Sustainability

Squaring the circle

Since Victorian times, a good reputation has been considered an imperative for success in the long term – whether at an individual or corporate level. Modest financial transgressions could land someone in the debtors’ prison. Whilst the personal values of etiquette, decorum and morality were very à la mode more than a century ago to maintain prosperity, one thing has not changed – reputation is everything.

The wrong type of business culture

This is certainly true in the digital age – a good reputation can be decimated instantaneously. For example, think of the impacts of BP’s slow response to the Deepwater Horizon oil spill; the Volkswagen vehicle exhaust emissions scandal; Starbucks’ lack of transparency regarding its position on corporate tax affairs; and Uber not expeditiously addressing concerns about sexual harassment in its workplace – the list is extensive and keeps growing. Why do some organisations and their employees act unethically when it inevitably destroys shareholder value and harms investor confidence and the potential for future financial support? One factor that ties these incidents together is culture, i.e. where there is lax business conduct at the centre of an organisation, this can precipitate the type of behaviours outlined in the examples above and most recently witnessed with the collapse of Carillion. The fact remains, the internet does not forget.

At Luminous, we talk to our clients about how content is once again king, but increasingly we now have conversations about the nexus of purpose, responsible business and sustainability has well and how important they are in the overall communication journey.

Building the business case

Talking about sustainability, it is a concept that is seen by many as a mechanism to bolster an organisation’s reputation – once an organisation has undertaken a materiality assessment of its key impacts and issues, actions taken across the sustainability spectrum can help to address or ameliorate these impact areas and act as a compass to guide the organisation towards being a better corporate entity, helping it to maintain its licence to operate. As Malcolm Preston, a recently retired sustainability and climate change partner at PwC, has said, ‘Sustainability risks are business risks, full stop’. He went on to say that ‘What you don’t want is to be the CEO who fails to identify those particular aspects of the risk and then end up with no employees and no customers’. The move to address wider stakeholder needs beyond just profit is certainly starting to happen, but executive level teams do not always know where to start. When considering publicly quoted organisations, investors care very much about how their investments perform: for example, whether the forecast earnings per share will be met this year is a given. Moreover, they need to be assured that the executive team at the helm are going to maintain a profitable business this year, next year and into the future – there is a contradiction when it comes to expectations about short-term return on capital versus the longer-term horizon of sustainability.

Communicating with your stakeholders

One organisation that has been at the vanguard of getting companies to better understand and disclose their exposure and contribution to climate change is CDP, formerly known as the Carbon Disclosure Project. It has been engaging with the investor community for over a decade with a mission to stimulate the debate between companies and investors with the belief that ‘Improving corporate awareness through measurement and disclosure is essential to the effective management of carbon and climate change risk’. CDP has expanded its work beyond just climate change risk to other natural capital asset classes, notably forests and water. It now helps to oversee a dialogue with over 800 institutional investor signatories with a combined, mammoth, US$100 trillion in assets. CDP’s mission is having the desired effect with around two-thirds of the FTSE 350 disclosing voluntarily their strategies, data and carbon performance.

The investment industry has a track record of pushing the agenda for better disclosure and transparency, which is enlightened self-interest in many respects. It is much easier for an analyst to produce a buy, sell or hold recommendation if there is a clear understanding of the non-financial risks as well as the financial risks of an existing or potential investment opportunity. Steve Waygood, Chief Responsible Investment Officer at Aviva Investors, has explained that the Task Force on Climate-related Financial Disclosures (TCFD) guidance launched in 2017 is rapidly gaining traction and helping companies to ‘manage climate risk and disclose those risks to the market and these are being used more and more by market participants’. Furthermore, as a substantial equity investor, Aviva will take action at a company AGM including voting down a set of accounts if it does not include sufficient explanation regarding climate change risk.

However, as Sir Jonathon Porritt, Founding Director of Forum for the Future (a sustainability think-tank) has said, “Climate change is not the only game in town.” With this in mind, FTSE4Good was one of the first global environmental, social and governance (ESG) indices that launched and has now been around for almost 20 years. It has been instrumental in driving sustainability up the boardroom agenda as organisations have sought to be included in what remains a well-respected responsible business barometer, used across the world’s stock markets, and one of a handful of go-to benchmarks giving fund managers an instant initial understanding of an organisation’s commitment to sustainability and showing that companies merit consideration for investment as a viable creator of long-term shareholder value.

Mainstreaming sustainability thinking within the investment community

An organisation that properly manages its sustainability risks and opportunities is a proxy for good governance and management overall. In September 2018, HSBC commissioned and published a report called ‘Sustainable Financing and ESG Investing’ in which it outlines some key points regarding the growth in size and importance of ESG criteria in fund management. It states that 30% of investable assets globally – over US$20 trillion – include sustainability criteria in their investment analysis. Stakeholder and shareholder pressure rank highly in the investment decision making process, indicative that the ESG market is maturing and sustainable.

In his annual letter to CEOs at the start of 2018, Larry Fink, the Founder, Chairman and Chief Executive Officer of BlackRock, Inc., made headlines around the world as he communicated his ‘New model for corporate governance’ and an organisation’s ‘need to find a purpose’. Boardrooms around the world need to take note, not least because BlackRock is one of the world’s leading asset managers and investors. Sustainability needs to be front and centre and a key contributor to demonstrating leadership, which builds a credible reputation.

It starts and finishes with reputation

The bottom line, to reference an investor’s go-to section of the annual report and accounts, is that sustainability has a key role to play in not only creating, but also sustaining reputation. Whilst we are a long way from the workplaces of the Victorian era with their insufferable pay and conditions, no-one wishes to work for an organisation they do not respect, could not recommend as a good place to work and, increasingly, which does not have a clear purpose beyond just returning dividends to shareholders – it is now not just about how much profit you make, but how that profit is made and why.

If you would like to chat more about how Luminous can help define your sustainability journey, from reporting to employee engagement, please get in touch.

[email protected]

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