Recently, I read a challenging article by Paul Colgan for Businessinsider.com.au (Jan 29 2018) – entitled: ‘Sustainability’ has a new and more troubling meaning for the global business elite.
The article related to the recent “World Economic Forum annual meeting” in Davos, Switzerland and deals with the talking points around the forum.
Of interest was his comment: “Sustainability – a term that has become much broader”. To many within the Sustainability sector, the comments are a reflection of what has been discussed openly over the past years but not fully accepted by many others – until maybe now. In the article, comments are made that would reflect, in my opinion, an evolution in the thinking of sustainability. For many years, it has been given lip-service in many sectors, but recently there seems to have been a realisation that this is not a “passing fad”, but it is an economic challenge that needs to be taken up. Previous comments from global sources have included: A key outcome from the United Nations – Global Compact 2015 General Assembly: “Sustainability is now firmly on the global business agenda, but there is an urgent need to turn words into action…” and that “The business of business is sustainability”.
The challenge now appears to be how and when many business sectors and groups are going to take up the complete aspects of sustainability and realise the potential for economic return on such an investment. Sustainability may also challenge or disrupt the some of the previous business norms, but this may be a benefit as change incorporates the sustainability benefits.
To demonstrate this changing environment, I have included sections of the article, in that Paul Colgan writes:
Paul Colgan – Publisher & Editor at Business Insider Australia
In and around the WEF official program, sustainability is a central topic of conversation but term has taken on a new and more challenging meaning for companies; it’s really just a shorthand now for the realisation that there is a bigger structural problem facing big firms everywhere. In short, it’s that capitalism has a problem.
As Matt Turner writes here, everyone in Davos was talking about “Larry’s letter”, the missive from Larry Fink, the CEO of the world’s largest investment fund BlackRock, which warned companies that they need to “serve a social purpose”.
At the heart of the conversation around sustainability is a recognition that elements of capitalism — including but not limited to the focus on quarterly financial performance which in turn tends to drive equity valuations — don’t sufficiently incentivise things like social inclusion programmes, skills training, community cohesion, and environmental protection.
The higher levels of income and wealth inequality in advanced economies in the years since the GFC are the simplest, most direct indicator of this problem, but it also is reflected in the more intense brands of politics and economic policies that have been emerging in various countries, driven by a sense of disenfranchisement from those people who feel they have been left behind.
Perhaps this focus is connected to how the political volatility is creating new challenges for business.
So sustainability has moved from a notion that has been previously been, for many firms, a matter of branding (through corporate social responsibility programmes and environmental initiatives) to being about company strategy itself. Companies’ business models can be more easily disrupted in a more fractured world through, for example, sudden regulatory interventions or changes to trade arrangements.
To a large extent this is a reassessment of the importance of company values and then some questions about how conventional financial modelling can evolve to keep up with the new threats there are to companies in the modern environment, chiefly through brand risk.
It’s becoming increasingly clear that not only does the workforce want to be at companies with strong values on social issues, but that the absence of strong values can also be a threat to a company.
Corporate values and strong leadership on expected behavioural norms are not just about discounted yoga memberships, charity activities to lift staff engagement, and saying the right things to attract talent. They are functions of business risk management.
The threat of disruption by neglecting organisational values is, of course, not just internal. A company whose product or business model fails to align with the values of its customers can suddenly find those customers looking elsewhere.
This conversation about values and sustainability won’t be received well in some corners of the business world, including in Australia. And particularly the case for those more sleeves-rolled-up, punctilious elements of the Australian financial sector where a scoffing cynicism is the default response to practically everything (except whatever lines up with their own investments and trade ideas).
But this is a live conversation in the world’s biggest companies and investment management firms. Australians are going to need to be able to participate, even if it is to argue against the whole premise of a broad philosophy that sustainability is important.
With company valuations conventionally based on the hard metrics of cash flows and earnings multiples, it’s easy to see why some will roll their eyes and want to change the record when the sustainability question comes up. How do you even start to measure it?
But it’s happening. UBS and other banks are already building sustainability into their financial modelling, trying to account for brand and social equity when running the ruler over companies.
And as Bob Mortiz, the global chairman of PwC, told me in an interview: “it very much plays into the modelling that the analyst community does”. He went on (my emphasis):
And you wonder whether some of the cashflow models that are out there have really taken into consideration that sustainability of cashflow, and whether the discount is appropriate enough for the volatility and the disruption that comes either because they’re disrupted by competitors, technology, companies or otherwise, or disruptive because the brand is not actually seen as contributing to society and dies a slow death, or maybe in some cases a fast death.
I think that’s the issue of how you think of these evaluations because right now they just assume steady course. There’s not that much discount in terms of that volatility or that risk, that I think is more evident in society today than ever before right now.
Some think that not much needs to change, and it can be business as usual. On the other hand there’s a group — and WEF co-chair Sharan Burrow says it is growing — that acknowledges there needs to be some change in how companies operate and maintain their social licence.
Burrow commented (my emphasis) that she thinks that there’s an awareness that groups can’t just keep talking about it.
Trust the Australian to be the one insisting on pulling the collective finger out.
The sustainability question was so central to everything at Davos this year that a failure to see action from companies and governments on some of the issues would be damaging to the cause. We’ll await decisions and initiatives with interest.
I remain open-minded on the question of sustainability in company valuations, by the way. Spending more on corporate social responsibility programs, and saying nice things about the environment and how we must a better society isn’t going to cut it. (In fact, it would be a good thing if that kind of all-talk approach was called out a bit more for what it is: posturing.)
But convincing investors on the merits of a new approach to sustainability needs detailed justification from boards, executives, and the analyst community. Short-term “programmes” and “sustainability initiatives” aren’t good enough; what the serious, business-minded sustainability advocates at Davos are talking about is baking in corporate resilience and therefore long-term shareholder value (and returns!) by having sustainability built into strategy and behaviour.