There’s little doubt that efforts to engage in sustainable and responsible business are in the spotlight more than ever before; Volkswagen’s share prices plummeting amidst last year’s emissions scandal, the public reaction to Amazon’s treatment of employees and the outrage that China burns much more coal than it claims – the list could go on. But what do corporate treasurers need to know and what can they do to ensure their business makes a positive impact on the world without having a negative impact on profits?
When China’s President, Xi Jinping, visited the UK late last year – the first state visit from a Chinese president since 2005 – it marked an important moment between the two countries. The trip, however, was somewhat tainted by China’s poor history with human rights; numerous reports narrowed in on the fact that the country’s record has been distant from international standards until recently. The Telegraph questioned whether Jinping deserved the UK’s “red carpet” treatment, for instance. The general air of malaise was one indication, amongst many, of a mind-set that is focused on a responsible future more than ever before.
And it isn’t only the treatment of people that is receiving precedence; engaging in business that has a positive environmental, social and governance (ESG) impact has been in the spotlight for some time. “The train has truly left the station,” says Gavin Power, Deputy Executive Director for the UN Global Compact, a key sustainability initiative. “Sustainability is a global agenda here to stay.”
Since it is sometimes disregarded as a buzzword in the corporate arena, it is apt to provide a definition of sustainability. The UN Global Compact felt the need to put a stake in the ground and defined sustainability as the delivery of long-term value towards environmental, economic, social and ethical concerns. There remain some obvious hurdles, including the disparity in what embracing sustainability means for different businesses and the sceptics who believe that, in current economic circumstances, sustainability is unaffordable. But momentum is gaining ground.
What do companies owe society?
Bill Gates, however, probably wasn’t alone in his belief when he claimed last year that the private sector is too selfish to produce effective energy alternatives to fossil fuels. “There’s no fortune to be made,” he told The Atlantic. For many, it isn’t unreasonable to question the extent to which sustainability is an obligation for business – their allegiance, after all, is primarily to growth and profit generation. Axel Boye-Moller Head of Global Transactional Services, Asia, at Westpac, clarifies that this is an issue to overcome. “A sustainable approach to doing business makes sense for all stakeholders, including shareholders, and there are significant opportunities for businesses that get this right. However, in the short term, there are challenges. For example, producing sustainable agricultural commodities can be more expensive in the short term. There is a lot of discussion around who is going to wear that cost and how it will play out – however it is important to maintain focus on longer-term value, in line with shifting expectations.”
But, Power argues, there is a fiduciary duty to answer these questions. “For large companies and investors, there is a legal responsibility to ensure their organisations are managing critical sustainability issues.” Why? “Because they are risk issues.” According to a recent report from the UN Global Compact, ‘Fiduciary Duty in the 21st Century’, in addition to the ethic argument of meeting the needs of today without compromising future generations’ ability to do the same, there is a legal case for sustainability.
In terms of investment, ESG factors are certainly viewed as risk factors. Loic Dujardin, Director, Research at Sustainalytics, a leading global provider of ESG and corporate governance research, ratings and analytics, explains that the research they conduct enables investors to identify ESG risks that could have an impact on the bottom line of companies. “A typical example would be investigating the potential water scarcity for a mining or power generation company. Without water, they are not going to be able to operate the mines or power generation plants.” The risk management performance of companies, he says, is something asset managers and asset owners, who have a long-term investment perspective, should pay attention to. In the words of Mark Carney, Governor of the Bank of England and Chairman of the G20’s Financial Stability Board: “The more we invest with foresight; the less we will regret in hindsight.” At the end of the day, ESG factors – such as climate change – are systemic risks to the economy, says Dujardin. “And for investors in Europe and North America, integrating ESG factors into investment decisions has become mainstream.”
In Asia, the story is slightly different. Although the sustainability landscape is rapidly changing, it is still a relatively new idea in the region. Broader recognition means unlocking the corporate leverage necessary to accelerate sustainable progress. This requires a new business mind-set – one which, according to Power, necessitates “an imperative on culture change top to bottom”. This includes the sustainability of a company’s own operations; the sustainability of its products and supply chain; and the encouragement of sustainability within the end customers’ lifestyles, and of all key business partners – suppliers or banks, for instance. It is about building resilience within company operations, as well as in the communities in which they operate. “At the very heart of that, it is about winning the hearts and minds of customers,” adds Boye-Moller.
If further motivation is needed, however, Sustainalytics offer a benchmarking service for corporates “so within a specific industry, a company can find out how they perform compared to peers”, says Dujardin.
Times are changing, however: the options available to corporates, the economic drivers encouraging sustainable business and actions many country leaders are taking towards this topic are on the rise. “Five or ten years ago, non-business organisations and spheres of influence were unclear about the best modes of engagement with the business community. Fast-forwarding to now, we are at an inflection point in the sustainability movement; multilateral organisations, governments, civil society, investors and corporates are aligning in some exciting ways,” says Power. The Sustainable Development Goals (SDGs), for instance are one example of this increasing alignment.
