Water Scarcity – Even the US Government sees the threat

As we look at the long-term issues that sustainability brings forth, resource depletion and scarcity are top of mind.  We’ve written about water a variety of times at this blog, but this past week brings a whole new confirmation of the scarcity that we face.

Last week, Bloomberg reported that the Director of National Intelligence released a report saying that competition for scarce water over the next decade will fuel instability in regions such as South Asia and the Middle East, all of which are important to the U.S. national security.

Although the report doesn’t suggest that we are looking at an all out war over water (in the next 10 years), they do highlight that they expect nations to start using water as a bargaining chip with each other.  They also go on to suggest that the adoption of water as a weapon by states or terrorists will become more likely after 10 years.  It highlights that the US intelligence community has a growing interest in understanding how environmental issues such as water shortages, natural disasters and climate change may affect U.S. security issues.  They go on to highlight that annual global water requirements will be 40% more than current sustainable water supplies by 2030.

So as an investor, is this not something that we need to start thinking about now?  Yes, we’re talking 10 years out, but as I recall, in terms of the feasibility process for new mines for resource companies, 10 years out is tomorrow.  So are we looking at risks that need to be considered in approvals for new mine sites?  Will resource companies not only have to work with the communities in which they hope to extract resources, but will the geo-political issues of our times not become even more concerning?  Are we asking these types of questions of companies in the resource sector?  Probably not at this point as most financial analysts won’t put any value on those operations into their financial models for some period of time.  The questions I have are: Will the risk be worth the effort?  What will this do to commodity prices?  Will we see more public-private partnerships on the water front?

With the announcement of the report also came the announcement of a new public-private U.S. Water Partnership that includes Coca-Cola Company, Proctor & Gamble and Ford Motor Company.  Sounds like some global companies are already thinking about these issues.  I think their shareholders should be too!

http://www.bloomberg.com/news/2012-03-21/u-s-intelligence-says-water-shortages-threaten-stability.html

Is M&A starting to be driven by sustainability issues?

Recently I’ve been thinking more and more about sustainable business strategy and in particular, how eventually we’ll see large corporations buy smaller, more efficient and sustainable organizations for not just assets, but more so for their sustainability know-how.  Sustainability has it’s challenges for business leaders.  It tends to be difficult to articulate into hard numbers, which of course is what all of us in business and finance tend to look for.

This week has highlighted a very interesting transaction seeing UPS purchase TNT.  My guess is that TNT was an attractive target partially because it has been was a leader in sustainable business practices.  In 2010, TNT’s then President, Peter Bakker, received the Sustainability Leadership Award and in 2009, Mr. Bakker was also awarded the Clinton Global Citizen Award which recognizes corporate responsibility efforts of leaders.  However, when reading the press, there is absolutely no mention about this element of value within the transaction by either the media or financial analysts.

Should we be surprised if it were driven by sustainability?  I don’t think we should.  Last fall I heard the presentation by a UPS representative speak at the Commit Forum in NYC.  The speaker made it clear that as UPS started to measure and monitor key sustainability performance indicators,  it was recognizing that efficiencies would be a business driver going forward and ultimately, new business opportunities.  At the time, I read between the lines to mean acquisitions.  Therefore, I was not surprised at all to see the transaction come to fruition.  This leads to the question of whether we are seeing other transaction also being driven by the same motivation?

As I try to answer that question, I came across an article written by Kirsty Jenkinson at Ethical Corporation.  Ironically, it appears that there have been other deals being driven by sustainability related themes of resource scarcity.  To name a few that she mentions:

Shale Gas:

• Chevron purchased Altas Energy
• Statoil bought Brigham Exploration
• Total purchased a stake in Chesapeak Energy

Although much controversy revolves around these resources, these acquisitions are still happening because of resource scarcity and energy security issues

Food & Science Industries

Dupont purchased Danisco – a producer of food ingredients, enzymes and bio-based solutions which appears to be driven by the need for sustainable food and fuel.

