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Sustainable Infrastructure And ESG Risk Management

The UN Sustainable Development Goals are a useful high-level framework for business to use in assessing its negative or positive social impacts. Global partnerships between government, NGOs, and the private sector will be required to achieve them by 2030.

The rise of community expectations around climate change and other ESG risks means that boards and senior executives can no longer function in “press release” mode when it comes to sustainability initiatives.

The management of ESG risk is a crucial part of your risk management framework, and firms need to identify and manage both quantitative and qualitative risks. The excuse that it is difficult to quantify some ESG risks will not cut it with stakeholders over the coming decade.

Institutional and retail investors will increasingly expect rapid and decisive responses to controversies, including the immediate resignation of directors and senior executives. “Riding out” the storm of displeasure will be very difficult given the increasing volume in the media on these issues.

One of the important considerations when thinking about sustainability reporting and the achievement of the UN SDGs by 2030, is that innovation and profitability in the private sector is a crucial success factor.

Many businesses have the opportunity to assess their current operating model, identify where and how they can make a positive social impact, and move towards implementing a responsible operating model that delivers for a full group of stakeholders while still generating an appropriate level of profit.

Goal 9: Build resilient infrastructure, promote sustainable industrialisation and foster innovation

Goal 9 of the UN SDGs is about how essential investments in underlying infrastructure are to enabling sustainable development. Technological efficiency, energy-efficiency, and increased productivity enabled by investments in transport, energy, technology, healthcare, education, and irrigation will all help developed and developing countries alike in improving their standard of living.

A lack of necessary infrastructure in developing countries means that their people are at a clear disadvantage when it comes to ease of access to more markets to sell their products and services. Sustained employment growth will become more realistic for some countries once appropriate infrastructure investments are made and brought online.

Environmentally sound infrastructure development will help achieve other sustainability outcomes while providing lower environmental impacts from infrastructure development. Firms who operate in the infrastructure sector will be able to share their best practices with developing countries to enhance ecological efficiency for new projects.

For firms operating in developed countries, assisting in developing countries and providing technology investments where feasible can help accelerate sustainable development. For example, substantial investment in mobile phone networks in Africa has enabled a wave of entrepreneurship and innovation to take place in previously unconnected communities.

Board and Senior Executive Considerations

Boards and senior executives in other sectors may not think they can have any impact on this particular goal. However, UN SDGs are a broad church of targeted outcomes for a global society. One of the more effective ways that any business can make an impact on these goals indirectly related to your business is through due diligence and standards for your broader value chain.

The first exercise is a current operating model assessment that looks at your present purpose, strategy, and operating model. The outputs of this exercise can be mapped at a high-level to each of the 17 UN SDGs to provide input into the next activity.

The second exercise is mapping the current operating model outputs to each of the UN SDGs and identifying the positive or negative social impacts your business currently has. There may be somewhere there are none, there may be others where some substantial impact is possible.

The third exercise is taking the first two exercises into account and re-examining the purpose of the business. Why do you do what you do? Is your goal relevant in the 2020s? Are you a sunrise or a sunset business?

The fourth exercise is then revisiting the business strategy. Does it help or hinder the achievement of sustainability outcomes? Are there any products or services that need changes or closing down in light of changes in community expectations today or anticipated changes in community expectations tomorrow?

Once the current operating model, mapping exercise, purpose re-examination, and strategy re-examination are complete, a broad group of stakeholders should participate in the development of a responsible operating model.

The current trend in transformation is to speak of the target operating model; however, in the 2020s, it will be necessary to design and implement a responsible operating model. Sustainability outcomes must be incorporated into the design and planning stages of any transformation program. If they aren’t, they won’t be delivered.

One of the changes in thinking about ESG risk is that the business case is about the enterprise value of the business itself. Issues that even five years ago may not have merited a mention in a footnote to a presentation could now present themselves as existential crises for a board of directors.

Over the past decade, the cost of implementing appropriate systems and controls to manage compliance risk has been billions of dollars for the financial services sector. The coming decade will see a further increase in required technology and project expenditure to give boards and regulators assurance that a framework is in place and monitored actively at all levels of a business when it comes to ESG risk.

Other industries have faced similar costs, such as the impact of health & safety legislation on the construction sector. But no one would argue that making sure everyone goes home from a worksite at night is less important than making a profit at any cost. However, 30 years ago, those arguments were undoubtedly being made by some construction sector executives and boards.

Times have changed, and old attitudes towards ESG risk will need to be updated. The current economic environment globally, where the asset markets have boomed, and many companies rebounded from the Global Financial Crisis after brief tests in 2008 and 2009 of their operating model, means that the next downturn will provide an opportunity for deep introspection and consideration of what a responsible operating model needs to look like for a secure strategic position relative to your competitors in the coming decade.

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Sustainable Economic Growth And ESG Risk Management

An environment of ever-increasing expectations on corporate leaders to do the right thing when it comes to sustainable business means it’s an issue to be taken seriously from the board-level down. The identification, active management, mitigation, or elimination of ESG risk from your operating model is a vital part of building a sustainable business that makes a positive social impact as well as delivering a profitable business for shareholders.

