Will the real investor please stand up?

Monday, June 06, 2011

18:00 - 20:30

What will be the trigger for taking Sustainability out of a silo and into the organisation's core business strategy? That question sits at the back of the minds of most Sustainability strategists. Many of the core drivers remain weak: the policy framework is evolving too slowly, only 10-15% of consumers typically seem to care and employee preferences generally fail to impact strategy.

Is it time for the Investor to stand up?

There are signs that Institutional Investors are starting to wake up, and they may be the most important driver group to watch. If the environment enters the conversation between the CEO, Investor Relations and their shareholders, it will quickly enter core strategy. There are a number of reasons for thinking that this is starting to happen:

  • Osmosis Investment Management has shown that companies who use resources most efficiently tend to outperform the market.  Its resource efficient FTSE World Companies outperform the FTSE World Index by 6% per annum on a consistent basis.
  • Environmental supply chain issues are starting to impact values. In February, Britvic saw its share price fall by 12% when it announced its raw material costs rose to 10% due to the rising cost of oil.

Green Monday on the 6th June will reach out to Institutional Investors, Investor Relations and internal Sustainability strategists to discuss the significance of these changes, and how these groups should be communicating with each other.

 

Speakers

Dr. Craig Mackenzie Scottish Widows Investment P...

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Roger Seabrook Unilever

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Round Tables

Built Environment

How does the property market value environmental performance (visible green elements, carbon and energy efficiency)

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The key was to investigate whether green/ sustainable buildings are valued more highly and specifically to investigate the impact of issues like carbon and energy efficiency. Investigate views on whether investors are driving the move to green buildings or occupiers.

KEY POINTS
• Institutional investors are keen to ‘future proof’ their investment, thus they were seen as one of the main drivers
• Green premium or brown discount was a key thought
• In the US it was generally agreed that the benefits of a green building were more clear-cut while in the UK, who benefits and who pays is less clear
• According to some reports (BPF/ IPD) leases are generally getting shorter and thus was impacting decision to green or not.
• Green doesn’t automatically mean it will sell. An example was a Gazeley warehouse with excellent green creds has been vacant for a substantial time.
• Regarding the impact of BREEAM on the value of buildings: Maastricht University two year study to be released shortly, will provide some evidence based on a significant dataset that a premium can be commanded. As an aside, LEED was generally seen as more credible with international traction.
• Regarding energy efficiency and energy provision – a variety of models, from fully outsourcing to shared risk and return

CONCLUSIONS
• Sustainable/ green buildings for new commercial buildings are a must. With existing stock, most are not ‘labelled’ – this is where the issue and the opportunity lie. Funds are being set up to buy existing buildings, green them and then offload to the market.
• Legally there are many issues for occupiers to overcome re greening their building – so putting PV on the roof is not as simple as it sounds.
• Generally it was thought that Energy Performance Contracting had bigger role to play in the UK and new models like the risk and shared reward contracts (DEFRA implemented for new HQ) was seen as a step in the right direction

How should investors look at Sustainable supply chains?

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SUMMARY
The plenary threw out 2 key comments that could drive investor interest and discussed in context of your supply chains:
• Resource scarcity / Risk management - less substitutable products available and ability to recover from price shocks
• Policy changes coming down the line in various markets.

KEY POINTS
• The first question companies need to answer is whether a measurement of environmental impact in the supply chain has been made. If this has not been attempted, in order to quantify what, when and where, companies cannot understand risk from a supply chain perspective.
• Regarding clothing supply chains, risk can be at 4th tier supply and beyond
• Walmart has started asking social questions in response to investor demand, which has now moved to environment questions
• In construction: investors were originally happy that only 10% of suppliers who covered the majority of work were queried. This has now escalated to a position where 100% of suppliers are asked for more detail. There is a call for more transparency and more independent accreditation of claims in the supply chain.
• In real estate: a green refurbishment of a major building complex in Germany allowed the passing of the asset to an investment fund.
• In banking: reporting to all scopes, many buildings are leased - so there is a clear focus on paper, waste and IT
• In cities: local government and communities along with the investor are looking for local supply as part of procurement decisions

CONCLUSION
• Measurement is fundamental to answering investor questions about Sustainability risk in the supply chain
• There is an increasing trend for investors to ask more and more detailed questions about these risks and therefore the need to become more systemic in how to measure and assess these risks is required.

