The growing importance of Environmental Social and Governance (ESG) for businesses

17 December 2015 06:30 pm Views - 4128

Following is the speech delivered by Standard Chartered Global Head of Sustainability Mark Devadason at the Ceylon Chamber of Commerce Corporate Citizen Awards Annual Dinner in Colombo recently. 

It is a great pleasure to be back in Sri Lanka. Thank you to the chamber for inviting me and to Jim McCabe of Standard Chartered for kindly hosting me.
I congratulate you on hosting this excellent Corporate Citizen Awards 2015 event here at Cinnamon Grand Hotel.

Chambers of Commerce have a very important role to play in business communities around the world. When I was last posted in Thailand I had the pleasure of being the Chairman of the British Chamber, the country’s largest chamber, and appreciate all the hard work that is done and great value delivered to members.
I have had the fortune to enjoy a 30-year career with Standard Chartered Bank covering business roles in corporate banking, risk management, private banking, human resources as well as seven years as a CEO in Japan and then Thailand before taking on the Head of Sustainability role in 2010. 

I speak therefore to you not as an environmentalist leading the sustainability team but as a practical businessman, with a leadership background.

Some of you may have wondered about my surname. I have a complicated family heritage. I have a Malaysian born father of Sri Lankan origin, an English mother, an Australian wife with Irish heritage, a Hong Kong born daughter, a Singapore born son and a dog from Tokyo.

This evening I will share with you a number of emerging trends that I see in the sustainability area that may have direct or indirect impact on your businesses and I will share with you some observations about the opportunities the new Global Goals for Sustainable Development may have for the chamber and its members.

Sustainability is a simple idea that has evolved over the past 100 years as the full impact from companies’ activities has been better appreciated and concerns raised. These concerns were being expressed by observers such as Ambrose Bierce well over a 100 years ago.

Companies have evolved since the industrial revolution from a time with minimal sense of social responsibility, driven by pure profit motivation entirely for the benefit of shareholders and without care for the environmental or social consequences of their operations. 

Industrial pollution, child labour, human rights abuses were all seen in Western corporations a 100 years ago and well into the 20th century.
 
The images of pollution that we see on a daily basis in some of the world’s fastest developing markets are not new. They were prevalent during the industrial revolution in the UK, USA and across the Western world.

In the first quarter of the 20th century some of America’s largest industrialists like Ford and the Rockefeller families, after some fairly public scandals, decided to try to improve public perceptions through making large philanthropic donations. Philanthropy has a role in society but isn’t the full story. Interestingly, the Ford and Rockefeller Foundations today are fabulous sophisticated organisations making huge contributions to social development and promoting progressive ideas on corporate social purpose and good governance.

Increasingly, as we firmly move into this century, companies are expected by society to be fully responsible for the consequences of their actions, which is why the idea of philanthropy has evolved to corporate social responsibility (CSR) and more recently the idea of sustainability.

If you haven’t already read the book or seen the documentary ‘The Corporation’ by Joel Bakan you should do so. It is a fantastically depressing and, at the same time, entertaining description of what motivates and drives corporations. He paints a picture of the concept of corporation by describing its behaviour to a clinical psychologist, who then identifies this behaviour as belonging to a psychopathic personality but in this case one programmed to exploit others for profit.
But Bakan goes on to explain things are changing and “those who now invest expect companies to “deliver the good, not just goods; to pursue values, not just value; and to help make the world a better place.”


Doing good is good business
The whole idea of CSR and sustainability is open to multiple interpretations and as a result, misunderstandings. It needn’t be so complicated. To many, it refers to their environmental sustainability, which is entirely valid, particularly as we move within days of the Climate Change talks in Paris. To some it merely relates to ideas of philanthropy and community investment. These ideas are OK but certainly not the whole story. 

I want to argue today that what is most important is linking ideas on sustainability to your core purpose as a company and I will argue that by focusing on a strategy that aligns with good social purpose you can do well as a business; or as some have said “doing good is good business”.

I said I would share a few thoughts on trends I see that might be relevant to the chamber and its members. I see these trends as:

•     Where the best companies, large or small, are aligning their business strategies around a heightened sense of their social purpose. Social purpose is an idea based on the belief that social change is good for business and business is good for social change. 
•     The emergence of Environmental Social Governance (ESG) processes in banks and corporations that will impact you as a client of a bank or as part of the supply chain of major global corporations and the increased expectation of reporting your ESG processes.
•     The changing idea of stakeholders from those with a direct financial engagement relationship. Increasingly these days, with the expansion of social media, we have to be alert to the expectations of society in general. Look, for example, at the recent scandals with VW and BP; non clients can do huge damage to your brand if you are not meeting the expectations of society and listening to the voice on the street. 
•     Lastly expect to see increasing collaboration around a collective desire to see positive social, environmental and economic change. I will share with you my recent experiences with the UN Global Goals for Sustainable Development and share a few ideas that might be worth looking into as a chamber and as individual companies.