The UN Sustainable Development Goals provide a useful high-level framework for assessing your firm’s ability to deliver sustainability outcomes and is increasingly used by global firms as the core 17 areas for reporting their sustainability focus in their annual report.

You can map the 17 UN SDGs against your current operating model to identify the areas where your firm is making a positive or negative social impact. This exercise could assist in the analysis work before a transformation programme begins, ensuring that the development and deployment of the target operating model incorporate sustainability outcomes.

Ever-increasing community expectations around what businesses are doing to reduce ESG risks and deliver a positive social impact for a full group of stakeholders means that thinking about what a responsible operating model for your business incorporates can help the process of positioning your firm ahead of the curve.

Boards and senior executives might consider assessing their current risk management framework to identify whether the broad array of ESG risks as some choose to define them are present in their existing risk register.

Environmental, social, and governance risks can be much harder to quantify than many financial or operational risks. Firms should develop a defensible framework for estimating the cost of these risks and the severity of their impact on the operations of the business.

The business case for making significant investments into projects that reduce these risks and enhance the enterprise value of your business is clear. Increasingly, firms that do not take these issues seriously or engage in a press-release driven approach will find it difficult or impossible to raise capital.

Institutional investors in 2020 expect well-aligned corporate behaviours and communications on sustainability issues with their preferred responsible investing frameworks than even five years ago. Investor relations and corporate access teams at investment banks will have higher rates of inquiry from stakeholders who may previously never have engaged with them, and that means that the operating model for an investor relations function or corporate sustainability function needs to adapt and improve as part of the core operating model of the business, instead of being tucked away in a small department.

Goal 8: Promote inclusive and sustainable economic growth, employment and decent work for all

Goal 8 is about sustainable growth that cares about people. Eradicating global poverty depends on increasing the quality and compensation levels of workers around the world through raising productivity and sharing some of those gains.

In many developing countries, having a job doesn’t mean that your family is out of poverty. Roughly half of the world’s population lives on less than US$2 a day even with global unemployment around 5.7% according to the UN.

“Sustainable economic growth will require societies to create the conditions that allow people to have quality jobs that stimulate the economy while not harming the environment. Job opportunities and decent working conditions are also required for the whole working age population. There needs to be increased access to financial services to manage incomes, accumulate assets and make productive investments. Increased commitments to trade, banking and agriculture infrastructure will also help increase productivity and reduce unemployment levels in the world’s most impoverished regions.”

Some of the detailed sub-goals associated with Goal 8 include per capita economic growth, higher levels of productivity supported by investment in technology, a focus on high-value-added services, implementation of development-oriented policies, and eradicating forced labour and modern slavery.

8.1 Sustain per capita economic growth in accordance with national circumstances and, in particular, at least 7 per cent gross domestic product growth per annum in the least developed countries

8.2 Achieve higher levels of economic productivity through diversification, technological upgrading and innovation, including through a focus on high-value added and labour-intensive sectors

8.3 Promote development-oriented policies that support productive activities, decent job creation, entrepreneurship, creativity and innovation, and encourage the formalization and growth of micro-, small- and medium-sized enterprises, including through access to financial services

8.4 Improve progressively, through 2030, global resource efficiency in consumption and production and endeavour to decouple economic growth from environmental degradation, in accordance with the 10-year framework of programmes on sustainable consumption and production, with developed countries taking the lead

8.5 By 2030, achieve full and productive employment and decent work for all women and men, including for young people and persons with disabilities, and equal pay for work of equal value

8.6 By 2020, substantially reduce the proportion of youth not in employment, education or training

8.7 Take immediate and effective measures to eradicate forced labour, end modern slavery and human trafficking and secure the prohibition and elimination of the worst forms of child labour, including recruitment and use of child soldiers, and by 2025 end child labour in all its forms

8.8 Protect labour rights and promote safe and secure working environments for all workers, including migrant workers, in particular women migrants, and those in precarious employment

8.9 By 2030, devise and implement policies to promote sustainable tourism that creates jobs and promotes local culture and products

8.10 Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance and financial services for all

8.A: Increase Aid for Trade support for developing countries, in particular least developed countries, including through the Enhanced Integrated Framework for Trade-Related Technical Assistance to Least Developed Countries

8.B: By 2020, develop and operationalize a global strategy for youth employment and implement the Global Jobs Pact of the International Labour Organization

https://www.un.org/sustainabledevelopment/economic-growth/

Board and Senior Executive Considerations

Boards and senior leaders will see that, like the other SDGs, there are several areas where any business can make a positive social impact. Procurement processes need to ensure that risks such as forced labour and modern slavery are not in your supply chain.

When you assess your current operating model, the key areas to explore when considering Goal 8 include people and culture processes and policies. If you are in financial services, finding what actions you could take to support the achievement of goal 8.10 would be a key focus. If you are in transportation or travel, exploring sustainable tourism such as going beyond net-zero or carbon neutral and thinking about carbon-negative operating models that create local jobs where you operate your business would be worth consideration.

