Sustainability – A Hot Item on Board AgendasShare
Sustainability – A Hot Item on Board Agendas
Today, over 3.9 billion or 54% of the world’s population live in urban areas. By 2050, urban population will grow exponentially to some 6.4 billion, or 66% of the world’s population1.
This rapid population increase and urbanisation has certainly put a strain on natural resources. Human activities have driven global temperatures to a new peak, with 2015 officially being the hottest year on record. This alarming rate of change in our environment, coupled with an exploding population growth, can lead to widespread catastrophe if not managed swiftly and effectively.
The unprecedented COP21 Paris agreement is evident of the urgent need towards sustainable development, with 195 countries pledging their commitment to the climate action pact. Many nations have submitted their Intended Nationally Determined Contributions, including Singapore which stated its intent to reduce its Emissions Intensity by 36% from 2005 levels by 2030, and stabilise its emissions with the aim of peaking around 2030.
Against this backdrop, the business landscape is fast changing. Sustainability, long-considered a "good-to-have", is scaling the agenda in boardrooms.
There have been many recent major developments in the sustainability arena with strong impact on businesses. In the wake of the 2007-2008 global financial crisis, there was growing recognition that the financial system must not only be sound and stable, but also sustainable. In January 2014, the United Nations Environment Programme launched an inquiry into policy options for guiding the global financial system to invest in the transition to a low-carbon, green economy.
At the end of 2015, the Financial Stability Board announced the establishment of an industry-led Task Force on Climate-related Financial Disclosures. Led by Michael Bloomberg, the Task Force will develop voluntary, consistent climate-related financial disclosures for companies to provide information to lenders, insurers, investors and other stakeholders.
Sustainable investments have also grown over the years. The United Nations-supported Principles for Responsible Investments’ (PRI) signatories grew from 800 in 2010 to nearly 1,400 in 2016. Assets under management by PRI’s signatories also increased from US$22 trillion to US$59 trillion.
More stock exchanges are mandating sustainability disclosures. Within the region, stock exchanges in Malaysia, Indonesia, Thailand, South Korea, Hong Kong and Taiwan have also required listed companies to report on Corporate Social Responsibility (CSR) or Environmental, Social and Governance (ESG) disclosures.
PROPOSED SET OF GUIDELINES
In January, Singapore Exchange released a proposed set of sustainability reporting guidelines. The new ‘comply or explain’ approach and the reporting guidelines are expected to apply to companies from the financial year ending on or after 31 December 2017, with reports published from 2018. Under the guidelines, responsibility is placed on the board to consider sustainability issues as part of its strategic formula and the board is required to sign off the sustainability report. In a way, the board is expected to have a good understanding of the company’s sustainability practices and to ensure that strategies and performance are communicated clearly.
Indeed, growing attention has been paid to the accountability of board members on ESG issues. To evaluate quality of management, many investors examine not only ESG performance and the quality of disclosures, but also the governance or management of these issues by executive teams. A recent study Tomorrow’s Investment Rules 2.0 by Ernst and Young showed that 80% of 200 institutional investors surveyed, consider mandatory board oversight of a company’s non-financial reporting as either essential or important; a drastic increase from 36% in 2014.
Addressing the rapidly growing interest in sustainable investments worldwide, investors require effective tools to assess and compare ESG attributes of various funds, and how successfully the companies in their funds manage their ESG risks and opportunities. In early March, Morningstar, Inc., a global fund research house, introduced the industry’s first sustainability rating for more than 20,000 funds. That same month, global index firm MSCI, expanded its MSCI ESG Research coverage to include some 21,000 funds globally, in response to increased client demand.
Apart from investment funds, other financial institutions could also play a key role in achieving a low carbon and climate-resilient world. The finance sector has the power to steer capital towards sustainable development and influence businesses through responsible lending and green financing.
In Q3 2015, companies faced mounting pressure from the prolonged haze situation in Singapore. Paper products sourced from a supplier, found associated with peatland burning, were pulled off the shelves. Banks were put under the spotlight with the Association of Banks in Singapore’s announcement of its responsible financing guidelines, which encouraged banks to be mindful when lending to firms that might disregard environmental and corporate governance standards.
Increasingly, consumers in developed regions and of younger age groups consider sustainability more of an imperative than a value-add. According to the 2015 Nielsen Global Corporate Sustainability Report, which polled 30,000 consumers in 60 countries, 66% of respondents said that they were willing to pay more for sustainable brands, an increase of 55% from 2014. In a year, millennials’ willingness to pay extra for sustainable offerings grew significantly from 50% to 73%.
Brand trust topped the list of sustainability factors that influence purchasing for 62% of consumers globally. This indicates an opportunity for highly trusted brands to outperform those who ignore sustainability. Simply put, brands that have not embraced sustainability are at risk on many fronts including attracting talent, investors, community partners, and importantly, consumers, particularly millennials with high spending power.
There is no lack of successful cases on integrating sustainability into business practices. In 1994, the late Ray C. Anderson, former Interface Founder and Chairman, shifted the company’s strategy to include a focus on sustainability without sacrificing its business goals. Since then, Interface has grown into a billion-dollar corporation, named by Fortune as one of the "Most Admired Companies in America" and the "100 Best Companies to Work For."
Unilever is another successful case. CEO Paul Polman radically transformed the company’s business approach, driven by a bold pledge to halve the company’s environmental footprint by 2020. Unilever has already achieved zero waste across its global factory network; saved a million tonnes of CO2 savings since 2008; and is committed to using 100% renewable energy in future.
In Singapore, the late Deputy Chairman of City Developments Limited (CDL), Kwek Leng Joo, was regarded a visionary in sustainability who drove change in Singapore’s built environment. As far back as 1995, when the sector was widely perceived to be destroying before constructing, he established CDL’s ethos to "conserve as it constructs".
Defying norms, CDL made a transformational change in its business and operations by integrating CSR and sustainability. This has helped CDL to innovate, mitigate risks, improve performance, reduce capital cost and engage suppliers to adopt responsible practices. Conferred the BCA Green Mark Champion and Built Environment Leadership (Platinum) awards in the early 2000s, CDL has helped place Singapore on the global map of sustainability. It is ranked top real estate company in the Global 100 Most Sustainable Corporations in the World in 2016.
In today’s business environment, forward-looking directors and CEOs must recognise the strategic importance of sustainability and turn it into growth opportunities.
As Grant Kelley, CEO of CDL puts it, "I foresee that in five years’ time, businesses will be held accountable for their carbon footprint. In the long-run, good ESG performance will not only enhance a company’s reputation, but also help companies in risk mitigation and cost management, creating greater value for sales, operational performance and share price – ultimately contributing to the bottom line and long-term growth of the business."
Moving forward, businesses that are committed to embracing sustainability and responsible practices will have a strong licence to operate and gain the support of consumers and investors. This is the formula for lasting growth of a business, making sustainability a "must-have" item on board agendas.
1 United Nations’ 2014 World Urbanisation Prospects.
(First published in The Business Times’ "Sustainability and Going Green" supplement on 31 March 2016.)