This was one of the themes explored at KPMG’s global business summit in New York City, “Business Perspectives on Sustainable Growth: Preparing for RIO + 20.” The panel for the Financial Services sector break-out session comprised:
- Michael Baldinger, CEO, SAMGroup Holding
- Michel Lies, Group CEO, Swiss Re
- Kenneth B. Mehlman, Head of Global Public Affairs, KKR
- Stephanie Miller, Director, Climate Business Group, IFC
- Curtis Ravenel, Global Head, Sustainability Group, Bloomberg
That such a senior group of leaders from a broad cross-section of the financial services sector chose to lend both their presence and voices to this topic underscores just how critical an issue sustainability has become.
Sustainability impacts our industry sectors (banking, capital markets, insurance and investment management) in numerous ways. In this article we focus primarily on how sustainability impacts the ‘buy side’ within banking and investment management. Future articles will consider the role of the insurance sector in putting a price on climate-related risk and how the financial sector can support sustainable development in emerging markets.
There is ample evidence to support the idea that sustainable practices are good for business. Kenneth B. Mehlman noted during the summit that, at its essence, sustainability is about the use of resources and ultimately it is a cost-effective, bottom-line-oriented activity.
“Pollution is expensive … if you can reduce the amount of energy you use, the amount of water that your company uses, if you can reduce the amount of waste that is generated, if you can reduce the amount of forest products you use, you’re going to save money.”
Sustainability as a business strategy extends beyond being energy-efficient and reducing one’s own carbon footprint – as do the benefits.
A recent study published by Robert G. Eccles and George Serafeim of Harvard Business School and Ioannis Ioannou of London Business School showed that corporations that have placed sustainability at the heart of their strategies have consistently better performance than their peers with regard to valuation, profit and loss and return on equity. The authors studied a matched set of companies from 1992-2010 termed high sustainability and low sustainability. In the year that the companies were matched, the two groups operated in the same sectors and were almost identical in terms of size, capital structure, operating performance and growth opportunities, according to the authors.
The study, published in late 2011, provides some of the most compelling non-anecdotal evidence to date about the value of sustainable business practices. According to the authors, US$1 invested in the beginning of 1993 in a value-weighted (equal-weighted) portfolio of high sustainability companies would have grown to US$22.6 ($14.3) by the end of 2010 based market prices. In contrast, US$1 invested in the beginning of 1993 in a value-weighted (equal-weighted) portfolio of low sustainability companies would have only grown to US$15.4 ($11.7) in the same timeframe.
Among the characteristics of the high sustainability companies were “a coherent set of corporate policies related to the environment, employees, community, products, and customers.” The authors posit that the high sustainability companies outperform the others because their cultures and practices allow them to “attract better human capital, establish more reliable supply chains, avoid conflicts and costly controversies with nearby communities (i.e. maintain their license to operate) and engage in more product and process innovations in order to be competitive.”
What does this mean specifically for financial services companies? As the leading providers of capital, banks are uniquely placed to promote sustainability by encouraging businesses and individuals to use capital and resources in ways that benefit themselves, society and the environment, as well as those that supply the capital. Financial service companies are increasing their investments in green funds, clean energy technologies and sustainable projects and offering “green” products/incentives to consumers. Between 2004 and 2010, such investment has increased almost 500 percent, from US$52 billion to US$243 billion.
Among the consumer-oriented products being offered are mortgages that reward customers who reduce their energy consumption (in Canada) and banks that offer cash credits to customers who adopt sustainable living practices (in the US). Bank of America offers a US$1,000 credit to borrowers whose homes meet certain energy-efficiency guidelines. Similarly, Citizens Bank gives US$0.10 cash back to its Green Sense accountholders every time they perform a paperless transaction.
Finally, banks are working to reduce their own carbon footprints through such measures as encouraging both employees and customers to adopt “paperless” initiatives, increase use of ATMs and move to online transactions. Such practices, combined with an internal focus on using resources more efficiently and incorporating cleaner energy practices will also have a positive impact on the bottom line for banks.
Such green-themed products and practices not only have the potential to be additional sources of revenue or cost-savings for banks, but they also serve as points of distinction to consumers who often see little differentiation between financial products and the institutions offering them.
Not to be overlooked is the opportunity sustainability offers to help banks regain the credibility and trust that were eroded or lost in the wake of the financial crisis. Between 2007–10, the Edelman Trust Barometer reported that trust in the US and UK banking sectors fell 39 points and 20 points respectively. And this phenomenon was certainly not limited to banks in North America or the UK.