The use of the UN SDGs as a high-level framework to map your current operating model against the ability of your business to deliver a positive social impact is a useful exercise for businesses. Many leading global firms already incorporate this reporting in their annual reports.

The decade ahead will be necessary for firms as they strategically position themselves to be ahead of their competitors on ESG issues. Moving beyond reporting and engagement to actively choose where your operating model (people, processes and systems) can adjust to improve positive outcomes or reduce adverse consequences will be tables stakes.

Institutional and retail investors are growing their awareness of ESG risks and expectations of the pace at which boards and senior executives will respond decisively if any controversies arise. Waiting it out or sending out a press release won’t cut it. Resignations and ending supplier relationships will become far more frequent and building a responsible operating model with in-built flexibility that can respond if a critical supplier needs to be changed because of an unacceptable level of ESG risk will increasingly mark the leaders in this space distinctly from the laggards.

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Sustainable Energy Goals And ESG Risk

The UN Sustainable Development Goals are a useful high-level framework to assess your firm’s ability to make a positive social impact. They cover a wide area of topics including equality, energy, climate change, responsible growth and more.

There are many frameworks that governments and NGOs try and get business behind. Each has its pros and cons. The UN Sustainable Development Goals are a global framework which enables comparison sustainability reporting between companies that operate in different jurisdictions or industry sectors.

Boards and senior executives should assess their current operating model against the 17 high-level SDGs to capture a baseline. They can then identify the areas of their operating model that make a positive or negative impact on these goals and generate sustainability reporting to track their progress in moving towards a responsible operating model that incorporates sustainability outcomes into the transformation process.

Goal 7: Ensure access to affordable, reliable, sustainable and modern energy

Goal 7 of the UN SDGs is to ensure access to affordable, reliable, sustainable and modern energy. Almost 1 billion people still don’t have access to reliable electricity, half of them in sub-Saharan Africa. Energy production and consumption are responsible for nearly 60% of total greenhouse gas emissions globally.

Globally, not even one-fifth of global electricity production is from renewables. There are many areas of energy that will need to improve over the next decade including energy efficiency, battery storage technology, renewable energy production, and reliable energy supplies for developing countries that doesn’t cost too much.

The benefits of clean energy for our planet are enormous. Reliable and affordable energy sources mean that cooking, cleaning, and necessary business activities become possible for people in developing countries.

In developed countries, increasing energy efficiency, even more, means that marginal energy producers that rely on fossil fuels such as coal, natural gas, and oil can sunset older plants and invest in renewables such as solar, wind, geothermal, and hydropower.

 Some countries have already made enormous progress in developing their renewable energy sources, including China which has some of the most significant solar and wind power initiatives in history in operation and under construction.

The ability to make an impact on goal 7 isn’t just for businesses in the energy sector. Responsible electricity consumption and energy efficiency initiatives are realistic in a company that uses electricity.

Thinking about the energy efficiency of your entire value chain including the energy efficiency of your suppliers and partners means that operational due diligence on suppliers should start to include questions around their electricity provider, their investments in energy efficiency, their analytics and insights into their energy use, and developing a strong understanding of their strategy to reduce their carbon emissions and increase the proportion of their electricity supply from renewable sources.

Board And Senior Leader Considerations

There are many different frameworks and reporting guidelines for sustainability and ESG risk. As at January 2020, there are no global standards like IFRS that enforce certain levels of disclosure. Some companies will not care about transparency on these issues because, for some, it could be “brand destroying” to be open about some of the ESG risks that exist in their value chain.

Boards and senior leaders should start with a high-level assessment of their current operating model. Working through the basics of your business model is necessary before launching into exhaustive ESG risk analysis.

  • What is your purpose? Why do you do what you do?
  • What is your business strategy?
  • How do you deliver your strategy?
  • Who delivers value to your customers?
  • Where are your operations located?
  • Who are your key suppliers?

The business model needs to be understood and decisions made on the boundaries of how much the board and senior leaders are willing to change the business model to achieve the targeted level of ESG risk in their business.

The risk management framework and risk registers will already include many of the risk themes that emerge during a strategic review of this nature. However, some of the ESG risks like social risk and environmental risk, are facing ever-increasing community expectations.

Boards and senior leaders need to be forward-looking in their identification, mitigation or elimination of these risks. They need to be ahead of the curve because an acceptable business practice today could be completely unacceptable from a social license point of view after one newspaper article or one tweet goes viral.

A great example of an ESG risk related to energy is the proportion of your electricity supply that comes from renewable sources. Some organisations have changed their procurement procedures to ensure that only the suppliers with the best effort on increasing renewable sources of electricity supply are even in the running for tender opportunities.

What does this mean? It means that because the era of the press release is over, boards and senior leaders need to be thinking long-term about how to position their business strategy so that their operating model does not give rise to any potential ESG risks that will put their economic engine at risk.

