UBS Wealth Management’s Chief Investment Office recent white paper on “Business with Impact” covers a potential transformation in the field of corporate responsibility. Mark Haefele, Global Chief Investment Officer at UBS Wealth Management, provides his thoughts in the exclusive interview below:
29 September 2017
Tim Nixon, Managing Editor, Sustainability: The paper states that definitions of business sustainability are evolving. Is this evolution evenly spread across sectors?
Mark Haefele: This changing definition of sustainability is spreading across all sectors because the drivers of change are universal. These drivers include rising demands, led by millennial and female stakeholders, for businesses to make money and do well for society at the same time (a so-called “business with impact” approach). Half of affluent women and a third of men are interested in investment opportunities that potentially deliver positive social or environmental outcomes alongside commercial returns, according to a 2014 report from the World Economic Forum.
Corporate take-up of a “business with impact” approach is greater in some sectors over others – financial services, materials, communications, and consumer staples are leading corporate impact investing, according to a 2016 report from the Committee Encouraging Corporate Philanthropy (CECP)
Tim: How about differences across geographic regions?
Mark: I would say that there is a growing global appetite, among the client entrepreneurs whom I meet, to look at social and environmental factors not as risks to be managed, but as opportunities to generate commercial and societal returns. Many business owners are responding to shifting demands from their customer and investor bases.
There are differences in the extent to which investors use businesses’ non-financial information (on environmental, social, and corporate governance factors) to guide their investment decisions, and to lobby for change. In 2016, a third of investors in Europe, Middle East, India, and Africa conducted a methodical review of corporations’ environmental and social impact data before committing capital, according to EY. Around one fifth of investors in the Americas and Asia-Pacific did the same, but these regions are expected to play catch up as the “business with impact” trend becomes more mainstream
Tim: Are there individual business leaders driving this, and if so, who?
Mark: Individual business leaders have a great opportunity to talk about a more impactful approach to sustainability with peers in their region and sector. Our latest white paper features interviews with senior leaders of three diverse businesses – Top Glove Corporation, Unilever, and Mountain Hazelnut.
Each executive sets out varied ways to deliver positive returns to society and to stakeholders. The common thread, which most resonates with clients, is that each interviewee gives concrete, practical advice on how to make “business with impact” a core part of their operations. When entrepreneurs can see how the theory turns into practice, they’re more likely to respond by making changes to the way they do business.
Tim: How much of this evolution is a result of new generations asking the question: “show me you are really sustainable” in the United Nations defined SDG sense?
Mark: Our research finds that demands from increasingly powerful investor groups that care about sustainability – the millennial generation and women – are a major force driving this evolution. And the UN Sustainable Development Goals (SDGs) provide a common framework that helps businesses measure their efforts to generate positive social and environmental returns that benefit the world at large.
Around nine in ten participants in a 2015 survey conducted by PwC said it was important for businesses to sign up to fulfilling the SDGs. A majority of respondents in countries like the UK said that meeting the SDGs should be a core part of a company’s strategy.
Tim: The white paper asserts that businesses are under pressure to make money and benefit society at the same time…but they can “face blocks” in doing so. Are any particular sectors under more pressure than others? For example utilities, mining, fossil fuel energy or cement?
Mark: We find that the firms facing the biggest pressure to generate simultaneous commercial and societal returns are those with global supply chains, whether of product or people. Complexity makes for corporate challenges, as does growth – the International Labor Organization estimates the number of global supply-chain-related jobs grew more than 50 per cent between 1995 and 2013, topping 453 million workers.
In a tech-enabled, globalized world, businesses of all sizes and across all industries are being empowered to use social and environmental factors as opportunities. Across all sectors firms are being driven to deliver positive outcomes for communities, and enhance commercial returns – by opening up new markets or deepening existing, developing ones, for example
Tim: Do the “blocks” in doing so really come down to the extent to which a business model relies on externalizing cost to drive profitability?
Mark: Not entirely. It’s true that if there were financial markets to price and report on all social and environmental costs each quarter, stakeholders that push for short-run profits might take a longer view, realizing more clearly that not doing well for society can lead to an explicit hit on top- and bottom-line growth.
