Sustainability is key concern for investors

Moving sustainability up the agenda is a key success factor for today’s companies and board members must now get up to speed on the issue. And pressure to do so is increasingly coming from the investor community.

“Investors are the first ones to say that companies need board members with these skills,” says Prof Andreas Hoepner of University College Dublin’s School of Business. “They’ve been saying it for the past 10 years. Investors engaged in ESG [environmental, social and governance] investing have been pushing companies to have board members that drive the sustainability agenda. We have studies that can show that engagement with sustainability does drive down risk for companies.”

Hoepner has posted a research paper called ESG Shareholder Engagement and Downside Risk on the Harvard Law School forum on corporate governance. The study looks at at how institutional investors actively engage with their portfolio firms to reduce ESG risk exposures and, as an example, looks at one institutional investor with more than $1 trillion in assets under management. The analysis provides evidence that the institutional investors’ successful ESG engagements with companies led to significant subsequent reductions in those firms’ downside risks.

Mike Hayes, global renewables and decarbonisation leader at KPMG, agrees that investors are driving this agenda. He points to a recent development where a coalition of investors overseeing $9 trillion in assets wrote to more than 30 of Europe's largest companies, including Anglo American, BMW, EDF Energy and Lufthansa, urging them to include climate-change risks in their financial statements.

Investor

The investor group, which included JP Morgan Asset Management, Fidelity International and M&G Investments, called on the companies to ensure their financial statements reflect the implications of the Paris agreement citing concerns that corporate accounts have become disconnected from businesses’ public statements on climate change with many groups setting out plans to cut their carbon emissions but not reflecting this position in their financial outlook.

“The bottom line is that there is no vaccine for climate change,” says Hayes. “I compare the climate agenda to World War II which had to be fought on land, sea and in the air. The three big battlegrounds for climate change are governments, companies and individuals. Sustainability continues to be very important. People talk about ESG and the social aspect of it has come to the fore. Companies ignore that at their peril. But the big issue is climate and investors are very interested in it. Climate risk is financial risk and investors are kicking up about it big time.”

And they will continue to do so. “Hopefully, we will have a vaccine available for Covid-19 before very long but if you think Covid-19 is bad, you ain’t seen nothing yet with climate change,” Hayes says. “Not enough people have noticed yet how much the dial has moved in the investor’s mindset. The big-beast risk is climate change. At the heart of all of this is climate risk which is two things: physical risk and transition risk. Every company in the world has to start thinking about these things.”

He says physical risk is the one that everyone can understand – the risk of being affected by forest fires or assets being destroyed by typhoons. “Transition risk is not at all as well understood,” Hayes says. “Because of all the different things that start happening because of climate change consumers will change preferences, they may eat less meat and they may fly less. Regulation is going to come in relation to climate in so many different ways. There will be supply chain pressures which are difficult to understand. Big companies are saying it’s not enough for them to be zero carbon in their own operations, their suppliers will have to be as well. Employees are also driving action. Whatever business model you have will be impacted. Your job as a chief executive or a non-executive director is to understand the impact of climate risk. If a company director is not thinking about that, investors will want to know why not.”

Climate change

One company where the directors are clearly thinking about climate change is Lidl Ireland. "We've been in Ireland for 20 years and we now have 167 stores in the Republic of Ireland and 40 in Northern Ireland," says Owen Keogh, head of corporate social responsibility (CSR). "Sustainability and CSR have become ever more important parts of the business over that time. Our comprehensive target-led sustainability strategy, 'A Better Tomorrow', illustrates our awareness of our societal role, responsibility and potential to make a real difference."

The company has established a clear structure with defined roles and responsibilities to ensure it achieves measurable impact in these key areas. “At Lidl we have strong buy-in from our executive team with each member of the board of directors having a dedicated representative to manage CSR topics in their area as well as report and develop their commitments with our CSR department annually,” says Keogh.

This buy-in at the very top ensures policies get translated to action on the ground. “For example, the director of property and central services will look after solar panel installations and EV [electric vehicle] charging point installations at our properties. We are the largest owners of solar-panel arrays in the country at the moment as a result of that. Similarly, our aim of zero waste to landfill is led by the logistics team. We focus on where we can make the most gains.

“The community is the area where we can have greatest impact and each of our four regions has a local CSR representative who manages all the localised community and charity programmes. That cascades down to store level with each one having local ambassadors for different CSR initiatives.”

And pressure on boards from investors is only likely to increase. “Hedge-fund manager Sir Chris Hohn wrote to asset managers earlier in the year asking them to put pressure on firms to speed up action on climate change,” says Hayes.

And what Hohn told them was telling: “Investing in a company that doesn’t disclose its pollution is like investing in a company that doesn’t disclose its balance sheet. If governments won’t force disclosure, then investors can force it themselves.”