Tuesday, 3 July 2018

Sustainability makes business sense

Speakers at a Sydney event held by HSBC and the German-Australian Chamber of Industry and Commerce said that more companies are recognising the importance of being sustainable and that profit and purpose must go hand in hand.

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More businesses are seeing sustainability as a key area of strategic focus, according to Hamish Kelly, Head of Global Banking at HSBC Australia. In fact, according to an HSBC survey, almost two-thirds of the mid-sized Australian companies believe sustainable practices can support growth plans and increase profitability.1

Many companies are realising the commercial benefits of being more socially responsible and environmentally friendly. The Dow Chemical Company, for example, has shown that a commitment to sustainability can deliver financial gains. According to Taimor Hazou, Dow’s Leader of Public and Government Affairs, the company saved US$5 billion across safety, waste, water and energy management measures after investing US$1 billion to meet its 2005 sustainability goals.

Launched in 1995, Dow’s sustainability program has evolved from a focus on operational efficiency to developing products that help solve global challenges. Now in the third stage of its 30-year sustainability journey, Dow works with a wide range of partners to improve its environmental and societal impact.

From our experience in the previous stages of the program, we realised that the best solutions come from those partnerships. They don’t come just from us. They come from collaboration.

Taimor Hazou, Leader of Public and Government Affairs, The Dow Chemical Company

Dow will invest in innovations to increase the positive net impact of products across all markets in which it operates. The objective is to ensure that the benefit to global sustainable development exceeds burdens by six times. It also aims to positively impact the lives of a billion people, via its employees. To achieve this, every unit of the company is required to drive change and set its own key performance indicators.

Committing to change

HSBC has also demonstrated the value of committing to sustainability. The bank has supported clients in their transition to a low-carbon economy, and regularly finances climate and environmental projects. It has also set up a Centre of Sustainable Finance to provide thought leadership in how to unlock the capital flows needed to address major sustainability challenges.

Internally, HSBC has been improving its own operations and transparency.

Our commitments include sourcing 100 per cent of our electricity from renewable resources by 2030, and significantly reducing our exposure to thermal coal.

Hamish Kelly, Head of Global Banking at HSBC Australia

Achieving growth in the ‘green economy’

Andrew Petersen, CEO of Sustainable Business Australia, considers that business profit and purpose are starting to converge, and that there could be a ‘generational change’ underway.

He says the ‘green economy’ is now as big as the fossil fuel economy. A recent FTSE Russell report shows that the green economy now represents 6 per cent – or around US$4 trillion – of the world’s business sector, based on the market value of listed companies.2

That to me is a tipping point in relation to the market paying attention to future growth and not looking at sustainability as a noble enterprise or purpose – but as a place to make money because fossil fuel is increasingly not the place to make future returns.

Andrew Petersen, CEO of Sustainable Business Australia

Responding to demand for sustainable products

As customers demand sustainable products, companies must respond. Dow, for example, understands that customers want safer and more efficient chemicals, and has improved its products and processes accordingly. According to Hazou, the company’s collaboration with partners has also driven it to seek better solutions to global challenges.

An example of this is a long-term partnership with The Nature Conservancy which has resulted in screening tools as part of Dow’s Global Project Management process; such as the ESII (Ecosystem Services Identification and Inventory) Tool to help business managers and engineers at Dow measure the value of nature in decision making.

By combining resources and expertise, the Dow-TNC relationship, is helping integrate the value of nature into Dow’s business decision-making. The results from these collaborations are peer-reviewed and published for the benefit of other companies as well as the scientific and economic communities.

Petersen expects Millennials – those born after 1980 – will drive change in the way companies do business. He says that Deloitte research shows that these customers no longer believe that the main purpose of business should be to make a profit – it should be to create social value.3 Millennials see the 21st corporation as one which sets out to achieve a balanced set of objectives, including making a positive impact on society and the environment.4

Listening to your shareholders

Shareholders are also demanding that businesses track and report their positive and negative impacts on the environment and society, says Petersen. Major investors have started encouraging companies to improve their climate risk reporting by following the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

The TCFD, established by the Financial Stability Board, aims to increase climate transparency in financial markets by recommending voluntary climate-related disclosures to companies. As of March 2018, 252 companies have supported its recommendations.5 BlackRock even sent letters to 120 companies it invests in recently, urging them to align their climate risk reporting with the TCFD recommendations. Moves like this – coming from the world’s largest asset manager – are expected to press more companies to pay attention to such risks.

