The Shareholder Revolution?

Monday, October 03, 2016

17:30 - 21:00

Like it or not, institutional investors exert major influence over our economic system. And when it comes to how companies relate to society, they have given little support to progressive management teams and have found little reason to punish antisocial companies. On the 3rd October we looked at how investor attitudes are changing, and asked if companies are now behind the curve?

What are the signs of change? Firstly, empirical evidence that shows “high sustainability” companies outperform their peers is getting investor interest. Secondly, the ESG data that supports investment strategies is improving, lending itself to algorithm-based investment programmes. And thirdly, well-orchestrated activist campaigns are putting ESG issues on investors’ fiduciary duty agendas.

Studies, such as one from MIT / BCG, show that companies now significantly underestimate the importance that investors are putting on ESG data. This is a missed opportunity for some organisations, and a hidden risk for others. As one commentator put it, internal sustainability teams are still working in PowerPoint whilst investors are working in Excel. 

We opened with a keynote speech from Omar Selim, the CEO of Arabesque Partners, which has been described as the “Tesla of finance”. Omar gave us a glimpse of how big data is transforming that ability of investors to access, analyse and use ESG data, and what that means from a systemic perspective. 

Alex Threfall then moderated a panel of diverse perspectives – the head of responsible investing at a major investment manager, the CEO of a successful activist charity and an internal expert from a listed company. We worked our way through issues such as;

  • What is driving the change in investor attitudes, and where are we headed?
  • Should there be two languages - ESG and sustainability?
  • What trends should CFOs and risk managers be following?
  • What of Theresa May’s call for employee representatives on boards?
  • Have indices such as the DJSI had their day?
  • How should companies report sustainability in a big data era?
  • How can sustainability and Investor relations teams work better together?
  • How can companies and investors work better together?
Speakers

Axel Threlfall Reuters

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Catherine Howarth ShareAction

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Omar Selim Arabesque Partners

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Steve Waygood Aviva Investors

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Sue Garrard Unilever

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Round Tables

The Shareholder Revolution?

How real is the change in investor attitudes to corporate sustainability? What is likely to influence change in the future – more evidence that sustainability is an outperformance criterion, shareholder activism, new reporting initiatives or big data? Should companies anticipate harder screening of their sustainability performance? What message should sustainability teams take to their CFO? 

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TABLE 1A

Why are there so many cynics on impact investing?
• Hard to measure, hard to prove
• Burden of proof sits on the organisation
• Are we clear what the business case actually is?
• The opportunity side of sustainability comes from looking at the human impact of living in a resource-constrained world – how can you enrich people’s lives? This burden falls on businesses

Are investors more advanced in their thinking than the corporates give them credit for?
• It depends on the investor – most are probably not.
• Vast majority of quant investors do not care about sustainability, or even really what the company does.
• Revolution comes when individuals know how markets work.
Informed consumer choice and their need to trust the organisation and their standards

How polluted is the space in terms of indices?
• 200+ sustainability indices

Consumer goods company's 4 Pieces of Sustainability:
1. Less risk
2. Greater trust
3. Lower costs
4. More opportunity?