Jim McCabe, the CEO of Standard Chartered Bank in Sri Lanka, will not forgive me if I don’t say a few words of introduction about Standard Chartered. 
The bank is headquartered in the UK with a 162-year history of banking in Asia, Africa and the Middle East. We have a proud 150-plus-year history in Sri Lanka, being one of the largest foreign banks, the third largest credit card issuer and over 500 staff.

Our journey to our present model of sustainability has been long. At Standard Chartered, in 2009, we announced a defining brand promise to be ‘Here for good’ as a central theme for the company and a guiding principal for our staff. Our sustainability agenda falls off that central theme and is very much grounded in the business we do and the way we do business. 

For us it all starts with our primary purpose as a bank to responsibly disburse our balance sheet and services to drive sustainable economic growth. We have adopted publicly disclosed position statements of what we will and won’t bank and we have robust Environmental and Social Risk standards embedded in the bank’s underwriting standards. The other pillars of being responsibly governed and to invest in communities, falls off this core business theme.

Under my leadership of the sustainability function we have been increasingly focusing our community work on our core strengths as bankers and we have been driving an employee volunteering approach to financial literacy training to youth and to start-up entrepreneurs across many of our markets. We have well received programmes of this nature in operation in Sri Lanka.


Social purpose 
Let me now make a few observations on social purpose.
I had a fascinating few days in San Francisco a few weeks ago. I am on the board of an NGO called Business for Social Responsibility (BSR) and at their annual conference was listening to a number of CEOs talking of their increasingly focused approach to driving their business with a clear sense of social purpose.

I am talking about companies with a clear social purpose integrated in their business model. Tom Linebarger of Cummins Engines - the world’s largest privately owned diesel engine manufacturer - said that “investors yawn at idea of sustainability but if you can turn the sustainability approach into long-term value creation then investors start taking you seriously”. 

What is then is social purpose? What is a company with social purpose? There are numerous definitions and in reality it totally depends on the nature of your business. For example, Caroline Roan, Pfizer’s Vice President of Corporate Responsibility, defines, “the social purpose of Pfizer is to discover and develop new and innovative medicines that prevent and treat disease, allowing individuals to live longer and healthier at every stage of life”.

The social purpose of a business should embody the purpose of its leadership and its leadership should direct the social purpose of the business. You see this clearly embodied in the way Paul Polman has changed the way Unilever is managed, focused and strategically developed.

The social purpose of a business is based on the idea that social change is good for business and business is good for social change. The two are inexorably linked. The social purpose of business is relevant to firms of all sizes… indeed it is publicly recognized, the genuine struggle of visionary leaders like Paul Polman to persuade Boards and management to refocus their strategies along the lines of social purpose. 

For many of you in this audience that challenge may be somewhat easier. Many of you own your companies which can reflect your culture and your concerns. Most importantly the social purpose of a company must be fully integrated, making it virtually impossible to separate from everything the business does to make money.

What then might be the advantages of leading a company with social purpose aligned to its business strategy?

•      The first reason is increasing evidence it is better for business performance. Based on 10 years of empirical research involving 50,000 brands, Jim Stengel developed a list of the world’s 50 fastest growing brands which built the deepest relationships with customers through a clear integrated social purpose. The study, establishes a cause and effect relationship between a brand’s ability to serve a higher purpose and its financial performance. Notably, investment in these companies – the Stengel 50 – over the past decade would have been 380 percent more profitable than an investment in the S&P 500.
•     Secondly it is increasingly important for attracting and retaining talent. Talent and particularly the millennial generation is looking for companies with social purpose. Robert Reich, the Labour Secretary under President Clinton, and prolific book writer, said last month in San Francisco that companies must work harder to find ways to do well by doing good and young people want to be associated with those companies.
•     Thirdly it is likely to start costing more not to integrate business with clear social purpose. Insurance companies are now thinking of differentiating with lower insurance premiums for companies with embedded genuine sustainability agendas because they are learning these are better managed companies with longer-term horizons and lower volatilities. In the same way that if you don’t smoke you probably think that health insurance should cost more for people that do. Last week in San Francisco the CEO of AXA, Henri de Castries, spoke of his decision to price up insurance premiums for company clients with poor social purpose stories and on the asset side of their balance sheet to divest itself of industries identified as damaging the planet such as fossil fuel companies.
•     Fourthly there is increasing evidence that companies with clear social purpose get more business. We live in a social world and opinions about brands can change rapidly and amongst people who are not our traditional stakeholders. There are many studies from companies like Edelman who have presented clear evidence that consumers, when quality and price are matched, will see social purpose of a brand is the most important factor to buying that product. 

Walmart recent found that all things being equal consumers will select an identical product made by a declared women-owned and managed company in 90 percent of occasions and as such have started a US $ 20 billion programme for sourcing products from women-owned and managed businesses.