In Australia, the proposal to update the Australian Securities Exchange’s Corporate Governance Principles and Recommendations may encourage companies to better disclose and manage environmental risks. A draft of the revised Principles and Recommendations proposes changes to sustainability disclosures, including a suggestion that listed companies with material exposure to climate change risk should implement the TCFD recommendations.

Pursuing sustainability for better business

Businesses should pursue sustainability as part of their overall business strategy.

Sustainability, including climate risks and opportunities, will impact the future environment in which business operates.

Dr Graham Sinden, EY’s Director of Climate Change and Sustainability Services

Solar energy costs, for example, are forecast to drop a further 66 per cent by 2040, and onshore wind costs are expected to fall by up to 47 per cent.6 "Businesses will need to respond to these risks and opportunities, adjusting their strategy and investing accordingly," says Sinden.

Sinden believes that practising sustainability in business creates value; however, this value may not be immediately apparent if the valuation method doesn’t recognise it. “Having methods that recognise the impact of addressing sustainability issues ensures the value of these actions is visible,” he says.

The results of sustainable business practices often don’t get reported in the form of risk-weighted returns, for example. "Given the way decision making is often carried out, there’s often a gap between the sustainability-related decisions and the way we measure and report performance," says Sinden. To help close this gap, his team at EY works with companies to measure the effectiveness of the strategies they use to address climate change risk and opportunity.

Setting long-term goals

Petersen believes key performance indices are showing that sustainable businesses are successful businesses.7 Leading businesses have long been engaged in efforts to integrate sustainability at the core of corporate strategy, decision-making and governance. Sustainable Business Australia has identified three steps for Australian companies to do this: set an ambition, be authentic and ensure accountability.

Engaging stakeholders – including employees – in the push for sustainability also requires a long-term goal. "You can’t have a short-term goal of three or five years. It has to be an ambitious 10-year goal," says Hazou.

HSBC’s sustainable financing commitments

HSBC has committed to provide US$100 billion in sustainable finance and investment across the world by 2025. This financing will enable HSBC’s clients to transition to a low-carbon economy while mitigating and adapting to the impact of extreme climate change.

The bank is also financing climate and environmental projects. "By providing the finance to develop such projects, HSBC is playing an important role in shaping the fast-developing green bond market and the newly launched green loan market," says Hamish Kelly, Head of Global Banking at HSBC Australia.

Green bonds are used to fund projects that have a positive environmental impact, such as sustainable agriculture and fisheries. Green loans are similarly designed to provide finance to businesses to help them achieve environmentally-friendly outcomes.

HSBC has recently completed Australia’s first green loan for a major financial institution. "We’ve seen a huge amount of interest from corporate Australia wanting to talk about green loans. I really see it as a growing market," says Kelly.

1 HSBC, ‘Australian corporates turn to sustainability for growth and investment’. Available at: http://www.about.hsbc.com.au/-/media/australia/en/news-and-media/171220-australian-corporates-turn-to-sustainability.pdf.

2 FTSE Russell, ‘Investing in the global green economy: Busting common myths’. Available at: http://www.ftserussell.com/sites/default/files/documents/fr_investing_in_the_global_green_economy.pdf.

3 Deloitte, ‘Millennials want business to shift its purpose’. Available at: https://www2.deloitte.com/global/en/pages/about-deloitte/articles/gx-millennials-shifting-business-purpose.html.

4 Deloitte, ‘The Deloitte Millennial Survey 2018’. Available at: https://www2.deloitte.com/global/en/pages/about-deloitte/articles/millennialsurvey.html.

5 Task Force on Climate-related Financial Disclosures, ‘Euronext, FSMA, NBB and Belgian Ministry of Finance Show Joint Support for the TCFD Recommendations’. Available at: https://www.fsb-tcfd.org/wp-content/uploads/2018/03/Press-Release-TCFD-Brussels-Announcement-FINAL-22-Mar-2018.pdf.

6 Bloomberg New Energy Finance, ‘New Energy Outlook 2017’. Available at: https://about.bnef.com/new-energy-outlook/#toc-download.

7 https://www.thefifthestate.com.au/business/investment-deals/views-for-2018-tim-williams-ken-morrison-phil-wilkinson-melissa-schulz-luke-menzel-andrew-petersen.

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