The business case for building a responsible operating model and reducing or eliminating as much ESG risk as possible is not just about return on investment. Customer satisfaction, shareholder approval, cost avoidance, revenue retention, regulatory compliance, social license maintenance, and employee satisfaction all have some elements that can be quantified to support the financial side of any business case for a programme of work to build your responsible operating model.

The UN Sustainable Development Goals have one significant advantage for boards thinking about how to measure and monitor their social impact. They are a global framework, and many major global companies already include their SDG reporting in their annual reports.

One consideration is that some companies are already so far ahead on adjusting their operating model to deliver better sustainability outcomes, that they could already “lock-in” a strategic competitive advantage.

Costs to businesses not taking ESG risk seriously can arise in visible areas such as the ability to raise capital. Look at how thermal coal companies are on the way to becoming unbankable as an increasing number of financial institutions globally stop lending, cut lines of credit, don’t take commercial paper, and don’t invest in equity or debt raises for thermal coal companies.

Thermal coal miners are currently losing their ability to raise capital. Retail and institutional investors will increasingly demand near-perfect delivery from boards and senior leaders on the reduction and elimination of their preferred definition of ESG risk.

The rising community expectations on these issues will impact a firm’s social license to operate, and focusing on short-term operating model changes that deliver outcomes will be judged better than long-term ambitions that will take decades to achieve.

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Health, Wellbeing And Sustainability Reporting

The Sustainable Development Goals are the blueprint to achieve a better and more sustainable future for all. They address the global challenges we face, including those related to poverty, inequality, climate change, environmental degradation, peace and justice. The 17 Goals are all interconnected, and in order to leave no one behind, it is important that we achieve them all by 2030. 

https://www.un.org/sustainabledevelopment/sustainable-development-goals/

Is supporting health and wellbeing solely the preserve of companies in the healthcare industry? Goal 3 of the UN Sustainable Development Goals is a complex and detailed one that highlights how far developing countries have come, but also how far they still have to travel to catch up to developed country data on health and wellbeing outcomes.

Increasing life expectancy and reducing infant mortality includes a target of fewer than 70 deaths per 100,000 live births by 2030.

Improving the financing of healthcare systems, boosting economic growth so that countries can afford better healthcare, increasing the number of medical professionals available in developing countries and improving sanitation and hygiene are all ways to improve global health and wellbeing outcomes.

The maternal mortality ratio is still 14 times higher in developing countries, which is a shocking statistic. The specific goals here highlight the enormous gap in health outcomes between developed and developing countries and the importance of taking action to reduce these gaps.

Goal 3: Ensure healthy lives and promote well-being for all at all ages

3.1 By 2030, reduce the global maternal mortality ratio to less than 70 per 100,000 live births.

3.2 By 2030, end preventable deaths of newborns and children under five years of age, with all countries aiming to reduce neonatal mortality to at least as low as 12 per 1,000 live births and under-5 mortality to at least as low as 25 per 1,000 live births.

3.3 By 2030, end the epidemics of AIDS, tuberculosis, malaria and neglected tropical diseases and combat hepatitis, water-borne diseases and other infectious diseases.

3.4 By 2030, reduce by one-third premature mortality from non-communicable diseases through prevention and treatment and promote mental health and well-being.

3.5 Strengthen the prevention and treatment of substance abuse, including narcotic drug abuse and harmful use of alcohol.

3.6 By 2020, halve the number of global deaths and injuries from road traffic accidents.

3.7 By 2030, ensure universal access to sexual and reproductive health-care services, including for family planning, information and education, and the integration of reproductive health into national strategies and programmes.

3.8 Achieve universal health coverage, including financial risk protection, access to quality essential health-care services and access to safe, effective, quality and affordable essential medicines and vaccines for all.

3.9 By 2030, substantially reduce the number of deaths and illnesses from hazardous chemicals and air, water and soil pollution and contamination.

3. A Strengthen the implementation of the World Health Organization Framework Convention on Tobacco Control in all countries, as appropriate.

3.B Support the research and development of vaccines and medicines for the communicable and noncommunicable diseases that primarily affect developing countries, provide access to affordable essential medicines and vaccines, following the Doha Declaration on the TRIPS Agreement and Public Health, which affirms the right of developing countries to use to the full the provisions in the Agreement on Trade-Related Aspects of Intellectual Property Rights regarding flexibilities to protect public health, and, in particular, provide access to medicines for all.

3.C Substantially increase health financing and the recruitment, development, training and retention of the health workforce in developing countries, especially in the least developed countries and small island developing States.

3.D Strengthen the capacity of all nations, in particular developing countries, for early warning, risk reduction and management of national and global health risks.

https://www.un.org/sustainabledevelopment/health/

Board And Senior Leader Considerations

The specificity of the goals above might make you wonder how your firm can make a positive impact on these goals. What is the business case for a healthcare company giving away services for free, for example? That would be an incorrect take on the situation.