ESG processes 
I now want to talk about the emerging trend of embedding Environmental Social and Governance - or ESG processes, in business
A few observations:

•     In HK, to be listed, you now need to make ESG reports available to your investors.
•    A positive trend now in financial reporting is to integrate ESG and sustainability language in the annual report and accounts.
• n    Banks like Standard Chartered have robust ESG processes embedded in our business processes that govern what we will and won’t do in contentious industries and in sectors that might impact reputation. I would advocate that to make real change bankers’ associations and regulators need to insist on these processes.
•     You will see banks increasingly talking about these issues to their clients. We won’t, for example, bank fishing companies that operate in the sharks fin sector and we won’t bank non RSPO certified palm oil producers. 
•     You will also be increasingly seeing large corporations at the top of the supply chain asking tough questions on human rights, child labour, women in the workplace issues, and environmental approaches… their shareholders are demanding that they are taking responsibility for what happens all the way through the supply chain.

Turning now to the recent transition from the Millennium Development Goals (MDGs) which were launched in the year 2000 to the recently ratified Global Goals for Sustainable Development, which are sometimes referred to as the SDGs. 

These eight MDGs where designed to address some of the most pressing challenges facing societies across the planet and are largely assessed to have been a very successful set of initiatives. 

It is clear that much has been achieved but clearly more has to be done which neatly brings us to the announcement in September this year to set in motion plans to finish the work started 15 long years ago.

These 17 new Global Goals have like many things attracted criticism which I feel is missing the point. Leaders like Prime Minister Cameron of the UK had been pushing to have the list reduced to 10. OK for a simpler graphic I guess but what would you reasonably drop? Would you leave out peace and justice for example? What about dropping gender equality? I hope not.

These goals were developed as a collaboration of over 150 nations with varying agendas and priorities. In terms of the complexity of issue facing the planet it seems not unreasonably long. What is happening is that countries and companies are making choices and prioritizing what matters to them. This time more emphasis has been put on Goal 17, which is for governments, the private sector and civil society to collaborate to achieve the goals.

I am pleased to see how the Sri Lanka government has not only embraced the Global Goals in New York in September but has specifically talked about what they will focus on over the next 15 years. They are also leading the way amongst governments by planning to legislate action to promote the goals.

In New York in September, the Sri Lankan government reiterated that “sustainable development encapsulates the equilibrium between social and economic development and environment protection”. In Sri Lanka’s case the priorities have been clearly described as working towards the provision of basic needs of the people, progressive alleviation of poverty, elimination of all forms of discrimination and inequalities and establishing a society based on social justice and human security”. 

Special attention is focused on poverty alleviation (SDG 01), achieving food security (SDG 02), energy (SDG 7), education (SDG 04), minimising income disparity (SDG 10) and urban development (SDG 11). 


Gender equality 
Just to be a little contentious as I bring this talk towards a close I want to highlight Goal 5 on equality and specifically gender equality. I can already see a number of the women in the audience smiling at what I am about to say.

As this is already a declared national agenda item what might the chamber and its members do to lead the way in reducing inequality and advancing equal opportunity in the work place? I did some research before this talk and noticed that Sri Lanka has 33.7 percent women working in the labour force, but when it comes to senior management twice as many men are in senior roles and less than one percent of women are represented on boards. I also know that women are probably the least represented in Sri Lankan politics globally but I know work is in play with the government to start addressing that issue.

Our ex-Chairman, Lord Mervyn Davis, is leading the charge on advocating for women on boards in the UK with huge momentum building there and other countries.


Why is this important? 
Credit Suisse in a report published in 2012 called “Women on the Board Contribute to Outperformance” found that, in a like-for-like comparison, companies with at least one woman on the board would have outperformed stocks with no women on the board by 26 percent over the course of the last six years.

This issue is going to be a huge area of scrutiny and attention in the coming years. Gender diversity is being monitored and in addition to the simple concept of adding materially to the national talent pool there are other factors identified such as women can help balance out collective risk-taking cultures by all male boards and have been observed to lower risk appetite in recessionary and stressed economic periods.

It is also clearly the right thing to do with huge evidence of benefits of greater economic and political participation by an often ignored half of your population.
I thought I might leave you with a few final thoughts to consider:

•    As a chamber, are there any collaborative initiatives you might initiate to support Goal 17 and reach out to civil society and the public sector to collectively advance some of these goals? 
•    How might you consider as individual companies and as a chamber how to align to each of the goals? Your staff, investors and stakeholders and possibly some of your teenage children might be asking soon. For your information, Standard Chartered has already completed a risk mapping exercise against each of the goals and intends to look at progress against the goals on an annual basis.
•    Lastly I thought to mention that Standard Chartered was very proud to be a founding sponsor of a project called #TellEveryone. It was a collaboration led by movie producer Richard Curtis and funded by a few likeminded companies such as Unilever and Standard Chartered, in association with the UN to share the new SDGs with seven billion people over seven days using social media, the world’s largest lesson, the world’s largest prayer, concerts, radio and cinema broadcasts. I can confirm that we didn’t meet our target of reaching seven billion people but the latest update is that we reached an amazing 3.5 billion people…an incredible example of reaching for the sun and getting to the moon.

It has been a pleasure speaking with you all and thank you again to the chamber for inviting me back to this wonderful country.