Are Your Investments Sustainable?
Your investments in sustainable companies may not be as long lived as you expect.
by Rob Smith
Using sustainability as a guideline for investing can lead to highly reliable returns for investors but be careful, not all global companies that report on sustainability are actually
sustainable. Shareholder 's need to do their due diligence and look under the hood of their investments to find the true longevity of a company. Of special importance is the
lack of hands on expertise in risk management by most sustainability executives. This is because in many companies, sustainability was passed off to either the communication department
or the HR group. But managing risk is one of the most important elements in any successful sustainability and
EH&S program. Without a solid foundation in operational risk, environmental and sustainability programs are suspect at best. Our informal survey of the energy industry turned
up an even more surprising fact. Less than 50% of EHS executives in the energy industry had actually been on a working wellsite and 95% had never overnighted on one. This means that they are
directing EH&S activity without any significant direct experience in the environment they are responsible for managing.
We certainly can't force EH&S executives to leave the office and visit the field but we can help shareholders better understand what to look for in analyzing 'sustainability'.
Riskstream in co-operation with Fraser Exploration Ltd., a Calgary based E&P that also counsels large energy organizations on sustainability and risk, is releasing a
sustainability framework that provides a roadmap to sustainability 'best practices'.
For details contact Fraser Exploration Ltd. or Riskstream.
Riskstream Sustainability Framework
Sustainability is the commitment of a corporation to the principle of sustainable operations including the design and implementation of sustainable practices and policies
throughout an organization. It extends beyond economics to social responsibility, environmental management, innovation, performance and employee health and well being.
By addressing these issues in a responsible manner, shareholders will be rewarded with a more sustainable and stable investment.
Defining Corporate Sustainability Vision and Strategies
Boards of directors and executives need to buy into the concept of sustainability. Most senior energy executives bristle at the idea of global warming or social responsibility
but if the executives of the organization are uncomfortable with sustainability concepts, then sustainability will be simply a communications exercise and will add no value to the
shareholder. One method of determining a corporations 'buy in' to the concept of sustainability is to evaluate what they say about it. If the executive of an energy organization
cannot freely accept that they are doing something wrong environmentally then they are no different than an alcoholic who refuses to admit they are an alcoholic. The first step in
any sustainability program is for the CEO (and his lieutenants) to each stand up and admit they have an environmental problem.
Study the following statements very carefully ('in between the lines'). You will want to feel a true acceptance of the issues faced by the organization on sustainability without
any spin doctoring.
Message from the CEO and commitment by the board to sustainability
Statements of corporate mission and vision
Corporate values - statement of primary values for the organizations
Code of conduct commitment
Statement of corporate strategy and competitive advantage - corporate overview
Sustainability Strategy, Methods and Systems
Sustainability has a lot of moving pieces. Sometimes thousands and thousands of moving pieces. To manage all the components of sustainability effectively means organizations need
to have seasoned experts in some very vital sustainability functions including:
Operational and financial risk management including assessment, audit, controls and systems
Operational Innovation and Efficiency
New technology
Finance
Environmental disaster response planning and EMDRP systems
Environmental impact assessment, monitoring and systems
Renewable energy and green initiatives
Regulatory compliance
Without an extensive depth of experience in these specific areas by sustainability executives especially EH&S directors, sustainability initiatives will at best be an exercise in
corporate communications and spin doctoring
for public consumption and these type of companies should be avoided as a long term sustainable investment.
Look for a clear establishment of sustainability goals and schedules as well as reporting against annual targets. Some standard goals to look for are:
Sustainability goals
Environmental stewardship
Renewable energy and conservation
Stability of supply
Innovation
Social responsibility
Culture and heritage
Stakeholder engagement
Etc.
Important and highly visible elements in any sustainability program cover environmental, health and safety initiatives. Investors should be looking for detailed EHS policies,
methods and systems and a comprehensive Emergency Management Disaster Response Plan for the organization that covers all of its projects. Search for detailed documentation (should
be hundreds of pages) on:
EHS Guidelines
Environmental policies and frameworks
Environmental strategy and methods
Environmental Impact Assessments - including mitigations
EMDRP - global emergency response framework
Environmental Compliance
Material Inputs
Energy Use
Water Use
Biodiversity
Emissions
Effluent and Waste
Grievance mechanism
Safety
Health
Security
Respect
Communications
Having a communications strategy and associated systems is an important part of any sustainability program. And although public consultation and corporate image are often the key
goals of a communication strategy, safety, disaster response and whistleblower reporting should be the primary focus of any sustainability communications program. Having a pretty
website with grandiose statements about social responsibility with little corresponding action by the corporation should be a red flag to any investor. Look for the following:
Defined Communication strategy and associated systems
Emergency response systems
Whistleblower reporting systems and policies
Community engagement, feedback and policies
Sustainability reporting standards - GRI
Third party review of reporting
Sustainability feedback methods
Data collection methods
Sustainable Materiality
Materiality is a reporting requirement but also has a very real purpose. Operational risk management is a constant process of not just identifying risks but determining how
important they are and if they are worth mitigating. This valuation process is a standard part of risk management. In sustainability, the same methodology applies to components
to help evaluate which ones are the most important to the organization. Although materiality statements are common in sustainability reporting, the key will be in how materiality
is determined and the broadness of the sustainability executive's 'hands on' experience. They will need to have a wide depth of experience across many different areas of the
organization such as finance, risk, logistics, operations, field work, environmental assessment, audit, etc.