Roundtable Discussion
• A sustainable brewery approaches sustainability in an interesting way:
o People are starting to understand the link between sustainability and finance more clearly
o As a brewery, they are very resource intensive in water and other natural resources
o Difficult to use sustainability to affect the share price, but it is important to the shareholders who are usually very long-term shareholders and the shares have been passed down for generations
o For them it’s about seeing a slight improvement in their turn per year
• ESG/SRI investors in pharmaceutical company:
o G portion of ESG (governance) is currently getting the most attention from investors
o Generally, no, investors are not focused on ESG or SRI.
o i.e. Ebola – they asked instead are we going to make money out this longer term, rather than worrying about the environmental and social impacts of this work
o It is very important to link the sustainability practices to reduced costs or increased opportunities
o Many KPI’s are currently pure financial metrics – how do we change this?
• How are shareholders of a British telecommunications company thinking about sustainability?
o “I would love more pressure from investors in regards to sustainability.”
o Quite an aggressive tax situation – turning a problem into an opportunity – there was a huge amount of misunderstanding and misinformation – it is a loss making business for the most part, which explains the amount of taxes that they end up paying
• There is so much data – how can anyone make sense of it? But isn’t this exactly what artificial intelligence is meant to do?
o Big data always seems to be the answer – but we are still quite far away from this really having a true impact
o Carbon footprint of a can of beer is about half that of a bottle - but then you have to consider where the metal comes from – it’s not so black and white and it is very unlikely that AI can rationalize this at this point in time.
• How do you know what’s important with regards to data?
o Distinguish between correlation and causality
o Everything comes back to the quality of the information that is being fed into big data and therefore the artificial intelligence
• You can look for other evidence and symptoms of things in companies’ reports in order to determine the quality of the information provided
o The ability to read information (for AI) is kind of there
o But is that real? Is that there? They may just not mention it in its annual report but still be really good at it (whatever “it” is)
o So how would AI pick up on that?
• What if you don’t know what you are searching for? What about the really innovative stuff? What is the next most innovative thing? How do you find those true sustainability pioneers? It’s difficult to use AI if you don’t know which question you need to ask it.
• Human Rights Index – 500 global companies will be on that index and will be ranked
o This should be done for other information like sustainability
o SGS - 17 goals, targets, indicators
o There will always be subjectivity, but you need to balance this against transparency and what the investor wants – they can choose what information to look at and invest in
• We want to change the consumer behaviour, the grass roots. Once that behaviour changes, investors will change their behaviours as well.
• State of flux of the shareholders (voting on a scale of 1-10 by the roundtable members)
o 7, 5,7, 6, 4 or 5, 4 (but high on noise), 4 but with lots of potential

TABLE 1B

How real is the change in investor attitude towards sustainability?
• There is still a long way to go before a point is reached where sustainability is considered core to business. As with any large-scale shift, this is a slow-moving process and large companies have many conflicting priorities.
• While progress has been slow to date, there was widespread consensus that important strides have been made in recent years. One participant compared the pressure on companies to take sustainability more seriously to water building up in front of dam: progress may not be tangible at the moment, but the shift may be swift and companies that fail to prepare will be exposed.

What do you see as the most likely trigger for greater interest?
• A number of different factors were put forward as important in shifting the conversation:
o Performance: for sustainability to become mainstream, a detectable difference in performance needs to be observed between sustainable and non-sustainable companies. This requires establishing a causal link between sustainability and the increased profitability of a company. While numerous studies demonstrate strong correlation between the two, it remains difficult to build a business case that there is a direct causal link from sustainability to increased profitability.
o Shareholder activism: examples were brought to the table of activist shareholders bringing resolutions to AGMs to incorporate increased sustainability. Importantly, even where these were not adopted, the effect was still strongly felt internally through increased prominence given to questions of sustainability at Board and C suite level.
o Regulation: increasing regulation by, for instance,, changing the incentives companies face in deciding who to lend money to may hold the potential to shift companies towards a more sustainable trajectory.
o Changing consumption patterns: consumers can hold a lot of power through share-options. The increased availability of data on company performance may unlock corporate transparency making it easier for people to make conscious consumer choices. Whether this was a realistic outcome was the subject of debate: it may be relatively easy to make figures look good, but these do not reflect the value of what a company is really doing.
o Pensions: Any employee with a pension should lobby their FD and pension trustees about the PRI/ESG policies

Should companies anticipate harder screening of their sustainability performance?
• The majority of the impact is in the supply chain. Companies focusing their efforts in this arena will be most successful in achieving tangible reductions in their environmental impact.
• Indices and data in its present state are not good measures of how sustainable a company is. Even standardising ESG is very difficult. There remains significant issues with how companies are currently assessed (ISO14001, etc.). For example, total consumption of electricity is recorded without accounting for the source of this elecricity. Electricity generated from the burning of fossil fuels clearly has a higher impact than electricity generated from renewable energy sources. Context matters.
• The general consensus was that companies should anticipate this harder screening, but the level of scrutiny is still too crude, and could indeed be counterproductive if it resulted in an exclusive focus on measurables.

What message should sustainability teams take to their CFOs?
• CFOs timeframe and sustainability timeframe do not operate on the same set of axes. The CFOs remit is financial performance, that limits the scope of conversation that can be had.
• Go find out what investors think of your company and take that back to your company. As discussed above investor interest in the environmental credentials of your company can be a starting point for a wider push to prioritise sustainability.