The business case for using the UN Sustainable Development Goals as a framework to understand how your operating model supports or hinders the achievement of the goals is compelling – enterprise value decreases through actions or activities that harm society.

In the current low-interest-rate environment, the discount rate to be used when assessing projects has fallen for many organisations. Higher spending on investment projects to deliver sustainability initiatives can make sense if the payoff to the firm is ongoing and has a long time horizon.

Lower cost financing of these projects is possible through the use of sustainable finance strategies such as the issue of green bonds. Alternatively, borrowing from a bank that focuses on supporting businesses wanting to invest in improving the sustainability of their operating model.

When it comes to reporting on the UN Sustainable Development Goals, an example of how an infrastructure firm that owns toll roads could make an impact on goal 3.6 – reducing global deaths and injuries from road traffic incidents – would be to highlight investments in safety on the toll roads they operate.

What is their safety goal? Zero harm on their toll roads? If so, thinking about how to centre their operation around zero damage to their staff, their road users and other stakeholders could lead to innovations in their operating model and capabilities they have around safety.

Infrastructure funds could use the health and wellbeing goals as part of their operational due diligence on prospective investments – at the business-as-usual level of a target company, are they helping or hindering the achievement of these goals?

The additional sunlight on some companies will highlight how their operations either do not help society outside of the shareholders who earn a return on their capital. These processes may lead to divestment or even shutdown of business units or operations that do not meet new community expectations around social performance.

Every business should at least consider thinking through the totality of the UN Sustainable Development goals and then focusing on those it can impact the most. The board should deliberate on whether the company’s purpose, strategy, and operating model are sufficient to maintain a social license to operate with ever-increasing expectations on the private sector.

The initial assessment of a business to identify its current operating model and how it either helps or hinders each of the 17 goals is a process achieved through workshops and interviews with the board and senior leaders.

The report prepared for senior leaders should drive further examination of the strategy and the portfolio of initiatives underway to realise that strategy help or hinder each of the 17 goals. This way, reporting in the management reports and annual reports can include these factors to be monitored by the board.

A business may find that considering a positive global social impact means that significant changes to parts of its operating model are required. Engaging with external support through this process, including setting up appropriate gateways and monitoring of portfolio, programme and project activity and outputs that take sustainability outcomes as crucial success criteria are essential.

In this series of posts, as I work through each of the UN Sustainable Development goals, it is clear that the ability of a business to positively impact the achievement of these goals is in one of the 2nd level goals or through considering an alternative way of supporting the achievement of the outcome through clever use of scarce resources.

Focusing on the outcomes desired and creatively exploring ways to support them if applicable to your business or industry gives boards and senior leaders freedom to act boldly in a manner increasingly expected by stakeholders and an increasing proportion of shareholders, particularly institutional investors for whom ESG considerations are now standard due diligence for new or continued investment in any asset class.

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Zero Hunger, Your Business And Sustainable Development

The Sustainable Development Goals are the blueprint to achieve a better and more sustainable future for all. They address the global challenges we face, including those related to poverty, inequality, climate change, environmental degradation, peace and justice. The 17 Goals are all interconnected, and in order to leave no one behind, it is important that we achieve them all by 2030. 

https://www.un.org/sustainabledevelopment/sustainable-development-goals/

The UN Sustainable Development Goals are a useful high-level group of global sustainable development goals that can be used as a framework to assess how your business makes a positive social impact.

This series of posts explores each of the goals and proposes some considerations for boards and senior leaders. The rising pressure on business leaders to make genuine changes in their operating model to ensure that their people, processes and systems work together to make a positive social impact means that trade-offs must be made with scarce resources.

Considering how to benefit all stakeholders means that careful consideration of your firm’s purpose business strategy and target operating model to realise that strategy is a crucial part of building a sustainable enterprise.

Traditionally, value creation for shareholders was achieved by delivering value to customers and earning a reasonable profit. Today, value creation for stakeholders is the more popular terminology.

What does this mean? It means keeping customers happy, shareholders happy, regulators happy, politicians happy, industry partners happy, suppliers happy, employees happy, and certification authorities happy.

This mixed group of actors is outside the traditional boundaries of the firm, meaning that when it comes to approaching ESG issues, a press release won’t cut it.

Environmental, social and governance risks have to be identified, triaged, managed, mitigated or eliminated through the risk management process. A board should set clear expectations around how the operating model of the business ensures that the capabilities developed to deliver value to stakeholders actively consider these risks both during project phases and in a business-as-usual environment.

Goal 2: Zero Hunger

Goal 2 of the UN Sustainable Development Goals is Zero Hunger. In 2017, over 821 million people were under-nourished. Over the past few decades, enormous reductions in this number have occurred, but there is still work to do.

Differences in markets and institutions between developed and developing countries can explain much of the problem with hunger. Many states don’t have the infrastructure or even electricity to take advantage of agricultural productivity-enhancing technology at an appropriate scale.

One of the most disturbing statistics concerning hunger is the number of children who die every year from poor nutrition – 3.1 million each year. But merely sending more donations doesn’t solve the societal problems in these developing countries.