Circular supply chains
A change from engrained business models, advocates of the circular economy argue that products should be designed to maintain their quality and continue to be useful to the economy beyond their typical shelf life. “In a circular economy, products and materials flow in loops, maximising asset utilisation and minimising waste by design. It avoids the economic losses along the value chain and negative externalities inherent to the traditional linear model of production and consumption,” say Jocelyn Blériot, Executive Officer and Ian Banks, Editor, both from the Ellen MacArthur Foundation, a charity with a mission to accelerate the transition to a circular economy. Working with businesses, governments and academia, the Foundation seeks to set out the economic opportunities provided by the restorative and regenerative activities needed in such an economy.
Blériot and Banks provide the following two examples of circular economy business models being used on the ground. One hundered La Place restaurants in the Netherlands provide 2.5 tonnes a week of waste coffee grounds to GRO-Holland, a company that uses them as a growth substrate for oyster mushrooms. The mushrooms are then sold back to the same restaurants to be used as ingredients. The supply chain is therefore made circular by turning one player’s by-products into feedstock for the other.
As an example of a pay-per-use business model, in addition to selling lightbulbs, Philips now also signs contracts to provide light, by the lux. The company keeps ownership of the lighting system, taking care of maintenance and remanufacture during the contract. Such a model can be both more profitable than traditional products sales for the manufacturer and cheaper for the user. It also promotes increased customer interactions – and, potentially, increased customer loyalty. </div
The tide is turning
For corporates, despite slow economic growth and lingering volatility, investing in sustainable business practices is becoming an attractive prospect – one that can add value, people are beginning to realise, rather than adding just another cost to the business. Companies are reporting substantial savings as a result of their efforts to reduce energy use and waste, for instance. “It makes business sense to embrace sustainability,” says Catherine Bremner, Global Head of Sustainable Finance Solutions, ANZ. “Yes, there are challenges in terms of the change, innovation and technology necessary but there are massive opportunities for businesses.” Her colleague at ANZ, Christina Tonkin, Managing Director – Global Loans & Advisory, adds: “Corporates want to be operating for the long term and those that boast robust processes around their impact on the environment and society are the ones that will be in for the long haul. It is as simple as that.”
For example, businesses are demonstrating compassion for current environmental concerns. In October last year, 38 firms in Singapore pledged that their products were free of raw materials from companies being investigated for forest fires in Indonesia – an environmental disaster caused by forest clearance known as ‘slash and burn’, where land is set on fire as a cheap way of clearing it for new planting. The cost of this activity as of November 2015 was estimated – by the Indonesia government – at $47bn worth of financial damage to the region’s economy, illustrating the damage not only to the environment, but companies who are reliant on its health.
Corporates in Singapore aren’t the only ones adopting environmentally considerate initiatives. More of the success stories include: L’Oréal announcing its plan to become “free from deforestation” in the production of all its products by 2020 at the latest and Unilever supporting the most progressive suppliers which can guarantee key criteria, including compliance with the laws in the country on cultivation; informed consent from indigenous people and local communities; conservation and restoration of forests; and a pledge not to clear peat for new plantations.
Banks too are leading the charge against unsustainable primary goods. Westpac, for instance, recently launched a sustainable shipment letter of credit (LC) as part of the Banking Environmental Initiative to transform supply chain practices. By doing so, corporates can access commodities with a recognised stamp of approval to certify that they are produced sustainably. “We are now working with The Banking Environment Initiative to expand similar principles into more commodities and other trade finance instruments,” says Siobhan Toohill, Group Head of Sustainability and Community, Westpac.
As the range of sustainable financial products on offer expands, companies seeking out, or actively demanding, such solutions are leading ‘the new norm’. And the number of corporates taking sustainability matters into their own hands and looking for support is on the rise too, according to Power. The UN Global Compact is joined voluntarily, to publically commit to a universal language on corporate responsibility with the provision of learning materials and ongoing support. “We’ve passed a really important hurdle globally,” says Power. “When the Global Compact started in 2000, we had to coax companies to join but it’s now aligned with societal trends – graduates, for instance, look to join working environments which actively engage in the subject – and the membership of several large companies has encouraged others to join.” The initiative now has 8,000 companies and 4,000 non-business participants based in over 160 countries committed. Joining primarily involves company alignment with The Ten Principles, focused on human rights, labour, environmental and anti-corruption priorities.
Although it is a leadership agenda, the principles need to be cascaded throughout the organisation. Companies are provided entry level management resources to ensure they meet the expectations of how to implement the principles. The Global Compact also continually challenges companies to do more and produced a blueprint as a high-level aspirational model a few years ago. As Power says: “Sustainability needs to be a progressive agenda.”
Commitment also includes the mandatory requirement for corporates to submit Communication on Progress (COP) reports annually. Not only does this afford transparency, the UN now boasts the largest repository of these public sustainability reports. They can serve as learning resources, but have also generated numerous partnerships for companies who perhaps had never thought about sharing and inviting other partners. “I get calls and enquires from NGOs and UN agencies who, after reading reports, want to work with some of the companies on projects that they had heard about for the first time in a COP,” says Power. The Global Compact also has an interactive Business Action Hub to encourage similar engagement.