They will use this expertise to not only facilitate the materiality assessment but to evaluate the results against shareholder goals. Blind adherence to surveys about what is
important from corporate stakeholders, although a valid part of materiality assessments, should not be a proxy for shareholder decision making. Make sure the sustainability ranking
matches your investment strategy. Look for a:
Materiality statement
Evaluation of what elements are material by priority
responsible development
renewable energy
economic performance
corporate innovation
access to markets
disaster management
water use and mgmt
emissions quality
waste mgmt
environmental impact
land use and public access
aboriginal relations
health and safety
carbon footprint
employee attraction and retention
human rights
ethics
climate change
corporate governance
sustainable supply chain
security
etc.
Corporate Governance
Corporate governance can be easily tested. Review code of conduct filings and responses at the executive level. This is a critical test of how well ethics policies are implemented.
If the nature of code of conduct reviews is protection of the executive involved, then the code of conduct KPI will indicate zero responses against executives. The reality is that all
organizations have code of conduct complaints and most will be directed at senior staff or managers. If the response is zero terminations, then the entire governance process
from a sustainability perspective is suspect. In energy company's, daily breaches of the code of conduct occur. It's human nature. To have no action taken by the organization
is a large red flag. Look for reporting on code of conduct and ethics breaches. Look for clear and decisive indication for:
Ethics policy
Code of conduct
Whistleblower options and policy
Privacy
Public operating policies
Regulatory and compliance
Anti-competitive policy
Etc.
Social Responsibility
Social responsibility is usually the easiest thing for most boards to achieve. This is because social responsibility tends to be identified by easy actions such a broad statements
of values related to:
Aboriginal groups
Community investment and donations
International operations
Human rights policies
However being socially responsible is often very difficult for most boards and organizations simply because social policies are usually not part of conservative business management.
To spot this, search the upper management for actions that talk of social justice. Be suspicious of broad sweeping statements and a focus on charitable giving or staff
volunteering. What you are searching for is the acceptance and clear understanding of social principals by both the board and the sustainability executive.
Economics
It is obvious that sustainability is very contingent on the financial success of the organization. Nothing is more regulated than the presentation of financial information for a
public company but getting to the details can often be a challenge. The goal of most boards is to present financial performance in the best possible light and to bury less positive
information. One of the first things you are looking for is honesty and transparency. If you can't find information, then that should immediately raise red flags. In sustainability
reporting you should be able to find:
A comprehensive and fair executive compensation policy that rewards performance.
A clear signed commitment to honesty and transparency
A performance review of current performance to targets and past performance
Note that targets can and have often been changed to present positive results.
A clearly defined corporate strategy that identifies the level of risk that will be
targeted and the expected return.
Clear financial statements with full disclosure
A discussion of future opportunities that will be pursued and why
Performance
In sustainability, performance measurement and reporting is an important part of measuring a companies sustainable trajectory. Key performance indicators provide a measure
against which the performance of the organization can be compared. However performance measurement is only as good as the indicators against which performance is measured.
This is especially important in sustainability. You should be clearly able to find
A clear definition of the performance measurement process
KPI's that are used for measurement and how they have been obtained
Measures of all elements of sustainability including environmental, human rights,
community investment, risk, etc.
Statistical measurement assumptions
Easy to understand performance measures, variance to targets and variance to
historical performance.
If you can't easily find this information for all sustainability elements, then you should be concerned and suspicious.
Risk Management
Risk management is just too large to cover in this outline. Of interest is a clear definition of enterprise risk policies for risk areas such as:
Market Prices
Operational risk
Government policy
Catastrophic failure
EHS incident
Supply disruption
Market disruption
Project failure
Etc.
For each of these areas a risk analysis should be available including the level of threat and mitigation actions for each risk type.
For more information on energy risk, contact Fraser Exploration. For global risk, contact Riskstream.
Human Resources
The single most expensive operating expense for most organizations is the human resources. The investment in human resources is critical as it is these resources that will make
the organization work. The problem is that HR expenses can easily escalate out of control. As an investor you will want to see clear HR policies related to sustainment including:
Safety, Health and Wellness
Hiring and Retention
Labor and management relations
Diversity
OHS
Equality and fairness of pay
Training
The Role of Sustainability
The goal of sustainability is to ensure that the organization will continue to operate in the future. The greatest risk that investors face is that their investment in the
organization will fail. Understanding sustainability is the key to a ensuring a viable long term investment that will appreciate in value.
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