SINGAPORE (Dec 9): The efforts to promote sustainability in the financial community is gaining momentum. However, companies and their investors continue to debate whether being sustainable is profitable.
James Gifford, Credit Suisse’s head of impact advisory, citing a 2015 meta-study of 2,200 other studies by the University of Hamburg, notes that 55% of the studies show a positive correlation between being sustainable and having a higher share price, 37% report a neutral correlation and just 8% indicate a negative correlation. Accordingly, there is a good business case that sustainability pays, says Gifford at a recent forum on sustainable investing organised by The Edge Singapore.
There are, however, other authoritative bodies stating otherwise. For example, the International Monetary Fund, in a report on global financial sustainability published earlier this year, notes that there is no conclusive evidence for now that being sustainable has a positive effect on a company’s share price.
Furthermore, there are different standards to measure sustainability, and that is causing some uncertainty for the ecosystem of companies and investors. “The availability of consistent data and disclosure is a key challenge that we, alongside the rest of the market, have to grapple with,” says Ray Tay, senior vice-president for public, project and infrastructure finance at Moody’s Investors Service, at the same event.
Nevertheless, there is a convergence of the different standards. “The industry is getting much closer in terms of consistency than a year ago, for instance, and that’s positive for the sector,” says Tay.
Gifford adds that it is important that sustainable investing not be treated with double standards. The majority of active hedge funds underperform their benchmark, net of fees. Yet, hedge funds do not seem obliged to justify their existence.
From the perspective of Aditya Renjen, Olam International senior vice-president for treasury and investor relations, there are indeed multiple indicators and guidelines. At the end of the day, however, if individual companies want to play a sustainable role, they need to look at the framework that is most applicable to the nature of their business. The one-size-fits-all approach should not be forced on every company. And while the work of harmonising standards is in progress, companies should not use that as an excuse for not starting on their own sustainability efforts.
What the panellists agreed on was that there was more to be done in this field. “The next step is undeniably more research on ESG [environmental, social and governance]. There’s a lot more emphasis on incorporating ESG considerations into the credit analysis of issuers and sectors that we cover, and then articulating and communicating that through our research,” says Tay.
Impact on a billion
Thankfully, investors’ awareness of sustainability has increased significantly. The United Nations Principles of Responsible Investing was launched in 2006 by the then UN secretary-general Kofi Annan. Today, there are more than 2,200 signatories representing the majority of assets under management in global stock and bond markets. “This initiative was built on the idea that good companies are best placed to leverage the trends of the future and deliver longterm value for shareholders and society. It was great to see a concept go from just an idea in the early 2000s to be adopted by the majority of the finance sector,” says Gifford.
From left: Pauline Wong (a senior writer at The Edge Singapore and moderator at the forum), Tay, Renjen and Gifford
Besides the growing popularity of ESG, the industry has also become more sophisticated when it comes to ESG practices. For example, many investors and professional fund managers are starting to better appreciate the fine aspects of “impact investing”.
According to Gifford, impact investing is the subset of the sustainable investment/ ESG space, where investors can prove that they are actually making a positive difference in the world. More critically, they now know how to put their money to better use. “If we want to make the most impact, there are two areas we need to invest in: first, more illiquid asset classes, for example, in venture capital, private equity, infrastructure and private debt. Second, developing countries, particularly frontier markets that are often capital-starved,” says Gifford.
If impact investing is done correctly, a billion people would benefit. “One of the keys to lifting the bottom billion people out of poverty is capitalism, and so a critical way to get out of poverty without significant environmental damage is sustainable capitalism. Traditionally, people have said that impact investing is niche — comprising a small allocation in your portfolio. If you think about it and actually want to solve the world’s problems, however, sustainable and impact investing is the key to alleviating poverty in a way that protects the planet for future generations,” says Gifford.
“Economists have assessed that the UN Sustainable Development Goals would need about US$2.5 trillion [$3.4 trillion] extra per year, if we are solving the world’s biggest problems. Foreign aid runs to just US$300 billion — which is only scratching the surface.”
