Governance in the Environmental Social and Governance Era

Thursday, February 25th, 2016
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Environmental Social and Governance Era
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When he banged the gavel and confirmed a new climate change pact in December, French Foreign Minister Laurent Fabius signalled a new era.

With the climate change negotiations in Paris over, and a new international accord set to transform the world’s fossil fuel-driven economy and slow the pace of warming, the business community must now act.

Sustainability is no longer about compliance and corporate image. It’s about creating enduring value and managing risk.

Investors with a long-term view – banks, superannuation funds and governments to name a few – are analysing their investments against factors such as climate change, resource depletion, ecosystem destruction and human exploitation.

When viewed through the lens of Environmental Social and Governance (ESG) – that catch-all term for responsible investing – entire industries that are reliant on fossil fuels, are wasteful or exploitative become less attractive propositions.

“Good boards have realised climate change is an issue they can no longer ignore. They must address it – and they must get ahead of the game,” said chairman of Nestlé Australia, Elizabeth Proust.

Proust, who has held leadership roles in the private and public sectors in Australia for more than three decades, chairs Nestle’s Creating Shared Value Roundtable. She will be joining a panel of directors – including the Australian Institute of Company Director’s chief John Brogden – at the Green Cities 2016 conference in March.

She agrees that ESG is beginning to change the way shareholders think about their investments, but notes that we’re only at the beginning of a long journey.

“In the past, superannuation funds and others were more focused on the financials. But in the last year especially the focus has shifted to ESG issues such as diversity on boards and ethical investing,” she said.

Proust, who just recently stepped down from her role as a director of Perpetual Ltd after almost 10 years on the board, says the diversified financial services group ramped up its focus on ESG after its reporting was found lacking.

“We were doing a lot of things in this space, but we weren’t bringing it to everyone’s attention,” she said. “We started reporting on ESG not because the initiatives were new, but because we knew we had to bring everything together in one place.”

Proust believes this conversation has occurred around many board tables.

“Increasingly, investors are sophisticated, and they are looking beyond the returns to how the companies are operating,” she said.

The concept of shared value was first raised by Michael Porter and Mark Kramer in a 2011 article in the Harvard Business Review. They suggested that a new world order was emerging – one in which companies needed to recalibrate their purpose to pursue shared value instead of simply financial value.

Creating shared value differs from corporate social responsibility, although they are both grounded in the same motivation of “doing well by doing good.” One is about obligation while the other is about opportunity.

Companies can create shared value in three ways: by reconceiving products and markets, by redefining productivity along the value chain, or by creating supportive industry clusters.

“At its most basic, it’s about the ‘small L’ license to operate. In a country like Australia, companies have the ‘large L’ licenses – mining licenses, planning approvals and the like – but you also need a social license to operate,” Proust explained.

This will be different for each company. Nestlé, for example, has been tackling issues of water consumption, rural development and climate change for many years. One of Nestlé’s brands is Uncle Toby’s, which sources its oats for farms within a tight radius of Victoria’s Wahgunyah.

“By sourcing the oats from this district, it lowers our transport costs, but also creates employment for people in the region. And it’s more sustainable than importing oats from overseas,” Proust said.

At the Nestlé factory at Smithtown on New South Wales’ mid-north coast, a $40 million investment has recently brought production of Nescafe’s café menu permanently to the region. The investment has created almost 25 full time jobs.

“Nestlé is not only one of the biggest employers in the area, but has also been in Smithtown for more than 90 years. The employees at the factory are absolutely committed to sustainability – from waste and emission management on the factory floor, to business sustainability that ensures profitability and secures jobs, to the long-term environmental sustainability of the entire community,” Proust explained.

On a global level, the company has redesigned its coffee procurement processes by working with small farmers in impoverished regions to reduce water consumption and improve farming practices. The result? More productive farms, higher quality beans and shared value.

“For Nestlé, sustainability is a key part of creating shared value,” Proust noted.

In the built environment industry, Grocon is creating shared value with its pledge that every residential project it sells will contribute to the Homes 4 Homes program. This financial model encourages home owners to donate 0.1 per cent of their sale price to a fund – with a home that sells for $500,000 equating to a small $500 tax deductible donation. The fund then invests in residential projects across the county.

Global carpet manufacturer Interface’s Net-Works program also creates shared value by encouraging residents of fishing villages in Sri Lanka to collect the discarded nets which damage the marine ecosystem. These broken nets are sold back into the supply chain, and get a second life as carpet tiles, while addressing an environmental problem and creating employment opportunities.

Proust says a lot of ESG principles are founded on good business practices.

“If you reduce your waste and emissions, then you’ve got a competitive advantage regardless,” she noted. “The world is changing. Companies that ignore this will be overtaken by others that understand that they have an obligation – and an opportunity to do things better.”

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