Carbon Strategies

Only 0.1 percent of their carbon emissions of FTSE100 companies are offset – what should and do investors think of offsetting?

Finance & Corporate Sustainability

Will the CDP’s Carbon Action Plan have an impact on strategies around Direct emissions?

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Carbon Disclosure Project has asked major Companies worldwide to commit not only to disclosing their Carbon Emissions, but to year on year reductions. Table agreed to review what impact this is having on their own businesses and the market place. This discussion was central to the plenary, on the basis that it deals with commitments to stakeholders – including Investors

KEY POINTS:
• CDP adivse that it encourages Companies to decouple carbon Emissions from Economic growth
• They have 35 Investors, representing $35 Trillion USD committed to making their investments report and reduce
• There are still major issues of inability to make comparisons of Carbon intensity between similar organisations
• Lack of consistent measurements
• Carbon (and Sustainability) needs to sit under the Finance Function – ie move central to business
• There needs to be a common and agreed nomenclature
• Stakeholders and businesses need to stop seeing carbon as a “nice to have” and understand it represents a risk to the business – potentially regulatory and reputational as well as fiscal
• CDP action is being recognised by Investors – but still only small number relatively

CONCLUSIONS:
• Move sustainability to Finance function
• Drive through into supply chain – one retailer has target of placing 25% of its contracts to supply with its “Gold” performers on Carbon reductions
• Give clarity of what scope emissions cover
• Have a target that is relative – preferably to turnover – not just a year on year percentage reduction

Communications

Are your Sustainability experts communicating effectively with your Investor Relations?

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SUMMARY
The roundtable discussion considered the importance of language in communicating with investors

KEY POINTS
* Language is key - what is the language of investors?
* Cultural differences can be a barrier in tackling resource management issues in Asian markets
* Quality assurance of data will be increasingly important in the future
* Convergence of metrics for comparison moving forwards
* Sustainability is linked to risk management and resource use
* The term "Sustainability" has a resonance with the finance community
* Differences in the use of language for discourse between different stakeholders such as the public and investors
* Importance of considering what not to say and the absence of certain terms such as "green"

CONCLUSION
* Consider terminology with different stakeholders
* Convergence of metrics moving forward and increasing role of quality assurance
* Businesses need to increasingly understand investors needs and vice versa
* Importance of the messenger - CEOs as spokesperson

Energy Effeciency

How to use investor pressure to increase focus on Energy Efficiency investments?

Corporate Strategies

Will investors emerge as the biggest drivers of sustainability strategies, leaving policy makers, consumers and employees behind?

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Will investors emerge as the biggest drivers of Sustainability strategies, leaving policy makers, consumers and employees behind?

We asked the question; "is the value of Sustainability programmes to businesses articulated sufficiently well to investors such that they understand its relevance to their assessments of a company’s performance or management quality and approach?"

The companies around the table agreed that articulating their Sustainability programmes in ways that communicate real value both internally and externally was work in progress. Part of the issue was lack of awareness of the types of things that investors look at and why they look at them. Another issue was the need for companies to educate their investors on the wider issues that need to be managed in order to have a successful company such as management of people, environmental and social issues. Investors may not factor these into their financial models but they can provide valuable insights for investors on the quality of management, strength of risk management and resilience to external shock factors.

Having a clear business case is vital and if it rehearsed and refined internally, it will make the message more powerful when communicated externally. Forum For the Future highlighted their Better Decisions Real Value as a free resource and a useful starting point which may be a useful aid to develop and communicate business case thinking.

A number of interesting value drivers were highlighted during the discussion:

Access to markets: whether Business to Business or Business to Consumer – companies described meeting minimum sustainability standards was a pre-requisite to access markets. For example the supermarkets require minimum standards of their customers, as they use their influence as gate keeper to the consumer to drive standards in the supply chain. Likewise governments and regulators are increasingly setting high sustainability standards and are looking for evidence of responsibility as a minimum requirement in order to bid for contracts.