Final take-away:
• Shift the conversation beyond a narrow focus on short term profitability and towards an understanding of the increased long-term resilience of sustainable companies.

Big data - the ultimate solution?

They say big data is changing everything. Arabesque Partners uses an algorithm to invest in high sustainability companies from over 1 billion data points, and is outperforming the MSCI by 7%. To what extent could big data change the way that mainstream investors look at corporate sustainability and how? What are the other areas where big data could most impact sustainability? 

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TABLE 2

Table question 1: To what extent could big data change the way that mainstream investors look at corporate sustainability and how?

• Big data as a term is about finding informational signals in large volumes of information that can be acted upon in financial decision making: in simplest terms when choosing whether to buy or sell a company. It is unusual to mainstream investors and therefore alluring. The problem is that the signal often fails when you try to drill down to a company rather than a market level
• TruValue Labs’s Insight 360 platform (https://www.insight360.io/) is a good illustration of the way big data can change mainstream investors’ evaluation of sustainability. Integrated into platforms such as Thomson Reuters’ Eikon, it uses advanced technology in artificial intelligence and cognitive computing sifting through more than one million data points a month to provide investment professionals with the most relevant real-time information on their company holdings, sectors, and sustainability factors.
• Other examples of platforms leveraging systems analysis and working out correlations that you can’t straight forwardly compute include RepRisk (https://www.reprisk.com/), and IBM’s Alchemy (https://www.ibm.com/watson/developercloud/alchemy-language.html). The next step that no one has tapped into yet is not about unstructured data but about voice and video
• As a mainstream investor, to truly integrate sustainability you have to be transparent with regards to where money goes: “the supply chain of money”. For example, if you put money in your pension fund and it buys shares from Unilever, Unilever doesn’t get this money – you buy it from another asset manager and it simply gets shuffled around. To give an analogy instead of seeing horses through the start (as it was the case 30 years ago) we are increasingly betting on which horses will be winners, which is a different mind-set. Technically this ability to trace the flows is becoming more powerful (with blockchain the latest incarnation), but it’s a political and legal question too: lots of powerful players don’t want this transparency unless regulators & governors are prepared to put pressure on them.
• Interestingly, ESG is the only part of finance where we start with list of topics and defending them as important. Mainstream finance works in reverse: it starts with the opportunity, followed by the question “how do I find some information to solve this problem”

Table question 2: What are the other areas where big data could most impact sustainability?

• Big data has potential to impact sustainability in many areas but first sustainability data needs to be automated to become big. At the moment it is a lot of manual collection and analysis, which is not sustainable over the long term
• For example, one way it can be used by construction companies when they are being asked to deliver economic regeneration as part of projects is to predict what they need to change to deliver better value through our services

Communicating with investors

Swedish manufacturer Atlas Copco recently withdrew from the DJSI in favour of a GRI materiality approach. Do you feel this reflects the changes that the investor community wants? What is the direction of travel for this relationship, from completing investor surveys to working closely through the Investor Relations team to quantifying the value of sustainability? 

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TABLE 3

Swedish manufacturer Atlas Copco recently withdrew from the DJSI in favour of a GRI materiality approach. Do you feel this reflects the changes that the investor community wants?
• Not mutually exclusive – same set of information could feed into both disclosures. Different stakeholders will then make decisions either based on indices or ESG research done in-house or by analysts using sustainability reports.
• Which investors are you trying to reach? If there is a trade-off, you may reach a much larger audience by reporting directly to investors through your annual or sustainability report (investors will look at these first and often like to interpret the raw data themselves). Only a minority of investors invest using specialist indices.
• Benchmarking can drive internal change - often it is the company itself that is interested in the benchmark
• Too many different requests from people asking for the same information in different ways, with different levels of transparency in the resulting benchmarks. CDP are more public about the way they reward companies so these may be more useful e.g. you can send interested stakeholders to those responses.
• Reporting can take time – creates a focus on getting the information or even reporting ‘correctly’ and can detract from action, especially if the data is not well utilised.
• Comparability of information is important and this is difficult to derive from companies’ own reports.

