ESG issues and business responses: an interview with Ian Woods, AMP Capital

Woods_Ian 1 (3)Ian is Head of Environmental, Social and Governance (ESG) Research at AMP Capital investors and is a founding member and Deputy Chair of the Investor Group on Climate Change. He spoke with me about his views on business attitudes to ESG issues, especially supply chain issues, ESG issues of the future and integrated and sustainability reporting.

1. What changes have you seen in business attitudes towards managing and being accountable for sustainability risks and performance during your 13 years at AMP Capital?

For some companies nothing much has changed, but others, such as BHP and Rio Tinto, are being much more responsive and are trying to work out how best to communicate with investors on ESG issues.

More responsive businesses are looking at an issue or a process from a risk perspective and are identifying risks related to sustainability. For example, when a business is looking at risks in its supply chain ESG issues will come up. So if a business is using a supplier who is paying the minimum wage in a country like say Bangladesh, but that minimum wage is not something that people can actually live on, it becomes a social risk for the business which could have reputational consequences. From a social perspective, wages which are below a living wage increase the risk of worker and social unrest and ultimately wages will increase. From a company risk perspective, this translates to an increased risk of supply chain interruption and potentially undermining the original, and probably short-term, rationale to moving to a low wage country.

So it’s about asking questions of business in a different way, from a risk perspective, rather than a sustainability or ethical perspective.

2. What role, if any, do you think business should take in leading transformational change in society? Why should businesses bother to address ESG issues?

Personally I think business should be leading change to respond to climate change and social issues, but you need to find a business case to get traction. Risk, as I’ve mentioned, is one key business issue, another is ability to execute strategy. Strategy is delivered by people, so staff retention and an engaged workforce is important in executing a strategy. A good reason for investing in your human capital is that your workforce becomes more productive – and more likely to meet your strategic goals.

The culture in some businesses is that if they are obeying the law that is OK, but sometimes it is not enough to align with business interests. You often need to do more than the minimum. As some have found out complying with the law doesn’t necessarily give sufficient assurance that material risks are being managed.

3. I’ve heard CEOs argue that shareholders are the biggest barrier to them addressing sustainability issues because of their short term focus. Do you think this is true?

It is a bit of a cop out, but CEOs do have to be strong and look beyond the short term. Investors make money by buying and selling shares so want to push changes in companies whether it is for example, increased sales or decreasing costs and so I do have some sympathy with CEOs saying they are under pressure particularly as their appointments are often short term.

CEOs need long term incentives in their remuneration package. If companies don’t think long term about ESG risks and their strategy, it catches up with them in the end.

4. What are the key ESG should businesses be thinking about in the next five to ten years?

It depends on the sector of course but there are two areas companies need to think about:

  • issues which are shaping the market place, like climate change; and,
  • internal capability.

To some extent, Australians have been living on borrowed time. We have high expectations regarding our standard of living. And I believe, it’s not sustainable. Take the increase in property prices for example where residential property prices have been increasing faster than real wages. And until very recently real energy costs were less than they were in the seventies. Unsustainable.

5. What do you see as the key shortcomings of corporate reporting on ESG issues? To what extent do you think integrated reporting will address them?

There needs to be more thought about who reports are addressed to and what their information needs are. Integrated reporting is directed at providers of capital and sustainability reporting at a broader range of stakeholders. There is a need for both. Materiality for companies and for stakeholders is not necessarily aligned.

Generally 6-8 pages of information for investors and other stakeholder groups is enough. Companies need to think about different types of reports for different audiences and make them short and relevant to that audience.

Related articles on this website:

Integrated reporting and directors’ responsibilities

Materiality: financial reporting, sustainability reporting and integrated reporting

Integrated Reporting and the Six Capitals: What does it all mean?

Understanding (how sustainability fits into) your business model

Integrated thinking and integrated reporting

Five essentials to embedding sustainability

Developing integrated thinking: an interview with bankmecu’s CEO Damien Walsh

 

Additional resources:

Corporate responsibility and sustainability reporting

 

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