Access to innovation and funding: Companies described their sustainability programmes leading to the formation of innovative partnerships to achieve longer term goals which included accessing new sources of funding e.g. a pharmaceutical company partnering with the Bill and Melinda Gates Foundation and receiving substantial funding to support their work.

Cost saving: This is probably well recognised, but resource efficiency saves costs which directly affect the bottom line. One company described being part of KKR’s green Portfolio programme which claimed to have saved or avoided $160 million of costs across its portfolio as of October 2010.

Employee engagement: During the panel session Unilever identified that one of the spin off benefits of the Sustainable Living Plan was the way it had motivated and engaged its employees leading to increased satisfaction and pride in the business.

CONCLUSION
In summary the table agreed the business case for sustainability programmes was tangible and companies could do a better job of aggregating the benefits of sustainability programmes and communicating them in such a way that a meaningful conversation could be had with investors.

Energy Policy & Strategy

What is the renewable heat incentive (RHI) going to look like?

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The RHI plans to provide incentives for renewable heat schemes from July 2011 to enable the government to increase the level of heat generated from renewable sources. The aim of the discussion was to provide an introduction to the proposed legislation and give an insight into any practical implications for onsite heat generation.

1. The RHI is split into two phases; the first due in 2011 is focused on the non-domestic sector before being opened to the domestic sector in phase 2, currently anticipated in 2012.
2. The technologies covered in phase 1 of the RHI are Biomass (inc. CHP), Energy from Waste, Solar Thermal, Ground Source Heat Pumps, Biomethane.
3. The RHI has been designed to deliver 12% returns (5% for Solar Thermal) through 20 year, RPI linked payments.
4. The government have proposed a £860m budget to be funded through government spending.
5. Key technologies for on-site generation are Biomass boilers, Ground source heat pumps and Biomass CHP if there is a sufficient heat load
6. Key concerns for the investment community are;
• Level of degression and review of support levels
• Impact of the 2013 RO review on CHP technology
• Bankability of the heat i.e. availability of high quality off taker for the heat.
• Supply Chain – Securing the feedstock supply

What are the resources beyond carbon that investors care, and what are the new opportunities and risks?

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SUMMARY
The aim of this table was to accelerate resource efficiency by identifying related strategic opportunities for major corporates. With the plenary session speakers continuously referring to resource scarcity as a major reason behind the acceleration of sustainable investment, the group set out to determine what other resources beyond carbon could potentially attract investors.

KEY POINTS
• With 40% of the 600m tonnes of CO2e in the UK coming from fossil fuels the group aimed to find out how the remaining 60% can attract investors and identify which resources can become the next main focus on the sustainability agenda.
• The initial aim was to highlight three resources to focus on besides carbon, and discuss three key opportunities and three potential risks.
• Participants put forward a range of resources including; water (which was generally seen as the next most important issue but participants were unsure about how to persuade investors to realise its importance), copper, steel and aggregates (particularly for the construction sector), rare earth resources (which are seeing a continuing rise in market price), alongside others such as indium and phosphates.
• Participants also discussed the growing number of risks. Issues mentioned included; diminishing returns as an increase in energy is needed to extract commodities, climate destabilisation leading to increased unpredictability in markets (food prices were mentioned as a recent example), investors interests (short term vs long term ROI), scarcity (shortages and volatility both incredibly important), increasing population and the increasing dominance of China over resources.

CONCLUSION
• Potential solutions do exist and several were mentioned as important to the future; local manufacturing (seen as the best way to increase efficiency whilst decreasing footprint the London Olympics was given as an example here, business leasing - for example, energy centres for industry (where the life-cycle cost is taken into the model and the UK jobs market could benefit from) smart infrastructure i.e. ICT and Cloud Computing (participants believed that sustainability has yet to take advantage of the impact that ICT and social networking can have – the idea of doing more with less playing an integral part to this)
• Ultimately key resources vary greatly according to each sector and this is how investors view the situation. Data availability is and will continue to be crucial to help investors understand how each resource is valued.

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.