Ecolab purchsed Nalco – a water treatment and process company which is obviously being driven by water scarcity.

Perhaps overall it’s too early to make the call that sustainability will drive mergers and acquisitions, but from my view I think it certainly can be a major competetive issue.  Now the question remains, will the banking community eventually wake-up to this embedded value in corporations and subsequently desire to value it appropriately.   My guess is yes and this could clearly be our tipping point going forward.

Interesting Approach from Barrick Gold Corp

Just last week there was a very interesting announcement that came out from Barrick Gold Corporation (ABX) for which I believe the company deserves kudos.  They announced that they have put together a Corporate Social Responsibility Advisory Board which includes names like:

• Aron Cramer – Business for Social Responsibility
• Elizabeth Dowdeswell – Council of Canadian Academics and former Executive Director of the UN Environmental Program
• Robert Fowler – dimplomat and senior foreign policy advisor
• Ed Lieboxw – Director of Battelle Memorial Institute’s Seattle-based Center for Public Health Research and Evaluation
• Gare Smith – senior partner at Foley Hoag LLP and former Principal Deputy Assistant Secretary in the US State Department’s Bureau of Democracy, Human Rights and Labor
• John Ruggie – Author of the UN Guiding Principales on Business and Human Rigths, will also serve as a Special Consultant

In particular I find this very interesting and innovative on behalf of a global mining company.  Investors are increasingly understanding the importance of a variety of issues relating to  sustainability (in particular Environmental, Social and Governance) and more so, these issues can impact a company’s valuation.  Being innovative to bring together global leaders in sustainability to assist the company as it drives forward is leading edge.  Hopefully other global companies will understand the value of this kind of advisory board and that we will see other such advisory boards develop with a variety of players coming to the table to assist public corporations!

Kudos Barrick Gold for the leading the way!

A compelling new study shows sustainability practices DO pay off

Earlier this week I had the opportunity to hear about a compelling new study that shows that sustainability practices DO, in fact, pay off for business.  This study is the same one that was recently recapped by a colleague of mine, Louise Macdonald (www.louisemacdonald.ca), for the Toronto Sustainability Speakers Series.  What follows is Louise’s recap of the working paper.

The working paper is called “The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance”, by Robert G. Eccles and George Serafeim of the Harvard Business School, and Ioannis Ioannou of the London Business School. It is not exactly light bedtime reading, especially if you get into the elements of scientific inquiry that are detailed throughout, but it is compelling in that it provides evidence that creating a culture of sustainability leads to improved corporate financial performance in the long-term. Perhaps those of us who are passionate about sustainability knew that already, but here is a study spanning 18 years and involving 180 companies that clinches it, or at least provides more food for discussion about the cost-benefit equation of shifting the corporate mindset.

The authors took a matched sample of 180 companies in 1993, which means they found two sets of 90 companies in 29 different industry sectors with similarities along 5 different financial dimensions: Total assets, Return on Assets, Return on Equity, and their definitions of Leverage and Turnover, and Market price-to-Book value ratio of the shares. The first group of 90 companies were selected because they were considered by the authors to be High Sustainability companies, who had adopted environmental and social policies and integrated them into their culture long before the sustainability movement had taken off, and the other 90 were chosen because they were traditional or Low Sustainability companies, who had adopted almost none of these policies over the period studied. The researchers wanted to chart differences in behaviour and performance over time between the two types of companies.

The article highlights major differences between the two sets of 90 companies in 4 areas:  governance structure, the extent of stakeholder engagement, the extent of long-term orientation and the measurement and disclosure of non-financial information and metrics. They found that the high sustainability companies were more likely to assign board responsibility to issues of sustainability, and to make executive compensation a function of stakeholder perceptions along environmental and social metrics. The needs, perceptions and level of engagement of key stakeholder groups in these firms were integrated into strategic thinking and measurement of performance. The authors also analyzed corporate and investor communications to identify words associated with long-term orientation for both sets of companies, and they found that the high sustainability companies were more likely to use words demonstrating their commitment to creating value over time; they were also more likely to measure and disclose performance along non-financial metrics, representing their commitment to a culture of sustainability.