How do you provide responses that reflect materiality to your business?
• Don’t want to have boilerplate reporting, need scenario analysis and rigour (e.g. Taskforce approach) but how do you decide which scenarios to apply and what definition of materiality to apply? There is a trade-off between providing flexible frameworks and comparable ones. We are where accountants were 100 years ago.
• Different lenses of materiality may be relevant for different people (e.g. materiality to investors, customers or employees) and on different timeframes (e.g. no agreed means to define materiality when looking at 10/20 year scenarios). This can be reflected in different types of reports for different stakeholders.
• Or, no need to differentiate? Opposite approach is to acknowledge that if you don’t address the material issues for other stakeholders e.g. employees, then you will be creating a material issue for investors. Do need more work on the concept of materiality.
• Who defines what is material for your business? Some investors want to determine what is material, others want companies to determine what is material themselves (best done by the risk management part of the organisation but should also do a certain amount of external calibration with stakeholders)
• Lack of consistency on materiality is interesting to investors e.g. if something is material in the sustainability report but is not in the financial accounts. The difference between the two may prompt an interesting dialogue and reveal if the corporate part of the business has really taken sustainability on board as part of the core strategy.
• Growing gap in disclosure. Some companies produce absolutely nothing whilst others over-report which also doesn’t relay a good understanding of materiality.
• Transparency is the start. Put an agreed definition in when reporting – this creates a healthy dialogue. Can be rare to see companies transparently publishing their material risks (although there can be serious consequences) – sometimes a need to impose a framework. For example, lawyers in the US are very nervous about reporting around materiality. Companies’ understanding of materiality does evolve over time.
• 3rd party verification, done well, can help to challenge a company’s assessment of what is material
• Different channels for different information - can use different channels for reporting the key material issues; the detailed information that sits behind it; and to meet internal demand for motivating content.

How well do your IR teams understand and convey sustainability-related topics?
• Don’t get asked. Not enough investors ask specific questions about sustainability, especially not by mainstream, sell-side analysts. Dialogue is better when mainstream analysts have good partnerships with their equivalent ESG analysts.
• Internal communication challenge. Language barrier with the IR team – what do they need, at what level?
• Integrate messages into the rest of the narrative - ESG/sustainability label can be counter-productive. E.g. all mainstream analysts ask car companies about compliance with emissions requirements, just not labelled that way.

Effective change campaign

According to a Harvard Business School study, when investors file a shareholder proposal on an ESG issue (whether it receives majority’s support or not), the company’s performance on that issue improves. What else makes an effective campaign for changing companies? From shareholder activist campaigns to adopting voluntary principles, what will stimulate the board to develop long-term governance?

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TABLE 4

1st round: Issues you would have liked to get from the panel discussion.
- How to best engage with senior management on corporate sustainability.
- The current evidence of correlation between firms with high levels of ESG and financial performance poses two important questions: whether the relationship is causal, and if it is not or we were shown that ESG is not associated with performance does that alter our posture towards ESG?
- Often a solution to embed sustainability is to have good internal management systems. It is also about making sustainability simple, easy to understand and easily accessible to everyone.
- A potential question is whether accountants and/or audit risk are sectors where ESG pressure should be primarily applied.
- How narratives on sustainability can be used to create change. For example the creation of sustainability accreditations and the fear of having Green Peace knocking on the door has changed helped to start a change in narrative.
2nd round: What’s your experience engaging boards and seeing them change?
- You need charismatic CEOs with a vision to drive change internally, and in relationships with NGOs (doesn’t really apply to investors). Otherwise it is much more difficult and the business case needs to be sold to the executive team.
- Identifying best practice terms and using them as an encouragement
- Engaging investors as they own the business with a combination of facts and data, a sense of legacy, and using a human face. Lines like the potential to save energy do not usually work, and shareholders want more than reports they want to see the issues themselves – eg. Visiting plantations in Bangladesh.
- There exists a difference in engagement between private limited companies and public equity companies in terms of board engagement.
- Sustainability makes discussions with the board more interesting in private liability companies. It can be dull to only hear about profits and returns and throwing in other issues can be interesting. When nothing works, the last card is to point to fellow competitors that are doing it already (of whatever sustainability issue being advocated for).
- It is important to not play all cards at once, but of having a strategy of what arguments will be brought forward and advanced at a time.
- Private ownership gives more freedom to think things differently and the potential for change.
- NGOs are often key players in changing boards. The big shift in palm oil was largely triggered by Green Peace activists which climbed a Unilever factory in Liverpool dressed as orangutans. When Unilever was hit by a major Green Peace campaign regarding pesticide saturation in tea use in China it started to engage with the latter and make changes. Then Green Peace used the changes made in Unilever to prompt Indian companies to change.
- Coming up with new KPIs that allow investors to understand ESG in investments is very important.

