Beyond Philantrophy: How Big Corporations Deal With The Issue Of Sustainability

Generali.com

 Generali.com

Generali.com

“Philanthropy has a role of its own to play, but this should not be a substitute for sustainable practices. For a company the main risk of not being sustainable is erosion of trust and damage to the brand”.

Georg Kell is the founder and former Executive Director of the UN Global Compact. He retired in 2015 after over 25 years of service to the United Nations. In this interview he explains how big corporations deal with the issue of sustainability and why “it has become a necessary precondition for survival and growth”.

The word "sustainability" is the new mantra. Corporate Social Responsibility programs are now integrated into the strategies of big corporations. Is there still a long way to go?

On the one hand, we have seen enormous progress. Twenty years ago, corporations did not bother much about workplace issues in the supply chain, greenhouse gas emissions, or anti-corruption. Today most corporations have policies for these issues in place and they disclose corresponding relevant information. On the other hand, too many corporations are still operating on the exclusive premise of short-term returns, irrespective of the environmental or social impact. And given the imperative to decarbonize economies, clearly progress so far has not been sufficient and much more needs to be done.

 Did large companies understand that sustainability has become convenient for business? 

Sustainability has become a necessary precondition for survival and growth. Many corporations had to learn this the hard way, for example in a crisis situation that's threatened their brand. Others discovered it step by step: good environmental and social stewardship based on values and sound ethics go hand-in-hand with financial success. The business case for sustainability has emerged gradually as the framework conditions for market success have changed over time and continue to do so.

How did these framework conditions changed? 

First, technology and the rise of transparency mean that there is a premium on proactive behaviour and disclosure. Second, natural assets of any kind are bound to appreciate in value over time, thus putting a premium on early and good stewardship. Third, governance changes imply, among others, that responsive behaviour towards stakeholders and people is a winning approach to build trust.

Nowadays what are the main costs of not being sustainable? 

Besides punitive fines which have significantly increased over the past years in many countries, the main risk is erosion of trust and damage to the brand. Just remember the story of Nike and the crisis they faced in the late 90s due to their bad labour practices in the supply chain, BP's deepwater oil spill, the Siemens corruption scandal, and more recently, VW's cheating devices. The interesting point is that crises often offer unique opportunities for corporations to reinvent themselves and to learn from mistakes. Learning the right lessons ultimately means emerging stronger and more future-fit. In all successful learning experiences that emerged out of crises situations, as far as I know, sustainability has been a key factor.

 We can say that big corporations already are beyond philanthropy? 

Not quite yet. There are still some corporations who believe they meet societal expectations through philanthropy, irrespective of how and what they produce. But this kind of thinking is rapidly disappearing and philanthropy itself is increasingly being redefined in alignment with core business activities. And of course, philanthropy has a role of its own to play, but this should not be a substitute for sustainable practices. Regarding ethics, I do believe that questions of "right" and "wrong" will always be at the core of sustainability. As framework conditions change, questions about right and wrong will always be central to decision-making and solution-finding to dilemma situations.

Reputation is the new polar star?

Reputation and purpose, yes. We are moving into a post-industrial era where intangibles increasingly influence evaluation. Much of the metrics we are using today are based on industrial-era scale-and-scope thinking where environmental, social, and governance (ESG) issues were considered externalities and simply didn't show up in accounting records. But today we know that these issues increasingly have material relevance. Indeed, there is now strong empirical evidence that shows an overwhelming correlation between ESG factors and financial success. Since these factors have a direct relationship with reputation and are connected to the purpose of the company, there is now a renewed interest in this new polar star.

 The 17 SDGs of the UN represent a world reference point for big corporations. But being the SDGs so many and so different the risk is that every company can tailor some of them to their needs, each company chooses the most convenient one.

That risk exists when choosing à-la-carte, while ignoring fundamental issues such as human rights and the supply chain, workplace conditions, or reduction of greenhouse gas emissions. But corporations who understand that sustainability is more than public advocacy will use the SDGs not as a substitute for their own sustainability performance but rather as a complement to connect with wider societal and developmental goals. As such, the SDGs are an opportunity to align corporate purpose with broader goals to form partnerships with peers and civil society organizations.

Small and medium-sized enterprises (SMEs) have made their own the 17 SDGS or is there still a long way to go?

Many SMEs have stellar sustainability performance, even if they do not communicate this or report on it. Many owners of SMEs think long-term and act in the best interest of their employees and are conscientious about their role in communities. True, SMEs often lack organizational capacities to codify relevant actions and to communicate them and they often complain that they lack the resources to do so. But in reality, it is not difficult for CEOs of SMEs to reflect on sustainability issues, discuss them with their employees on a regular basis and set ambitious goals. With a bit of pragmatism and good intentions, SMEs can easily find a way to support the SDGs.

 As the founder of the Global Compact, are you optimistic about achieving the objectives of the Agenda 2030?