“The public perception is largely that anyone involved in the financial services industry is presumed guilty,” commented KKR’s Mr. Mehlman. “Rather than point fingers at someone else, companies can demonstrate that what you do isn’t just good for you, it’s also good for other people.” Doing this can create genuine value for a company as well as show leadership about a subject that is important to a wide variety of stakeholders.
Mr. Mehlman also pointed out that companies need to put the Environmental, Social and Governance (ESG) data they have about themselves to good use. “If you don’t understand all aspects of your business then fundamentally … you are an investor that is simply waiting for a problem and you’re not really doing your job as an investor or as an owner of the company.” KKR collects and analyzes ESG data across a substantial number of its portfolio companies, which also allows for sharing of best practices and finding opportunities for reducing waste and operating costs.
Demand for ESG data is also increasing among mainstream financial analysts, driving growth at Bloomberg’s Sustainability Group, which provides ESG data through the standard Bloomberg terminal. Curtis Ravenel (Global Head, Global Sustainability Group) presented data at the above summit showing a more than 100 percent increase in hits on ESG data fields since the start of 2010. Building up historical data sets and comparability between companies are some of the key challenges that Bloomberg is focused on. We can expect, then, that banks will further integrate sustainability with their strategies, not only to restore the financial sector’s reputation but also because it makes good business sense.
This being said, the picture across the industry is not universally positive, particularly in these challenging economic times. AVIVA announced earlier in 2012 that it was laying off some 160 people from the teams that look after corporate governance issues for organizations in which AVIVA invests, the team that researches ESG issues and from the fund management team that leads on socially responsible investing. This decision was not driven by AVIVA management having a change of heart about the importance of sustainable investment, but by commercial reality. While clients expressed support for responsible investment, in practice, this was not matched by sufficient fund inflows.
AVIVA’s actions indicate a curious situation. Many of the world’s leading companies see the value of sustainability, yet investors sometimes do not. This is a dichotomy that Michael Baldinger, CEO of Sustainable Asset Management (SAM) spoke about in depth at KPMG’s global summit.
SAM was founded in 1995 as the world’s first investment company focused solely on sustainability investing. The premise for SAM’s approach to investing, Baldinger explained, is that analysis which relies only on companies’ financial criteria is insufficient. And that sustainable businesses will perform better than others over the long term. Over the past 17 years, SAM has developed a research platform focused on under-researched, non-financial factors that it believes have a significant impact on investment performance.
Systematically integrating these factors into traditional financial analysis gives a more comprehensive view of companies’ potential for value creation which, in turn, allows for better-informed investment decisions. “Our experience has taught us that companies that can anticipate and manage current and future economic, environmental and social opportunities and risks are best equipped to prosper in a hyper-competitive and changing global business environment,” Mr. Baldinger told the attendees.
In 1999, SAM and Dow Jones Indexes created the Dow Jones Sustainability Index which, based on SAM’s research, identifies and includes the world’s most sustainable companies by sector and has become a global benchmark for corporate sustainability. Since then, some major global companies have decided to link top management remuneration to the Dow Jones Sustainability World Index – just one indication of the premium that strategic decision makers place on sustainability.
The chart below shows that adoption of sustainable practices has accelerated, yet, “the investor is lagging behind significantly,” Mr. Baldinger said. He likened the images the lines form to that of a whale and said that SAM’s goal is to “slim the whale” by closing the gap between how companies and investors view sustainability.
SAM’s findings are consistent with those of the Harvard study and suggest that companies can adopt environmentally and socially responsible policies without sacrificing shareholder wealth creation. Mr. Baldinger concluded, “I used to say, ‘Sustainability investing is the future of investing.’ I actually believe now that statement is wrong. Sustainability investing has become an imperative of the present.”
While data show that a focus on sustainability creates value for companies and can enhance their brands, it is also clear that not all stakeholders are aware of the value that is generated. That is a challenge for companies. Clear, consistent sustainability measurement is important. Integrated reporting – coupling how efficiently (sustainably) companies are managing their organization and its resources with the discussion of financial results – ultimately provides stakeholders with a more holistic view of an organization’s health.
Yet, in challenge also lies opportunity. Those companies at the forefront must continue to supply vision, leadership and support with regard to sustainable practices.
Financial institutions, among the world’s largest and most influential companies, are in a unique position to advance sustainability on many fronts, whether by reducing their own carbon footprint or educating their investors. Responsible use of resources, increased transparency and quality of data, a willingness to create innovative solutions and a commitment to partnering with other industry sectors will demonstrate the viability and worth of sustainable business practices and lead to greater adoption within the financial sector and across each of the sectors with which it intersects.
Global Chairman, Financial Services
Regional Coordinating Partner
KPMG in the UK
Tel: +44 20 7311 5800