BIS 1 - 2018
(L-R) Abbie Reynolds, Robbie Tindall, Rob Campbell and Sarah Kerr (Chair)

Valuable Advice from Workshop 1

Prioritising a Conscience – Why Sustainability and Corporate Social Responsibility Matter to New Zealand Businesses

Held on Thursday 2 May 2018

EXECUTIVE SUMMARY

Sustainability and corporate social responsibility get plenty of airplay in the business world. But what are they, exactly, and what do they entail?

Equally important, why should businesses embrace them? Are the benefits tangible and, if so, where do they show up?

The first Business Intelligence Workshop for 2018 tackled these issues with surprising results. Not least of all for the candour with which speakers addressed corporate performance in this area.

The bottom line, however, is this: while sustainability and corporate social responsibility have an undeniable feel-good factor about them, the reasons for embracing them go far beyond that. Put bluntly, being good is good for the bottom line, and being indifferent is a pathway to failure.

THE SPEAKERS

Abbie Reynolds, Executive Director – Sustainable Business Council

The Sustainable Business Council is a division of BusinessNZ representing 95 businesses, accounting for almost a third of private sector GDP. Before joining the Sustainable Business Council, Abbie led the Vodafone Foundation and was Head of Sustainability at Vodafone. She has worked on many sustainability initiatives including rolling out an eco-rating for mobile phones. Abbie was also the driving force behind a mobile phone recycling programme that delivered $2.5 million to Starship.

Robbie Tindall, Analyst at K1W1 and alternate director of The Warehouse Group

Robbie spent eight years with The Warehouse Group in various buying and merchandising roles. In 2010 he joined his father, Stephen, in the family investment company, K1W1, where he helps manage a portfolio of over 100 New Zealand technology and innovation companies. The companies are export-focused and predominantly early-stage. In 2017, K1W1 had a record year which saw it invest in 20 new deals.

Rob Campbell, Chair – SkyCity Entertainment Group, Summerset, Tourism Holdings, WEL Networks; Director – Precinct Properties

Rob has over 30 years’ experience in capital markets and is director of or advisor to a range of investment fund and private equity groups in New Zealand, Australia, Hong Kong and the US. He holds a Bachelor of Arts with First Class Honours in Economic History and Political Science and a Masters of Philosophy in Economics.

 

CHAIR

Sarah Kerr, Director – Lowndes

Sarah has over 20 years’ experience as a corporate lawyer, including 11 years in partner roles and over four years with law firms in Frankfurt and London. She advises on mergers and acquisitions, joint ventures, shareholding arrangements and high value commercial contracts. Sarah has represented early stage and expansion capital investor K1W1 since 2004.

 

WHAT THEY SAID

Abbie Reynolds: Sustainability is no longer optional

Abbie began by taking a straw poll to determine what audience members understood by the term “sustainability” versus the term ”corporate social responsibility”. After establishing that people see them as different things, Abbie asserted that they are in fact virtually identical in how they’re expressed. Abbie’s preferred definition of “sustainability” was:

“Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”

Her preferred definition of “corporate social responsibility” was:

“The way through which a company achieves a balance of economic, environmental and social imperatives while at the same time addressing the expectations of shareholders and stakeholders.”

Abbie’s view is that “the good money” is on sustainability – in other words, that companies with a broad, long term view are embracing sustainability.

Why? Because sustainability is “a way of navigating a volatile, uncertain, chaotic, ambiguous future”. At a time of unprecedented technological change, as well as changes in demographics, work lives, global climate and pressure on the planet’s resources, sustainability helps companies balance the expectations of their stakeholders with economic, environmental and social imperatives.

Doing so has an impact on attracting talent – 73% of employees say it’s important for them to work for a company that is socially and environmentally responsible. It also impacts on sales – 69% of consumers say they’re willing to pay a little more to get the best organic, sustainable and ethically produced products.

CFOs should be interested in sustainability too. After three years of integrated financial and sustainability reporting, seafood company Sanford reported a 1% lower cost of capital, and the potential reduction in operating costs from an improved supply chain has been estimated to be as high as an eye-watering 45% for some companies. The net result of sustainability practices is estimated at a 10% increase in the asset value of a business.

Then there’s the downside of ignoring sustainability. Abbie stated that 83% of New Zealanders will stop buying a product if they hear a business is unethical.

Unsurprisingly, then, more and more business leaders are taking on sustainability, and investors are also taking a greater interest in non-financial performance. One of the challenges that comes with this, said Abbie, is how businesses are to tell customers about their sustainability performance in a way that builds authentic connections.

  

Robbie Tindall: Old wine in a new bottle

Drawing inspiration from the recent Hollywood blockbuster “The Greatest Showman”, the tale of PT Barnum (the American showman, politician and businessman who founded the Barnum & Bailey Circus) Robbie started his presentation by stating that PT Barnum had sustainability issues. When a museum purchase failed to draw crowds, he turned to displaying people with physical oddities to the public – with spectacular results. However, one unintended outcome was moral outrage, and his museum was burned to the ground by protestors.

