it has been very, very interesting, not only to say, okay, the regulations themselves will change, but also actually our approach to enforcing those regulations will change.

There's been some very, very interesting stuff around greenwashing, whether that's from the advertising standards authority, or from this competition and markets authority from the NFSA so on, which is really illustrative there also in relation to competition and competition law. How do you square the balance between the really punitive regime that tries to prevent anti-competitive behavior, which stifles innovation and the obvious necessity for businesses to work together, to come up with the solutions, to drive sustainability. 

And the regulators in that space on their toes.I mean, the Dutch are doing great things. Our regulators in the UK are acting on it. There's a really important role to play that from them. 

Oksana: 

And I also think another Aspect is that end customers are quite unforgiving of certain missteps and customers, not only just consumers, but also users of software, they pressure, might not be as strong, but definitely as they are putting some pressure on businesses. 

Alex: 

You've nicked my third category, which is exactly what I was going to finish with because ultimately this is where society is driving us than it is consumer demands. I think my only comment on that Oksana is I think that in some of these areas around ESG and you were asking me to prioritize them earlier, but particularly around climate change, I think we are going to see as climate change bites and the consequences of climate change bite more acutely, we are going to see much, much louder demands from consumers and from civil society as a whole, for action.

I think that we are going to see just an acceleration of the requirement for change. And that is a challenge that business is going to have to step up to. 

Oksana: 

Yeah, for sure. And my last question before we wrap up is what has surprised you last year, ESG or non-ESG related?

Alex: 

We were talking about this earlier, as you know, I'm going to ask you to tell me briefly about your foray into NFTs, which is something I simply don't understand.

Oksana: 

Well, I think then for me to answer that question is sort of how some of the NFT art is priced. Still being a finance professional and investor, I still cannot get my head around it. 

Alex: 

When you work it out, perhaps you'll share it with us all because that's what everybody wants to know. 

Oksana: 

Exactly. That's a hundred million question. What is the right way? A hundred million dollar question. Well, thank you so much, Alex, for your time and for answering the questions and do stay in touch. 

Alex: 

Wonderful. Thank you so much. 

Oksana: 

Thanks for being part of this podcast. And if you liked what you heard, please follow and rate us. Also, please come find us online or on social media of your choice. Until next time I'm Oksana Stowe and this is ESG in VC.