Businesses in developed countries can make a positive impact on the goal to reduce hunger in the world. An example of how technology positively impacts developing countries would be the spread of mobile phones, enabling farmers to trade more easily with neighbouring towns and villages to sell their produce or livestock, raising incomes and encouraging more trade inside countries.

One way the private sector can assist developing countries is helping the internal free movement of goods and services. Mobile phone networks, education, infrastructure investment in roads, and assistance with agricultural productivity are crucial.

How might a developed country firm help reduce global hunger? Consider pricing frameworks and intellectual property protections for agricultural productivity-enhancing goods and machinery. Is what makes sense in Canada, a wealthy developed country, necessarily appropriate in sub-Saharan Africa if you’re selling into that market?

How about the issue of subsidies and tariffs? Lobbying for tariffs on some goods predominantly produced in developing countries takes money out of the mouths of the global poor. Even more concerning is marketing cooperatives who play on fair trade to pay a fixed price for goods below the world market price and then capture the price premium for those goods in hipster neighbourhoods in developed countries.

One of the themes in the UN Sustainable Development goals is the removal of unfair subsidies and tariffs that disproportionately privilege farmers in developed countries over farmers in developing countries. If we consider global hunger, losing some farms in the West to keep bringing millions out of poverty in developing countries could be regarded as a reasonable tradeoff as long as the West budgets for appropriate transition payments and arrangements for the impacted farmers.

Banks and insurers don’t need to open a branch in a developing country to make an impact. Letting subject matter experts spend a month upskilling their peers or conducting a training course in a developing country is a modest cost but high impact way of sharing knowledge and capability.

If your global supply chain includes agricultural products exported from developing countries, performing due diligence on the supply chain is essential. Ending unfair labour practices and exploitation of small farmers is something any business trading with these countries should incorporate into their operating model.

One example of how adjusting your operating model to ensure that a positive social impact occurs is by physically tracing the entire value chain for a particular product.

  • Who does the work?
  • How is it done?
  • How are they compensated?
  • Is it fair, giving account to local realities and expectations?
  • Where is it done?
  • Who captures the value?
  • Are there any health & safety concerns?
  • Are there opportunities to provide upskilling or coaching to suppliers?

Corporate Governance Considerations

If your business trades with developing countries, you need to make investments in technology so that qualitative information associated with your supply chain can be captured and analysed for insights.

Setting up a framework for supply chain risk management with the right supporting policies and processes is a complex project. Many businesses are already doing a great job at ensuring the integrity of their supply chain, but this is a topical issue and emerging issues when it comes to agriculture must be monitored.

Eliminating global hunger is just one of the many UN Sustainable Development goals. As an exercise, working through the plans may convince you that your business can only make an impact on 1 or 2 of them. But the activity itself is valuable because using a high-level framework for considering social impact will enhance your understanding of your operating model and offer up possibilities for small adjustments that could make a positive impact on others.

The drive to have companies consider a more comprehensive set of stakeholders doesn’t mean that no one can make a profit anymore. Many sustainable business practices can lead to lower operating costs and enhanced shareholder value.

There is only one planet Earth, and using the UN Sustainable Development Goals as an initial broad set of considerations can help refine the purpose of a business. Simplifying your operating model and identifying business units that may no longer be suitable to own and need to be divested or shut down will be a natural outcome of more boards and senior business leaders thinking about these issues deeply.

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ESG Issues, Social License To Operate And Your Target Operating Model

The rise of environmental, social and governance (ESG) issues as a priority for business leaders was a theme of the past decade. To ensure that your firm’s social license to operate continues to be renewed by the community, embedding a positive social impact into your operating model is essential.

A firm’s social license to operate has to adapt to changing community expectations of corporate behaviour. In the fallout from the revelations during the Financial Services Royal Commission in Australia, the extent to which community expectations can drastically shift against any industry is evident.

Ever-increasing considerations and requirements of businesses and how they manage ESG risks mean that balancing scarce resources is more complicated than ever before. Firms have to worry about legislation, regulation, environmental concerns, social impact, social risks, governance issues, operational issues, technological disruption, climate change, responsible investment disclosures, and more.

Designing and implementing a target operating model to deliver a firm’s strategy is vital. A firm needs to focus its purpose and concentrate on the core capabilities required to provide value to customers and other stakeholders.

The UN Sustainable Development Goals provide a useful high-level framework for considering a firm’s global social impact. Are you doing anything that could lead to negative headlines? Are there any small changes to your operating model that could support any of these goals and be an example of how your business is delivering above community expectations?

The Sustainable Development Goals are:

  • No Poverty
  • Zero Hunger
  • Good Health and Well-being
  • Quality Education
  • Gender Equality
  • Clean Water and Sanitation
  • Affordable and Clean Energy
  • Decent Work and Economic Growth
  • Industry, Innovation, and Infrastructure
  • Reducing Inequality
  • Sustainable Cities and Communities
  • Responsible Consumption and Production
  • Climate Action
  • Life Below Water
  • Life On Land
  • Peace, Justice, and Strong Institutions
  • Partnerships for the Goals

The UN Sustainable Development Goals certainly aren’t the only framework for thinking about building a sustainable business or considering how to provide comfort to your stakeholders that your operating model is in line with community expectations. Many companies will be able to make a positive social impact on at least 1-2 of the goals.