Most interestingly, the authors also tracked corporate performance over 18 years in terms of both stock market and accounting measures of return, and found that the sustainable firms outperformed the traditional firms on all measures. Their concluding comments reflect their enthusiasm for more research in this area, while acknowledging that more and more firms will adopt a culture of sustainability because of changing societal expectations, and that tradeoffs and choices will be made in favour of sustainability that will build the value of these corporations over the long-term.

This study confirms for me that for corporations today, the question is no longer whether to make the shift toward creating a high sustainability culture, but when and where to start. To my mind, the focus in this study on building strong relationships over time with all stakeholders is a fundamental place to start. How can we best involve them in the future of our organization? What do we as leaders need to learn about creating a company that provides for a sustainable future for customers, employees, suppliers, communities, suppliers and partners as well as investors? And most critically, how does the way we are leading now unwittingly send a different message?

A copy of the working paper can be found at  www.ecoopportunity.net

Louise Macdonald, is a transformational Leadership Consultant who works at the level of assumptions and mindsets to help her clients create engagement toward a Sustainability strategy, among other change opportunities affecting their business.

 

Are we at the tipping point for the adoption of Sustainable Business practices?

Recently I posted a blog about my perception that we are getting closer and closer to a tipping point with regards to the understanding and adoption of sustainable business practices.  To continue in that vein, I’d like to share a short interview with Noreena Hertz, Professor of Globalization, Sustainability and Finance at Duisenberg School of Finance following her presentation at the Responsible Investor Conference in Amsterdam in October 2011.

In this interview, Professor Hertz shares her view that business is indeed embracing sustainability because it leads to profit and that we are indeed at a tipping point.  She gives a great example of Walmart Canada’s efforts and rewards.  In addition she address the fact that in the past we’ve lived in a system where finance and economics were viewed to be separate and apart from sustainability and responsibility.  The recent financial crisis is highlighting that the perhaps these issues should indeed be more integrated.

Please find the interview at:

http://www.responsible-investor.com/tv/9/

How do we get mainstream finance to be more ecologically and socially responsible?

This is a question that I have recently been asked.  To some in mainstream finance, I’m sure that just posing such a question would be sufficient to make them shake their heads in exasperation.   One would likely get responses of this nature:  ”To be ecologically and socially responsible? — Our job is to make money and to get the best possible returns!”

In understanding the world of investments, it’s probably more appropriate to ask the question “What is the key to helping those in mainstream finance to understand that including environmental, social and governance (ESG) factors into their research methodology can provide better returns?

Professionals in the investment community are subject to the rules of fiduciary duty. This means, that no matter how much an individual may personally be pre-disposed to a particular thinking or direction, one has a duty to follow the directives (or the policy) as stipulated by their client.  What’s not well understood by the mainstream financial community is that the 2009 UNEP Financial Initiative report produced a legal opinion on fiduciary responsibility. The report suggests that an investor might not be respecting his/her fiduciary duty if he/she does not take ESG issues into consideration.

So if we reframe the question – then, how do we get mainstream investors to understand the important of ESG factors?  Well, according to an 2010 Accenture survey of more than 700 Global CEO’s, 93% noted that sustainability is “important” or “very important” to their company’s future success.  (From an investment standpoint, the use of the word sustainability includes the integration of environmental, social and governance factors into fundamental financial analysis).  Given the acknowledgement of the importance of such issues, it is becoming increasingly apparent that integrating ESG factors should be part of all analysts and portfolio managers day-to-day work.  The issue is that the majority of these individuals are:

1. Unaware of the importance of sustainability issues;
2. Unaware of the competitiveness that these issues bring to not only their own roles, but also to the companies in which they invest;
3. Unable to find appropriate education that is adapted to their specific needs given they are under enormous pressure to perform on a day-to-day basis.

