Advice: Sustaining an interest in ESG matters
Q. How much thought should IROs be giving to environmental, social and governance (ESG) issues?
A. In just over a decade, the issue of sustainability has moved from philanthropy to risk mitigation to growth strategy.
Firms like Walmart are making the business case for sustainability with a strategic approach to managing ESG issues. This has increased efficiency through packaging and energy savings and revenue growth from new products, while lowering supply chain risks and improving reputation.
ESG is going mainstream. Bloomberg terminals now provide accessible tools for analyzing company and sector ESG data alongside financials, and Goldman Sachs has launched its GS Sustain research. While socially responsible investing does not outperform on its own, strong ESG performance scores are a good indicator of the best-managed firms and can be used to identify businesses set to deliver industry-leading returns.
In early 2010 the SEC issued guidelines requiring firms to disclose climate risks, and the International Integrated Reporting Committee (IIRC) was formed with FASB and IASB participation to develop a globally accepted accounting framework for sustainability.
Several companies have developed frameworks to assess the materiality of sustainability issues to their long-term company strategy. For example, Shell’s ‘Energy scenarios to 2050’ details two alternative timelines of industry developments from 2015 to 2050 showing the best and worst case scenarios for the company.
In some IR presentations, Shell chief executive Peter Voser also discusses strategic and financial fundamentals over a nearer-term horizon alongside ESG performance, including growth of renewable energy sources and metrics relating to safety, oil spills and human rights.
At PepsiCo’s 2010 investor day, CEO Indra Nooyi explained the firm’s ‘Performance with purpose’ business strategy, which included plans for reducing sugar, sodium and fat content in response to changing consumer and government attitudes about health.
Coca-Cola presents sustainability as a way to create competitive advances and manage risk. After protests over water usage disrupted its operations in India, Coca-Cola has made global leadership in sustainable water use a strategic priority. IR presentations describe the company’s sustainability agenda as a way to create competitive advantages and its 2012 target to improve water efficiency by 20 percent.
Finally, bear in mind that sustainability issues also create opportunities for innovation: Procter & Gamble is aiming to generate $50 bn in green product sales by 2012, while Philips has just reached its target of 30 percent green product sales – three years ahead of schedule.
Jeff Zelkowitz is a senior vice president at APCO Worldwide.