How Do Companies Deal With This?

There are ever-increasing pressures from the media, from regulators, from industry bodies, from politicians, and from peers in your industry that mean that a few pages in the annual report no longer cut it – a genuine commitment from the board level down to the operating teams of the business has to be “baked in”.

In this new era, can you ever do enough to satisfy your stakeholders? I’m not sure it’s realistic. The level of constant change in the regulation of financial services, for example, has radically shifted how banks and wealth providers need to spend their investment budgets each year.

If the current level of investment on regulatory and compliance change is half of the spend, and investment in digital transformation or operating model change represents the other half, then which projects need to end to finance spending on sustainability projects?

This reality is where the rubber hits the road – the intersection of idealism around sustainable capitalism with tradeoffs in a commercial context. If a business has to be all things to all stakeholders, then radical simplification of the entire operating model is a high-probability method to ensure that the right trade-offs will happen at executive-level and operational-level.

The fascinating thing about the rise of responsible investment or ESG awareness when making investment decisions is that the light is rarely shone back on the operating models of the asset managers and data providers making these decisions themselves.

Public market investors and everyday people with their retirement savings in their 401(k), superannuation, Kiwisaver or pension increasingly tell market research companies and their providers that they care about not investing in companies that could have a negative social impact.

The plethora of filters available to asset managers means that what one asset manager believes is “responsible investing” is not necessarily what another asset manager defines it as unless they are using the same principles, framework and processes in their investment due diligence process.

When companies make disclosures around ESG issues to their investors, many have done a fantastic job in articulating where they see the risks in their businesses and how they are changing their business to reduce, better manage or eliminate those environmental and social risks.

Key Considerations For Boards And Executives

A key consideration for boards and executives here is that while you can compile an initial list of ESG risks and potential mitigations in a half-day workshop, that is only the beginning of the journey. An ongoing programme of work for some businesses – another substantial investment in people, processes and technology in addition to existing regulatory and compliance programmes of work.

Almost all boards and executive teams are aware of this, but balancing the pressures from shareholders and regulators can be a delicate act. There are earnings pressures, regulatory deadline pressures, and interpretation problems when it comes to how your operating model can deliver compliance with some requirements.

Without deeply examining the purpose of the business itself and going line-by-line through each operating division, hidden risks can remain that emerge at the least convenient time and undermine any previous efforts to promote that the business was trying to make a positive social impact.

The sorts of questions that I would be asking include: what is the purpose of our business? How complicated is our current operating model? How do I have confidence in the data and conclusions in the board reports I receive? How do we know we are ready for the “next” ESG issue that emerges in our industry? Who owns ESG risk in our business? If it is the audit and risk committee, are all members actively engaged in professional development on these issues?

One of the saddening things about reading some of the data attached to each of the UN Sustainable Development Goals is the realisation of how fortunate many of us are to live in highly developed countries. In a sense, many of the issues around managing these risks are “first-world problems”. However, that doesn’t mean that taking such a broad view is unhelpful to a business in an OECD country.

The critical consideration for boards and corporate leaders when it comes to social license to operate is recognising the need to be ahead of the curve on these issues. What is currently acceptable commercial practice today in one of your most profitable service lines or products could be completely unacceptable after a poorly served customer explains their poor customer experience.

A real-time feedback loop now exists between customers and businesses. Regulators, the media and politicians are always watching and listening. Empowering front-line people to do the right thing by customers and removing conflicts and any potential negative perceptions around your value chain are now an essential part of running and optimising your operating model.

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Ending Global Poverty And Your Operating Model

The Sustainable Development Goals are the blueprint to achieve a better and more sustainable future for all. They address the global challenges we face, including those related to poverty, inequality, climate change, environmental degradation, peace and justice. The 17 Goals are all interconnected, and in order to leave no one behind, it is important that we achieve them all by 2030. 

https://www.un.org/sustainabledevelopment/sustainable-development-goals/

A decade ago, few business leaders would have accepted that ending global poverty had anything to do with their business. But the recent decade has shown that social license and community expectations are a critical part of the external factors to your operating model.

A decade ago, understanding and taking action as a business on something like the UN Sustainable Development Goals, would be accomplished with a press release. Now, investors and regulators expect full disclosure of environmental, social and governance issues.

Understanding your current operating model – the value proposition, the principles, the people, the processes and the technology – is complicated enough for many firms. If you are embarking on a transformation, defining the new target operating model and building out the supporting processes and frameworks is tricky too.

The growing pressure from more regulation, legislation and industry standards increases the complexity faced by business leaders. There are so many potential frameworks that you could use to assess where your business stands, that going back to basics is a helpful approach.

