Sustainability’s stumbling blocks
Sam Lakha
November 29, 2010
Interesting piece in the FT outlining the ‘missing link’ between sustainability practices in big business and the investment world: ”Odd really, given that the people they invest for are the same customers shaping the demands of retailers”.
The article highlights the recent work done by SustainAbility which looks at various non-financial rating schemes that have appeared relating to carbon footprints and water use and the like, “but it is not clear how useful these are to investors, or anyone else”.
See SustainAbility’s Rate the Raters report here
Read full FT article below.
Published: November 28 2010 08:06
There is much talk of sustainability among the corporate community, but whatever action company directors decide to take on this front is rarely driven by shareholder pressure.
This much was evident from the presentation of Unilever’s sustainable living plan earlier this month. Paul Polman, chief executive, announced three goals the company aims to achieve: to halve the environmental footprint of its products; source 100 per cent of its agricultural products sustainably; and help 1bn people improve their health and wellbeing.
But in discussing how this would be achieved, there was no mention of financial issues, as FT columnist Michael Skapinker also observed (“Corporate plans may be lost in translation”, November 22).
When asked how he would sell the plan to investors, Mr Polman more or less dismissed this as irrelevant. Consumers and retailers want this type of initiative, and the planet needs it, he said. He was not interested in whether this became a competitive advantage; it was just “the right way to do business”. He acknowledged the need to “do a good job of attracting the right investors”, but was clear these were long-term investors prepared to look beyond the latest earnings announcements.
Mr Polman’s attitude does not surprise the investment community. He is habitually intolerant of investors with a short-term focus, and has been known to evict hedge fund analysts from presentations, I am told by one fund manager.
This particular manager is more interested in Unilever’s competitive position now than its long-term goals, though, revealing he had sold his position on a view that the company was losing out to competitors in key emerging markets.
Given the pressures on fund managers to outperform, it is no surprise he made this decision. But it confirms Mr Polman’s view that he should not look for universal support from investors in taking this step.
Most chief executives report a lack of interest in sustainability activities from investors and analysts, according to a survey of 766 CEOs by Accenture for the 2010 United Nations Global Compact. Only 12 per cent cite pressure from investors as being a factor in driving them to take action on sustainability issues. By comparison, 72 per cent cite brand, trust and reputation.
One European business leader told Accenture: “The real pressure, which isn’t there at all, is investor pressure.”
This is somewhat surprising given the 213 asset owners and 465 investment managers that have signed up to the United Nations Principles for Responsible Investment. Perhaps investors are about to make their presence felt, but that is not what CEOs anticipate, with only 22 per cent identifying investors as one of their most influential stakeholders over the next five years.
Most believed that even if sustainability performance was measured at the corporate level, investors would not make use of the information in valuation models.
Clearly, there are difficulties in assessing companies on the basis of their environmental, social and governance performance. The drive to integrated reporting, discussed on page 12 (“Putting people, planet and profit into the annual report”) may help, but in the meantime, says Richard Stathers, head of responsible investment at Schroders, incorporating sustainability factors into current valuation models is a challenge.
More effort is needed on both sides. The Accenture report said businesses needed to “track the impact of sustainability on core metrics and become more proactive in shaping the attitudes and mindsets of investors”.
There are plenty of ratings on the non-financial performance of companies, relating to carbon footprints, water use and so on. But it is not clear how useful these are to investors, or anyone else. Recent work by SustainAbility, a consultancy, concluded there were too many rating schemes measuring similar things in different ways; that many ratings did not properly consider the context of certain companies, industries and issues; paid insufficient attention to the economic factors; and “fail to truly reflect how companies are positioned to contribute to a sustainable future”.
Maybe in the end investors will just get pulled along in the wake of events. Walmart woke up to the issues posed by climate change when it lost over 100 stores in Hurricane Katrina, says John Elkington, chairman of Volans. Mr Polman is responding partly to pressure from retailers like Walmart, which are increasingly acting as market gatekeepers, he adds.
It looks for now as if companies will be driven more by these factors than by investors. Odd really, given that the people they invest for are the same customers shaping the demands of retailers.
By Pauline Skypala