Let’s not forget, though, that some firms might still not be able to adopt a “business with impact” approach, even if costs were internalized. Blocks might still arise due to insufficient internal resources or insufficient communication between different departments. That’s why collaborating within the business and with other firms to learn, share, and implement sustainability best practices is important.
Tim: How much of the trigger to “benefiting society” is really driven by regulatory pressure?
Mark: Regulatory change can be an important catalyst for firms to implement minimum standards on social and environmental factors that support sustainability goals like the UN SDGs. Some targets, like reduced inequality and strong institutions, rely on regulation rather than private capital to deliver positive social outcomes.
Yet in other areas businesses will act to maximize profits and positive social outcomes in an intentional and measurable way, driven not by the “stick” of regulation but the “carrot” of more commercial success. This type of approach looks to pre-empt regulatory change and target higher-than-minimum standards as a source of competitive advantage.
Tim: How much does reputational risk matter?
Mark: It does matter because intangible assets like brand value and reputation make up a rising part of companies’ total value. If you look at the US stock market, just 17% of the S&P’s market value comprised intangible assets in 1975. By 2015 that share had jumped to 84%, according to evidence from Ocean Tomo.
Technological advancements will likely mean that firms become less capital intensive over the coming years. Intangible assets will form an even bigger share of a corporation’s value. Businesses that promote inclusive and sustainable growth will likely enjoy stronger reputations and higher valuations. So it’s critical that firms align their business objectives with the social and environmental goals of wider society,
Tim: The paper asserts that “businesses can build on sustainability programs to develop impactful strategies that make financial sense, and also generate positive outcomes for society” How important are the SDGs to driving business strategy in this context?
Mark: The SDGs are crucial in driving firms toward a “business with impact” approach in three ways. First, they provide a common set of social and environmental factors that businesses can work toward achieving, and that stakeholders can use to evaluate non-financial performance. Second, the SDGs are spurring wider efforts to collect more comprehensive data on social and environmental outcomes so firms can quantify and report on the positive societal impact they generate. And third, targeting the fulfilment of the SDGs helps listed businesses to align their interests with sustainability-oriented activist investors. These shareholders’ rising engagement is supporting businesses to generate environmental and social returns, and create greater long-run shareholder value through greater operational efficiencies or fewer wasted resources.
Tim: Are networks increasingly important to “impact” given the scale and cost of the problems?
Mark: Networks help firms to overcome internal challenges like a lack of internal sustainability expertise, by connecting companies with businesses, impact investment consultants, and customers. These different parties can share best sustainability practices more readily. Networks are also key tools to overcome macroeconomic obstacles, like raising the estimated USD 5-7trn per annum required to fund the UN SDGs (based on a 2016 analysis from the Brooking Institute).
Combining networks with digital technologies to create a platform helps to overcome some of the issues that hinder private corporate and wealth capital from funding the SDGs. Examples include a lack of transparency about where investment needs and opportunities lie, and a lack of consistency in measuring social and environmental impact.
Tim: How do networks and partners increase the credibility of impact claims, if at all?
Mark: If networks and partners allow businesses to team up with institutions to measure, evaluate, and improve their societal impact more effectively, impact claims will become more credible. Using a network to share information from across a global supply chain with a supply chain aggregator, for example, can help businesses with complicated logistical footprints to trace, measure and monitor impact opportunities in greater detail.
Networks also allow for more efficient sharing of best practices, so it’s easier to demonstrate social impact to other firms. Combining credible data with widespread communication of the evidence is an efficient strategy to promote the commercial and societal benefits of a “business with impact” approach to the widest possible audience.
Tim: Is impact really measurable in a global sense, and does that matter?
Mark: Positive societal impact has to be measured in the same globally consistent way as commercial performance is today. Financial accounting standards are not entirely homogeneous across the world, but there is a lot more consistency of approach than currently applies for social or environmental metrics.
Demand-side pressures, from millennial and female consumers and investors, will likely compel firms to report a fuller, more standardized set of financial and non-financial information than they do today. There’s still some way to firms to go to meet this demand.
We’re hopeful, though, that deeper partnership within and across firms and other institutions can help support better impact measurement. And the more evidence there is that doing well for society can lead to more competitive financial returns, the greater the private capital commitment toward making money and funding a more sustainable, equitable world will be.