Impact and risk
Yet, not every investor is well equipped, nor best placed, to do impact investing. More often than not, impact investing entails early-stage ventures and frontier markets exposure, which has a positive correlation to risk.
Therefore, pension funds, whose priority is to deliver steady returns with minimal fuss for retirees, are not necessarily the type of investors that should be doing impact investing. Furthermore, pension funds tend to deploy vast sums of capital. By contrast, impact investing tends to be smaller-ticket bets, notes Gifford.
The wealth management industry needs to better engage family offices and other rich clients, especially those that built their own wealth as entrepreneurs. Precisely because of the way they made their money, these clients are often best positioned in the economy to take risks. “They have benefited from technology and globalisation, and are well placed to take risks and invest in the areas of the economy that are most in need of risk capital,” he explains.
Specifically for the wealth management industry, one way to approach sustainable investing is to advise their clients to think about the issues they care about and how to invest in them. They can think about impact investing the same way they build a diversified portfolio, and recognise that there is a relationship between impact and risk. “You can make really good money solving the world’s biggest problems, but you do have to take risks — and if you are good at investing, you will get paid for the risk you are taking,” he says.
“It is the same as being an entrepreneur — unless you take business risk, you are not going to create a unicorn. If you do not take a risk in impact investing, you are not going to build a venture that has an impact on millions of lives.”
Multi-tier, multi-purpose
While companies such as Olam are focused on sustainability, its guiding philosophy has always kept shareholder value in its sights. “That’s been our governing objective from day one and will continue for as long as we exist,” says Renjen. It maintains this objective by setting clear goals and financial metrics. “We have committed targets to our stakeholders, shareholders, in terms of [return on equity], [earnings before interest, taxes, depreciation and amortisation], invested capital, free cash flow and a gearing ceiling that we want to stay under.”
Yet, even as Olam aims to increase shareholders’ value, there is a lot more it can do. “Why do we get up and go to work in the morning? It’s not just about the paycheque. We want to reimagine global agricultural and food systems — that’s our purpose,” says Renjen.
To this end, Olam has established its “AtSource” comprehensive sustainable sourcing system, which measures on-theground impact. “We can provide industry-leading levels of traceability and guarantees through AtSource,” says Renjen. AtSource is also a way to show that being sustainable is to the company’s commercial advantage as well.
AtSource is implemented with different tiers of detail and complexity. The entry-level AtSource gives customers fundamental supply chain information. Olam’s customers have the reassurance that the suppliers are engaged in responsible sourcing principles and practices under the Olam Supplier Code, and Olam provides country-level social and environmental risk-screening.
The higher tier is called AtSource Plus, which measures impact using more than 80 indicators, covering what is happening at the farms, to the way the logistics is executed. The highest tier is AtSource Infinity, where Olam will co-create specific supply chains with the customers according to their specific requirements. “Customers can now stay with us for decades at a time, because we created a supply chain just for them,” says Renjen.
Olam’s approach to sustainability is comprehensive and well-founded too. The company does not focus on just a single aspect. It looks at the integrated impact, noting not merely the positive, but acknowledg ing the shortcomings as well.
For example, Olam has done a case study of its oil palm plantation in Gabon, and tracked the natural, human and social capital that was created or depleted, by virtue of managing a plantation in that country.
“For example, through that plantation, we’ve created positive human and natural capital through our operations. But, we have negative social capital when measured against the planetary boundaries. You have to look at projects in totality: You are creating value somewhere, but you are also destroying value somewhere. But, on a net basis, are you adding value across these different types of capital?” says Renjen.
“At Olam, sustainability is at the heart of our business, it is embedded in our business model. It is our way of life; it is how we work. The reason we do that is not just that it is the right thing to do, but [also that] we see very clear business objectives, outcomes and impact from pursuing this strategy.
“And by delivering on the strategy, we want to create prosperous farmers and food systems. We want the communities where we operate to thrive and we want to regenerate the living world.”