Because of the rise of globalised firms, it makes sense to take a global approach to assess the social impact of the components of your operating model. Helpfully, the UN Sustainable Development Goals can provide businesses with an extensive set of considerations to incorporate into an operating model review and target operating model development.

If you aren’t a global business, there is still value in considering how your business can make a positive social impact. If there is a lesson from the past decade, it’s that whatever you previously thought was the boundary of social, regulatory or legislative pressure on business, it is now far more demanding on business than it has ever been.

Many businesses may only be able to impact 1 or 2 of the sustainable development goals, but there is still value in considering all 17 to see if there are areas of your operating model that could change to make a difference.

Goal 1: End poverty in all its forms everywhere

The structure of the UN Sustainable Development Goals is useful for an assessment exercise. Each goal is high-level, there is a set of accompanying statistics describing the extent of the societal issue, and there are a series of detailed sub-goals.

The goal to end global poverty in all its forms everywhere is aspirational. It would be fantastic if achieved, and an initial impression could be that this is wholly unrealistic.

However, there are small things that businesses can do to help reduce the incidence and severity of global poverty. More than 700 million people worldwide still live on less than US$1.90 per day. Having a job doesn’t guarantee a proper standard of living as 8% of employed workers and their families lived in extreme poverty in 2018.

Poverty has many dimensions, but its causes include unemployment, social exclusion, and high vulnerability of certain populations to disasters, diseases and other phenomena which prevent them from being productive. Growing inequality is detrimental to economic growth and undermines social cohesion, increasing political and social tensions and, in some circumstances, driving instability and conflicts.

https://www.un.org/sustainabledevelopment/poverty/

Assessing Your Strategy And Operating Model

Every business has strategic goals it wants to achieve. The operating model is how it structures its capabilities to deliver on the strategy. These capabilities are groupings of people, processes and technology that create value or support value creation.

For example, your operating model is a crucial driver of decisions to insource or outsource capabilities. When you choose to outsource, your supply chain becomes part of your social impact. Enhanced due diligence on your suppliers and their supply chain is required. You need confidence that your business isn’t inadvertently generating a negative social impact through your supply chain.

The UN Sustainable Development Goals provide an additional set of considerations for business leaders when they are reviewing their overall operating model. There are two areas of questioning – business strategy and operating model.

What is your business strategy? What are your strategic goals? When you are thinking about how to create value, are there aspects of this value creation process that do not align with the UN Sustainable Development Goals?

What is your operating model? What are the key capabilities that you have assembled to deliver value? How do these capabilities create a positive social impact? Can they even contribute to making a positive social impact? Are there negative social impacts from some capabilities that your business has?

How is ending global poverty linked to your strategy and operating model? One helpful mental model is to think about the frontpage rule – is your business doing anything inside its operating model globally that could lead to a headline that accuses your company of perpetuating global poverty?

The location of your physical operations is a crucial consideration when it comes to helping end global poverty. Do you have factories, mines or offices in developing countries? If so, do you have a policy framework for ensuring that you are generating a positive social impact in these countries? Have your risk and compliance teams embarked on enhanced due diligence of your supply chain and recruitment processes in these countries to identify any areas of risk or potential exploitation?

The great news is that almost all global businesses already have robust frameworks in place to ensure that these environmental and social risks are identified and well managed. You can read about these efforts in their annual reports. They regularly engage consultants to benchmark their approach against global standards and identify further remediation required.

The change in thinking for businesses wanting to make a positive social impact is that when making a low level operating model choice, there are multiple competing priorities. Having a principles-based target operating model that gives business leaders the ability to choose different components is essential.

I think that businesses who do not currently use a broad framework like the UN Sustainable Development Goals to explore how they could make a positive social impact are missing something. There is an opportunity to use these goals as a differentiator and to identify how each key capability of your business not only creates value for customers and shareholders but aligns to these goals.

The goals and expectations of your employees matter too. Most millennials care more about the purpose of the work they are doing than the commercial drivers. They understand that a business has to make a profit, but if the operating model that delivers that profit helps create a positive social impact and supports the goal of ending global poverty by 2030, then that is another compelling reason for them to come to work.

Next Steps

  • Take a look at https://www.un.org/sustainabledevelopment/poverty/
  • Think about how your business could help reduce global poverty
  • Think about what your employees expect your social impact to be
  • Think about how your current operating model helps or hinders these goals
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What are the UN Sustainable Development goals?

The UN Sustainable Development Goals are a collection of 17 high-level goals that serve as a blueprint for “a better and more sustainable future for all”. The United Nations General Assembly set them in 2015, and the goal is to achieve them by 2030.

ESG or “environmental, social and governance” issues are top of mind for regulators, legislators, and corporate leaders. The UN Sustainable Development Goals serve as a useful framework for thinking about how your enterprise currently operates and how it could change to enhance its impact on society.

Over the next few weeks, I will outline some considerations for corporate leaders for each of the goals. I will pose many of them as questions around the relevant components of your operating model.