Companies need to make impact count to stay ahead of the game
Rio Tinto’s actions at Juukan Gorge hold a lesson for us all. Rio blew up the 46,000-year-old Aboriginal site to expand their mine. Rio is now accounting for their behaviour and its consequences – for the devastated community, before a Parliamentary inquiry and to investors.
Westpac’s Board has likewise had to assess whether our internal cultural and management systems, processes and governance are fit for purpose to manage non-financial risk. In the bank’s case this followed allegations by financial regulators of millions of breaches of anti-money laundering laws and ignoring patterns of transactions consistent with child exploitation.
This is a bellwether moment. Companies considered by themselves and others as top performers on social and environmental responsibility faced with consequences that cannot be undone, for local communities and for their future.
From financial services and investment to oil and gas and the fashion industry, companies are under the spotlight on sustainability. The pandemic, economic conditions and climate risk have combined in a perfect storm of rapidly shifting expectations. The firms that survive will recognise their actions have consequences beyond their bottom line and take a more proactive and integrated approach to non-financial performance.
As governments around the world continue to drive billions of dollars in economic stimulus, calls for a new bargain are growing louder. Political leaders are including conditions from quality jobs to reporting on climate in recovery packages. People are calling for different choices in how their money is invested through movements such as Make my Money Matter in the UK.
This shift started ahead of the pandemic. The US Business Roundtable called time to re-think shareholder primacy and recognise stakeholder interests, which sparked rich debate about purpose and value. In 2020, International Business Council of the World Economic Forum called for accounting of financial and non-financial performance. The first phase of the EU Sustainable Finance Package in December 2019 and review of the non-financial reporting directive set the stage for regulation.
Whether the tipping point is regulation, stakeholder activism or greater appreciation of the risks of mis-aligning social, environmental and financial performance, all companies will need to report impact performance alongside financial performance within a few years.
The partnership for sustainable capital markets between Japan’s government pension fund with US fund California State Teachers’ Retirement System (CalSTRS) and USS Investment Management Ltd announced in March 2020 signals impact is becoming a driver for investment portfolios. The message is clear: companies that seek to maximize corporate revenue without considering their impacts on other stakeholders … are not attractive investment targets for us. The Global Investors for Sustainable Development alliance including finance houses from Citi to Allianz and PIMCO to GPIF, Investec and Bank of America called for action to accelerate transformation of business and finance.
For most companies, strategic commitment to sustainable development and impact management have been in the too difficult bucket. Few have embraced integration. PWC’s SDG Challenge 2019 found that 74% of companies mention the UN Sustainable Development Goals in their reporting but only 1% are reporting quantitative measures to show progress.
Calls are growing for companies to account for their costs and benefits to society and the environment. Those who wait until they are forced to consider their impact risk losing more than their good name.
Time and again we hear that making impact count is difficult. Difficulty is not an obstacle to progress. People have sequenced the human genome and manned a space station. We can do difficult. We are already in difficult territory as we chart paths through the economic social and challenges ahead.
In fact, enough groundwork has been laid to act today and act with confidence.
Here are 5 straightforward, concrete actions companies can take now to start to embed impact management – and stay ahead of the game.
First, make impact management someone’s job. Show that this is a leadership role and will inform decision-making to send a message that impact is serious business. Work out where your risks and your strengths are for making impact count for performance.
Second, make it clear this comes from the top and get directors and senior leadership on board. Staff, customers and investors need to hear your vision and be invited to going to utilise strengths of your company for the greater good. Look to leaders like Danone for inspiration on how an impactful vision can secure the future of your business; their positive incentive financing strategy has lowered cost of capital based on sustainability performance.
Third, back words with action, talk to stakeholders and build understanding of where you shine bright and where you need to up your game. Conduct a high-level assessment of current business practices and products and understand your supply chains. Get clear about positive and negative impact on the environment and on people’s lives.
Fourth, set out a roadmap that is clear and transparent about where you are heading and how you will get there. Make clear links to strategy and engage stakeholder in the process. This needs to be based on evaluation of market opportunities that leverage the firm’s strengths and show how your product and servicing offerings will be adapted and new offerings created to align with your objectives to reduce negative and increase positive material impacts.
Fifth, develop and embed impact goals into your strategy, management approach, reporting and governance. Commit to transparency and accountability. Develop capability and systems for impact management, including incentives that link to financial and impact outcomes of your business.
The Great Depression in the early 1930s was the jumping off point for global accounting standards. The Covid-19 pandemic will be the jumping off point for global impact standards. Impact is mobilising people around the world with calls to build back better. In this new order, impact will be an interconnected strand of performance, intertwined with and informing our understanding of risk and return.
It’s time to get started; from there we can learn and improve.
If not now, then when?