Key performance indicators

With an array of sustainable reporting frameworks now available - including UNGC, UNPRI, GRI, SASB and ISO 26000 - how useful are these to investors? Join Martina Macpherson, Head of Sustainability Indices at S&P Dow Jones Indices, to discuss which data may be valuable for investors and the key indicators that companies may consider providing.

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TABLE 5
How useful are the available reporting frameworks to investors?

-Investors use the frameworks that will add the most value and are focused on what is material to the companies in which they are investing. Need for standardisation of frameworks around common KPIs, such as the interpretation of the SDGs for ESG investors.

-Companies are investing money in producing integrated reports. It is a learning curve for companies to meet investor needs. There some proactive companies that are ahead of the curve.

-There are two types of investors the conventional investors and the SRI driven investors. They act differently in approach and questions. The corporates currently need to treat the two types of investors differently. This creates an added burden for the companies since they have to respond to respond to multiple requests based on multiple frameworks.

- There is a risk that a new framework based on SDGs simply creates more burden, but it would also provide the opportunity for framework standardisation.

-Thoughts for the future: Is it ethical for private companies to collect all this ESG information of the performance and transparency of companies and selling it? Shouldn’t this information be public in order to aid the movement of the transformation to a more sustainable society? Need public frameworks around which the private sector can develop the best, but private data and insights.

-Key indicators that companies consider providing
Disclosure and transparency can be used as the starting point-from the tick box compliance to then define the criteria of the leaders that need to have a better disclosure. This can be measured against the set targets of SDG covering ESG.

- There needs to be an interpretation of the SDGs in order to be material to have an assessment. There are 17 Goals for which not all are material to all companies. Assessment of the risk management in addition to the revenue perspective where you can assess who are the companies that are performing well with regards to the ESG scoring as well as having good returns.

-Challenges: these is a communication gap between the corporates and the investors in addition to the investment chain. There are differences in the terminology used and how these can be integrated in the allocation debate. A join terminology is Metrics that is widely understood. To close the gap, specifically designed benchmarks can reflect KPIs supporting the SDGs.

-There is a wider concern that more frameworks and reporting can harm the positive movement to sustainable society. Companies should report on going beyond what regulation requires? Defining the net positive outcome, or benefit.

-There is a new interest from clients to address materiality. This is a positive development where the clients/companies want to understand their material issues in order to address them in a more targeted way.

-Too much information can create negative value for investors by diluting the key information. There is a need for more classification, taxonomies and benchmarks. Reduce the amount of information there is in annual reports/sustainability reports, focusing on material aspects.

The carbon revolution

It is estimated that over 50% of energy efficiency projects that make commercial sense to either the company or a third party financier are no being realised. Does that figure feel right to you?  If this is a market failure, how could the investor community play a role in correcting it? Do we need more policy in this area, or can you see the free market delivering rapid carbon reduction?

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TABLE 6

It is estimated that over 50% of energy efficiency projects that make commercial sense to either the company or a third party financier are not being realised. Why is that?

1. Current focus is on CAPEX, potentially at the expense of OPEX, i.e. delivering the projects at the lowest price possible, even if on-going expenses are higher.
a. Problem of short-termism, especially for listed companies with shareholders to satisfy
b. But for many projects: income generated from year 1 higher than cost of the project

2. Scepticism: energy saving needs to be low-hanging fruits in people’s mind - difficult for many to understand the business case behind it.

3. Carbon price (transparency and level): Difficult for companies to see the carbon price. The uncertainty creates fear for people to take on projects. When companies manage to see it, it is too small for them to care about (oversupply).

4. Behavioural issue: A lot of stakeholders to get on board means it is difficult to implement.
Engineers might be reluctant to change anything and scared that their job might be on the line.
a. Some easy things have been successful (e.g. LED) but anything more complicated faces
this barrier

How do we solve this issue?
1. Education: needed to get over the fear of some projects being implemented.