There is of course always the risk that policy makers will cause misery and it is certainly true that there is a lack of policy leadership in many parts of the world. But there are market-led changes. Entrepreneurship and technology have already brought unprecedented improvements to large number of people on all continents. Never before did we have the means at our disposal to solve almost any challenge, to end poverty, to decarbonize economies, and to create an exciting forms of human creativity. Individual business leaders increasingly stand up and try to move the needle. For example the CEO of Alcantara, Mr. Andrea Boragno, in cooperation with Venice International University, dedicates time and efforts to spread best practices on climate action. What really excites me these days is that finance is at last integrating ESG issues into their analysis and decision-making with new tools based on big data and machine learning, such as Arabesque S-Ray. The alignment of the corporate sustainability movement with sustainable investment promises to greatly accelerate market transformation towards cleaner, smarter, and people-centric solutions and thereby to advance the SDGs.





































































































































































































A Breath of Fresh Air

Nordsip, September 10th, 2018, by Aline Reichenberg Gustafsson, CFA - 

  Picture © Maria Mähl, Arabesque

Picture © Maria Mähl, Arabesque

Stockholm (NordSIP) – “Coming to Sweden is like a breath of fresh air,” says Georg Kell, Chairman of Arabesque and co-founder of the UN Global Compact, as we sit down on a bright Stockholm afternoon. “It’s like coming to a sunny island in the middle of a storm. As I travel, I meet autocratic and dictatorial regimes, corruption and crisis across the continents. Here, people do really great work, and they are sincere about it.”

Kell is in an exceptional position to observe the trends and advances of sustainable investment practices across geographies, as he travels the world as an ambassador for Arabesque. He is particularly enthusiastic about the firm’s S-Ray, a tool that allows anyone to monitor the sustainability of approximately 7,000 – and growing – of the world’s largest corporations. “We realised a year ago that the data we have can have a tremendous impact,” says Kell. “We provide access to this data to everyone at a minimal cost (or no cost at all), as we believe that if investors and even corporates embrace big data in the context of sustainable investing, we can accelerate the movement as a whole. The S-Ray is a diagnostic tool but also an entry point into ESG. We are pleased that many large institutions have embraced the tool: State Street, BNY Mellon and GPIF, the world’s largest pension funds, just to mention a few.”

The roll-out of the S-Ray has only started. “The S-Ray technology has an enormous capacity for further development and refinement,” Kell continues. “Right now, we can probably only unlock 10%. Our next step will be to develop theme-specific data and filters to model the Sustainable Development Goals (SDGs). This fall, we will come out with a new climate angle, which will be the first of its kind. Other SDG-related themes like water, women empowerment and children and human rights are getting a lot of attention at the moment, and data quality is improving all the time, even in those areas. With the S-Ray, we try to apply AI-derived mechanisms, such as self-learning, which can help to establish materiality between the different data points for example.”

Kell and Arabesque have found key partners in Sweden from the onset. “Here we have found so many like-minded people with excellent intentions, and having strong partners is really important when it comes to changing habits and doing away with old myths,” emphasises Kell. “The idea that sustainability comes at the expense of return is a myth that still represents a challenge in many places, even if the evidence to the contrary is now overwhelming. The right tools are not always readily available, and the data is fragmented and imperfect. Quantifying the risk and performance related to sustainability remains a challenge, and that one of the reasons the S-Ray is so useful.”


Kell and Arabesque have found key partners in Sweden from the onset. “Here we have found so many like-minded people with excellent intentions, and having strong partners is really important when it comes to changing habits and doing away with old myths,” emphasises Kell. “The idea that sustainability comes at the expense of return is a myth that still represents a challenge in many places, even if the evidence to the contrary is now overwhelming. The right tools are not always readily available, and the data is fragmented and imperfect. Quantifying the risk and performance related to sustainability remains a challenge, and that one of the reasons the S-Ray is so useful.”

In Sweden, a paradigm shift has already taken place. “The first steps into sustainable investing are often defensive. Investors think in terms of exclusions while failing to realise that there are opportunities. But in the meetings we are having now, we see a real shift. The local institutions talk about optimisation rather than exclusion. Swedish institutional investors have managed to keep an open mind about changes, whereas sources of phlegm and inertia can be so frustrating in other countries. Sweden has the potential to become the leading force for sustainable finance. I’ve observed that Swedish actors often under-communicate but outperform. The country already leads in other dimensions. Public policy has focused on the climate for a long time already, and it has driven a tremendous amount of innovation. Corporate disclosure and governance have also been amongst the most advanced in the world. I have been involved in anti-corruption discussions in Brazil, and we were looking at Sweden as the absolute benchmark,” concludes Kell.

In addition to the S-Ray system, Arabesque offers systematic strategies, amongst which one fund in Swedish Kronor, which is not only available to institutions, but also to individual investors on local platforms such as Handelsbanken, Aktieinvest and soon also Avanza and Nordnet. “We are pleased with the performance,” comments Maria Mähl, Head of Nordics at Arabesque.” Arabesque Systematic has returned +10.22% per annum since inception in August 2014, and ranks within the top 5% of its Morningstar peer group. Both Kell and Mähl are excited to see the enthusiasm for the fund in Sweden, but they also see the interest picking up in the US: “The Trump effect has actually strengthened people’s interest in questions of sustainability. We are expanding rapidly over there, and  have ambitious plans,” she adds.


Podcast: The Sustainability Agenda, Episode 51

In this revealing interview, Georg Kell reflects on three decades of sustainability, and highlights some of the most important changes he has seen over this time. He shares his views on the key role of corporates in dealing with the global environmental challenges we are now facing—while recognizing their role in creating these problems. In this interview, Georg focusses on three key forces reshaping markets: technology and automation, the issue of natural boundaries and, finally, changes in governance–and he explores the implications for markets, corporations and sustainability. Georg also discusses the role of finance– which he believes is now overtaking and giving direction to the corporate sustainability agenda. This is an essential interview—a fascinating perspective from a key figure at the heart of the development of today’s sustainability agenda.