I believe education is the key.  In my opinion, those most in need of education are:

• Research directors of buy and sell side firms
• Financial analysts of buy and sell side firms
• Portfolio managers who actively use this research
• Chief Executive Officers and Chief Investment Officers of all public funds
• Directors of publicly-listed companies, public funds, endowment funds and foundations
• The general public

I’d like to comment on the last point.  Recently I read an article by Hazel Henderson who noted that a tipping point is when public sentiment shifts.  Well, in regards to sustainability and the specific ESG factors that can provide a insight into competitive positioning of companies — we need to educate the public.

As society becomes increasingly aware of global environmental and social issues that we face, frustration is growing.  Status quo no longer works.  As we watch the Occupy Wall Street demonstrators, my sense is that members of society are not aware that they too hold power.

Many people in society, in some form or another, are participates in pools of capital.  Many have access to a pension fund (be it provincial or corporate), own shares in companies through their retirement investment portfolios or the organizations for whom they work, through endowment funds or possibly through a foundation with whom they give of their time. Each of these pools of capital will need to be invested to generate a return.

Where the power lies is in requesting that those who manage these pools of capital make a concerted effort to put into place responsible or sustainable investment policies. Once the policies are in place, those who manage said capital have a fiduciary duty to manage it according to such policy.

So ultimately the question is not only how we can get mainstream finance to become more responsible, but also how do we educate society so they realize that they hold in their hands the power to make the difference they desire!

People have the power to ask the right questions.   The problem is that most are either intimidated by the world of finance or simply don’t know enough to ask the right questions.  Overall, the education needs to be focused on both sides of the equation. Those who own the money and those who manage the money!

Carbon Disclosure Project — Engagement of Asset Management Industry is “woefully inadequate”

Last week saw the publication of the 2011 CDP Global 5oo Report.  With such, there have been some very interesting findings that should make those in the investment community sit up and pay attention.

Paul Simpson, the Chief Executive Officer of the Carbon Disclosure Project noted that this year’s report suggests that there is a “strong correlation” between a companies financial performance and their climate change disclosure and performance.  The report found that leading firms “provide approximately double the average total return of the Global 500 between January 2005 and May 2011.”

Now if that isn’t enough to get one’s attention, we’ve also had the chair of the Trustees of the Carbon Disclosure Project (Alan Brown, Schroders Chief Investment Officer) suggesting that the investment community has been “woefully inadequante” for it’s engagement on climate change:

“The level of engagement of the asset management industry is woefully inadequate in term so of quality and quantity.” 

Brown went on to say that asset owners fiduciaries should consider wider issues than merely risk-adjusted returns, in a similar way that company directors are obliged to under the Companies Act.  He went on to mention that he was disappointed that clients rarely ask his firm about its engagement activities.

Some other interesting highlights from the report are listed below:

• 81% of Global 500 companies responded to CDP in 2011.  Of those, 93% said their board or a senior executive oversees the company’s climate change program, compared to 85% in 2010
• 74% of Global 500 respondents reported greenhouse gas reduction targets, up from 65% the year prior; 45% have made emissions reductions more than double the 19% that reduced in 2010
• These climate change actions have short returns on investment (ROIs).  Nearly 60% of emission reductions paid for themselves in three years or less.
• In terms of carbon performance, companies in Canada, Japan and the USA lag behind their peers in Australia, Germany, Italy, Switzerland and the UK
• Most of the Global 500 companies (68%) have integrated climate change action into their overall business strategy, compared to 48% in 2010.
• The Energy sector is showing the lowest proportion of companies with targets (55%, 22) and is underrepresented in both the CPLI and CDLI. In view of the high emissions from the Energy sector, this points to the need for improvement. The Consumer Staples sector has the highest proportion of companies with emissions reduction targets (94%, 32)

The full report can be found at:  https://www.cdproject.net/en-US/Pages/HomePage.aspx