2. Incentive and corporate structure: useful if we consider that a senior management failure is part of the reason those commercially-viable projects are not implemented.
a. Useful to change behaviour of staff
b. Difficult however to make those incentives more important than e.g. profit-related ones so very difficult to incentivise staff
c. High staff turnover is also a key issue: no link to the company’s values, including sustainability ones

3. Automation: Take energy efficiency out of people’s hands and automate it (e.g. through light sensors) might be easier than behavioural change)

4. Government regulation: useful to tackle market failure
a. Needed because carbon efficiency is often not a priority for companies
b. Not clear however that the government is as open to regulation now (we saw a raft of new legislation 8 years ago to encourage energy efficiency but some have been reversed
– e.g. around housing as politicians are focused on the housing shortage).
c. Some examples of regulation working very well: light bulbs, boiler, etc.

5. Carbon market revamp:
a. Floor on carbon price: oversupply created because regulation pushed companies to cut carbon emissions quickly – the price should better reflect the issue at hand
b. All industries (including e.g. transport) should be included in this market.

What can investors do given that money availability is not the issue?
1. Short-termism continues to be an issue. Institutions seem to recognise this but there remains issues in the practicalities of changing this.

2. Focus gradually changing from looking at a snapshot of the company’s carbon emission level to looking at how the company’s efforts is reducing the aggregate carbon emission level over time.

3. Some indicators investors can look at, e.g. growth in amount invested in carbon reduction.

The empowered employee

On being made Prime Minister, Theresa May signalled she wants to have employee representatives on boards – a nod to the Germanic model, where employees have greater influence over decision-making. Should employees, companies and investors welcome this move, or is it at odds with Anglo Saxon capitalism? Is she right to focus on the employee to deliver sustainability, and why?

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TABLE 7

The first example mentioned was John Lewis, where employees have a share in the business and therefore share an invested interest in the company. This can lead to higher employee engagement and employees acting as advocates for the company or brand.

To accomplish employee engagement, a company culture that supports participation, listens and facilitates communication is required. Hence, in some companies, introducing employee engagement can mean cultural and behavioural change to ensure that there is no tension between driving business and engaging employees. The process of employee engagement could also introduce or improve innovation and create a purpose. It was suggested that employee engagement can result in less sick days, higher levels of motivation and better reputation attracting talent.

Theresa May suggests to have employee representation on boards. This would help to introduce new perspectives to the board – typically formed of affluent people- and its decisions, potentially resulting in better and more balanced decisions. However, one participant shared the results of a survey of about 3,000 businesses which has shown that there are mixed results if employee engagement is related to better financial performance.
It was further questioned whether one person (or a small group) can represent the interests and opinions of a diverse group of employees. Furthermore, other topics may be prioritised over sustainability such as job security.
It would need to be clarified how involved employees or their representative would be in decision making as there could be potential conflict of interests, for example when the board needs to make decision on employee benefits.

Furthermore, it would need to be ensured that employees are informed enough, which would require the company to provide the right information and regular updates. It was acknowledged that dedicated employee engagement (regular meetings, representation from each tier) can work in small organisations better than in larger organisations.

Finally, it was pointed out that the role of the board may change – from representing the interest of shareholders to stakeholders. This however would potentially require other stakeholder groups to be represented as well, such as suppliers. How would the process of decision-making change? Or would alternatives such as surveys be a better way to capture employees’ opinions, concerns and interests?

The influence of Private Equity

Are Private Equity (PE) house backed companies emerging as a driver of sustainability? With many PE house’s building in-house ESG teams and with increased focus on Responsible Investment is change in the air? If listed companies are seeing growing value in sustainability, what does this mean for PE? How can PE groups and their investee companies work better together?

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TABLE 8B

Do you see private equity as a driver of sustainability? With many PE house’s building in-house ESG teams and with increased focus on Responsible Investment is change in the air?