The banks’ role in championing change
Banks, of course, play a huge part in ensuring sustainable business practices come to the fore. “Five years ago, the first things banks thought of were immediate footprint actions – such as conserving electricity or reducing paper use – which are important but don’t get to financial institutions (FIs) central role in the global economy, finance,” says Power. More recently, banks in Asia Pacific (APAC) have been taking some impressive steps, however.
Westpac received recognition as the industry leader for banks in the 2015 Dow Jones Sustainability Index. “Sustainability is fundamental for the bank, it is embedded into all processes – our lending criteria for clients, for instance,” says Toohill. “We look at sustainability at a country and sector level, at a customer level and at a transactional level.” If a client’s sustainability policies aren’t up to scratch, banks will work with them to create alignment. When it comes to sensitive sectors, such as agribusiness, because there are a range of potential environmental and social impacts, specific mission statements and strategies exist.
In terms of guidelines on an individual transactional level – project financing, for instance – both ANZ and Westpac are signatories of the Equator Principles which sets a framework on risk management for projects. Banks often also commission separate research as part of that assessment. Trade finance, on the other hand, is short tenor and there may be transactions that need a decision intra-day “so we’ve got tools, frameworks and checklists in place to assess risks at that level quickly”, says Toohill.
In recognition that sustainability should be progressive agenda, banks keep their offerings up-to-date. “We need to have the finance available for corporates so they can grow their businesses in a sustainable way,” says ANZ’s Bremner. For instance, originally in Australia a lot of focus was on renewable energy, mainly wind power, but the bank is seeing mounting interest in rooftop solar. “Therefore, finance solutions are tailored in a way to suit individual client needs.” One of the largest targets of its type to date, an AUD 10bn commitment to support customers’ transition to a low carbon economy by 2020, will help meet this developing need.
Additionally, when Westpac exceeded its goal of AUD 6bn of funding for the CleanTech and renewable energy sector by 2017, it set a whole new benchmark in terms of what classifies as sustainable and warrants the allocation of funds, rather than resetting a new end objective. For example, a higher threshold for green buildings within the portfolio. “All of these movements are of interest to corporates across Asia,” says Boye-Moller. “I recently participated in a seminar in China, organised by The Banking Environment Initiative, alongside other banks, regulators, academics and some of the largest Chinese commodities importers. They were incredibly interested in what the banking sector is doing in the sustainability space.”
Indeed, according to Tonkin, “there are few institutions that will touch customers’ right across the globe and across all different sectors in the way FIs do. I welcome the increasing involvement of FIs into the sustainable finance space as the pivotal role banks play will benefit corporates and society going forward.” Providing their experience, driving advocacy through the standards set in lending practices and underlying policies, banks can raise the bar. For the treasurer, it is about selecting banking partners that can support their company’s transition to sustainability. The product suite, funding and attitude towards supporting ongoing sustainability are of consideration. Watch out however, as Power believes some are behind the times in terms of ESG concerns.
Taking the lead
In the near future, ANZ’s Tonkin and Bremner believe there will be an increased interest in company resilience – whether existing infrastructure is up to the task of withstanding increasingly severe weather, for instance. “Part of the challenge will be funding over the long-term,” she says. When US President Barack Obama delivered a call to action to some of the world’s biggest companies at the Asia Pacific Economic Cooperation forum in Manila in November last year, he raised the issue that “few regions have more at stake in meeting this challenge” than APAC. Aptly, as Tonkin says: “We are seeing sustainability embraced more as part of the DNA of business. It’s part of the conversation on a daily basis, elevated in the thinking of corporates across APAC beyond what was once a fringe subject.”
Investment opportunities, as well as funding opportunities, are on the rise. “We see good momentum in three markets predominantly: Japan, Singapore and Hong Kong,” says Dujardin. “Drivers include reforms and initiatives from regulators, governments, banks and other financial intermediaries. Investors too are concerned about the disruptive effects climate change could have on the stability of their portfolios.” Therefore, it is in the best interest of all that businesses align with climate and societal objectives. This could mean capital reallocation strategies for investors or for treasurers, investing capital in projects that will deliver sustainable returns, ensuring they are resilient to shocks that may come, and avoiding feeding into negative concerns through careful selection of business partners.
The risk of ignoring ESG priorities is becoming clear for the corporate world and, as a result, action is occurring – in supply chain management, for instance (see box opposite). But there remain aspects somewhat out of a treasurer’s control. More than anything, though, as Boye-Moller says: “In Asia Pacific, we need to get to a point, as you see in many more developed markets, where you have a large groundswell of consumer sentiment. People who are demanding, and are prepared to pay more for products that are produced sustainably. That’s where the region is still on a journey and each market is slightly different.” With the economic climate becoming more volatile and risks on the rise, perhaps this is an agenda item businesses in APAC should be looking to take the lead on.