Undeterred, Barnum launched his show in a tent, and the crowds returned. And so did the critics, who regarded his shows as “common” and in poor taste.

So Barnum set out to win the critics over and in the process alienated his core audience. The third challenge he now faced was to win back his customers.

What was Robbie’s point? Simply that sustainability – if interpreted as what’s needed to satisfy stakeholders and remain in business over time – is not a new challenge.

What is new are the kinds of sustainability issues facing businesses – and they’re not always environmental. Facebook is facing a crisis of trust, for example. Technology giants like Google and Amazon are under pressure to pay taxes in the countries in which they operate. The so-called “techlash” has been driven largely by media until now, but now public resentment is building too.

To earn the trust of customers – particularly millennials, who now account for half the global workforce – companies need a well-articulated reason for being that goes beyond mere profitability.

That’s an ongoing journey, said Robbie, noting his own recent realisation that 400,000 people work for The Warehouse Group’s sourcing factories in China, Bangladesh and India.

“Corporate social responsibility means more than community partnerships,” he continued. Every factory providing private label goods to The Warehouse Group must pass an ethical sourcing audit. The company has also committed to a 32% reduction in CO2 emissions by 2030, and has put policies in place around diversity, inclusion, wellbeing, safety and government relations.

That focus is even more evident with K1W1, which invests in companies that are solving environmental problems. They include LanzaTech, which is converting CO2 emissions into biofuel; Avertana, which is extracting valuable titanium oxide from slag heaps left from steel production; and Mint Innovation, which is developing economic methods of recovering gold from electronics, thereby reducing the need for gold mining.

 

Rob Campbell:

“My generation has failed companies, society and the future in being so lax in recognising and taking on sustainability.”

With this frank admission, Rob began a thoughtful discourse that injected equal quantities of optimism and pessimism into the morning.

Why does sustainability matter? he asked. “Because it’s the right thing to do,” he continued, “and because we have to.”

Traditionally, directors haven’t concerned themselves with sustainability, seeing it as a management issue (if it’s seen as an issue at all). The problem with that, said Rob, is that CEOs don’t apply sustainability if the board doesn’t include it in their KPIs.

One reason for boards’ reticence in relation to sustainability is a lack of board members who truly understand sustainability and corporate social responsibility. Boards still lack the kind of diversity that would see societal issues included on the agenda. Because board members are not typically selected for their awareness of sustainability, they’re still not good at setting directions based on that thinking.

Many directors Rob’s age are still only paying lip service to sustainability and corporate social responsibility, although a good number – himself included – have become what he called “deathbed converts”.

More converts may follow if a recent experience is a guide. “In the weekend, I interviewed six candidates for two board roles,” said Rob. “Three asked about the relevant companies’ CSR and sustainability policies – I’ve never been asked that before.”

If boards do become more oriented towards sustainability, they’ll also need to re-orient their gaze. “Directors have seen their job as backward looking, asking ‘what have we achieved?’. Some boards have more recently become concerned with strategy, but that interest is typically limited to one to two strategy sessions per year, where board members review draft documents prepared by management. In other words, boards are not setting strategy. They haven’t been picked to do that.”

But external pressures are bringing change. Public companies, for example, can’t ignore the investment community, which is increasingly refusing to invest money into companies without sound CSR or sustainability track records – or whose boards wash their hands of setting strategic direction.

Larry Fink, CEO of BlackRock, the world’s largest asset manager, recently wrote to CEOs of the need to “publicly articulate your company’s strategic framework for long-term value creation and explicitly affirm that it has been reviewed by your board of directors. This demonstrates to investors that your board is engaged with the strategic direction of the company. When we meet with directors, we also expect them to describe the Board process for overseeing your strategy.”

Closer to home, Simplicity CEO Sam Stubbs (~400m under management) has written to the boards of every company in which his company invests suggesting he visits them to discuss sustainability. “About 50% have ignored him,” said Rob, adding that Tourism Holdings welcomed him along.

Rob also made an astute practical observation around the increasing prevalence of electronic vehicles. He pointed out that if large corporates are forced to move from diesel or petrol vehicle fleets to electronic vehicle fleets, the depreciation rates historically applied to a corporate’s vehicle fleets are likely to be inaccurate and value significantly overstated. This, if nothing else, should cause directors to sit up and take notice of sustainability issues of an environmental nature.

Drawing on a phrase coined by political economist Joseph Schumpeter, Rob finished by stating: “One great feature – perhaps the only redeeming feature – of capitalism is that it generates creative destruction, which drives technological and social progress. But what determines whether that destruction is creative or not are the decisions of business.”

“Sustainability is not just a capitalism challenge. It’s one for every person who heads a business.”

 

For a pdf version of the valuable advice.

 

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