• ESG has progressed from there being widespread ignorance of the subject across PE, to ESG being widely used in due diligence, and now as a driver of value.
• ESG in PE has traditionally been from a risk assessment/due diligence screening perspective and more PE firms are doing it, with an increase in the appointment of dedicated ESG people – though it’s rare that there is more than one dedicated ESG person in a PE firm.
• More PE firms are also seeing PE as a driver of growth but – from publicly available materials and websites – it’s not always clear exactly how a lot of PE firms add value to investee companies through ESG.
• There is some suspicion that the lack of visibility around exactly how a lot of PE firms add value through ESG is part of the mystique that some PE firms like to cultivate – another ingredient of their own special ‘secret sauce’ that allows them add value in a unique way. It may in fact be the case that the ESG changes they help secure in investee companies are simply the result of the application of well-established ESG disciplines.
• There tends to be pack mentality when it comes to ESG. You don’t want to come last, but there is no real desire or incentive to be first.

Does PE see ESG seen as important in its own right or primarily in terms of it being a good indicator of a well-run company? If listed companies are seeing growing value in sustainability, what does this mean for PE? How can PE groups and their investee companies work better together?

• For many in PE, ESG is just a marker of a well-run company. You want to assess the extent to which they are liable for ESG risks, what the shareholders’ liabilities are, and what are the legal compliance issues. Assessment of the reputational risks arising from ESG tends to follow this initial due diligence.
• Incentives are crucial. One reason why ESG has gained in prominence is that PE firms are typically holding on to their assets for longer, as it’s more difficult to make money from investments in the short term. As PE firms are now investing over a longer period they are considering ESG issues more carefully as many ESG issues don’t have a material impact over the short term. ESG as a value driver is typically over the medium to long term.
• You also have to consider the incentives created by changes in consumer tastes – such as an increasing preference for free range eggs, rather than caged - and the recognition that cash flow can be severely affected by an ESG problem. It then becomes a material risk for investors to consider. The FAIRR initiative, for example, has shown how factory farming and poor animal welfare standards can pose substantial risks to investors.
• PE and investee companies can help educate each other on ESG issues. It should be a two-way street.

Wellbeing and corporate governance

Is there a direct connection between wellbeing and corporate governance? Can Theresa May’s ambition to have mandatory employees’ representation on executive boards enhance employees’ wellbeing? Can increased recognition of wellbeing in the workplace lead to better productivity and profitability? Find out how wellbeing is different from sustainability.

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TABLE 9

There is definitely a link between wellbeing at work and levels of productivity. Consideration has been given to elements such as space, termo-confort, light and air for assessing the environment of the workplace and developing models, matrix and business cases. Matrixes have been developed to evaluate if and how the quality and nature of the environment impacts on productivity. At present, there is insufficient data available and therefore it is early days to determine evidence of causality between the two sides of the equation.

Addressing wellbeing passes through considerations of what is wellness at work. The Lead Bayan standard is a comprehensive way of looking at how the perceived environment and environmental factors impact on human factors. Companies can broaden their influence on wellness and wellbeing with corporate governance initiatives that the quality and level of sugar and salt that is in the food offerings in their canteen and building.

A Business case based on the World Standard has been shaped around how buildings are designed and the way the space is distributed and allocated depending on the nature of the business and its activities, i.e. what proportion of the space is dedicated to working day, customer interaction and shared or private areas. For example, not only hot desking can save money on rental and leases, but also it a culture of flexibility, space sharing and networking opportunities, which allow employees develop a different sense of belonging. Space and environment alone are insufficient for promoting habits of wellness and wellbeing. Management actions and leadership style are fundamental for minimising the occurrence of repetitive strain injuries caused by too sedentary life at work, allowing breaks from the screen and snap-chats at the water cooler or coffee machine.

Without doubts, happy people produce more and going beyond wellbeing and corporate governance requires defining cultural values of the workplace within in the business model. Integrating specific cultural traits into the strategy can better shape and promote habits and behaviours that are drivers for shaping both short and long-term plans.

Venue Detail

Bank of America Merrill Lynch: King Edward Hall

King Edward Hall | 2 King Edward Street | London | EC1A 1HQ

Directions

Bank of America's offices are a very short walk from St Paul's tube station (Central Line). Exit the station at Cheapside/Newgate Street. Go past the BT centre, with it on your right-hand side and take the first available right down Edward Street. Continue down this road for 80m and the entrance to the venue is on your left-hand side.

Do not go to the main reception desk at their offices when you arrive. You are looking for an entrance that leads you directly into the King Edward Hall.
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