When it comes to corporate sustainability, what really matters? It’s a tough question to answer, especially as the diversity and complexity of issues under the umbrella of “sustainability” continues to grow.
There’s corporate governance, workers’ rights, carbon emissions, waste and much more, and – with government regulations up in the air – it can be exceedingly difficult to predict whether or not a sustainability play will pay off.
Recently, analysts at investment research firm Sustainalytics put together a list of the 10 unconventional sustainability stories that, they predict, are most likely to impact the finances of major companies this year.
These stories, compiled in a new report being presented next week, highlight some of the major sustainability factors that could affect corporate bottom lines – and, consequently, the large institutional investors, pension plans and portfolio managers who invest in these companies.
Here are the 10 most important issues to watch in 2015, according to Sustainalytics, ranging from potentially having a “strongly positive” impact on companies’ long-term finances to a “strongly negative” one.
Top five good stories
1. Lafarge and Holcim cement sustainability with a merger
Sustainalytics’ report says that the merger of France’s Lafarge and Switzerland’s Holcim – the world’s largest cement manufacturers – “could result in an upgrade of energy and GHG [greenhouse gas] performance and improved positioning in the growing market for sustainable building materials”.
The report is also optimistic about the success of the merger, which is on track for completion by mid-2015. Unlike some companies involved in “mega-mergers”, Lafarge and Holcim have similar sustainability strategies and that, the report claims, bodes well for a successful integration.
2. Intel’s progress toward ‘conflict-free’ processors
Intel’s “audacious plan” to completely rid its supply chain conflict minerals – such as from the war-torn Democratic Republic of Congo – by 2016 will make major progress this year, according to Sustainalytics.
“Intel is well-positioned to capitalize on consumers’ growing awareness of conflict minerals and any upsurge in demand for so-called ethical electronics,” the report says.
But profit has nothing to do with the company’s involvement in conflict-free minerals, stresses Intel spokeswoman Christine Dotts.
Getting involved in this conflict-minerals effort was never motivated by a desire to sell more microprocessors, or even being able to command any kind of price premium for a product that was perceived by consumers to be more ‘conscious minded’,” she told the Guardian.
“No financial analysis has ever been conducted by us to make the connection between these factors. We initiated this effort simply because it was the right thing to do.”
Nevertheless, Sustainalytics expects the effort to pay a “reputational dividend”.
3. Telenor seeks rewards in risky markets
When Norwegian telecom company Telenor launched a new mobile phone service in Myanmar in September, it exposed itself to an array of business risks. As Sustainalytics’ report notes, the region has a history of military rule, data privacy concerns and the threat of corruption.
Sustainalytics’ analysts argue, however, that the company stands to overcome these challenges because of its track record on environmental, social and governance issues.
What’s more, Telenor’s move into Myanmar could bring further dividends down the line: if the company succeeds, it could apply the lessons it learns to other emerging markets.
4. GlaxoSmithKline: scandal prompts ethics overhaul
Investors in scandal-plagued pharmaceuticals company GlaxoSmithKline (GSK) were hit hard last September when a Chinese court found the UK-based company guilty of running an extensive bribery scheme.
In addition to the reputational costs, GSK’s scandal also took a big bite out of its finances, with a hefty fine totaling nearly half a billion dollars.
Sustainalytics predicts that the company may have found a cure to help ease some of its investors’ woes. In the US, GSK has rolled out a new compensation policy for its sales team that is aimed at curbing unethical behavior. It plans to roll out the policy globally this year.
While the new model may reduce revenues in the short term, it could offer significant long-term benefits.
“In our view, these changes could help [GSK] rebuild investor and regulator trust in the wake of its recent reputational fallout,” Sustainalytics’ report says.
5. Pemex grows through competition
Is competition good for a company? Petroleos Mexicanos, or Pemex, Mexico’s state-owned oil monopoly, will find out this year. Beginning in June, foreign oil and gas companies will be able to begin bidding on exploration and production assets.
According to Hendrik Garz, a managing director at Sustainalytics, that bodes well for Pemex’s social and governance approach, especially in terms of health, safety and corruption.
“Pemex will be forced to adapt to the higher standards of its competitors. And from that we think the company will benefit,” he says.
Top five bad stories
1. Lonmin: the long shadow of a mining tragedy
In March, a special commission set up by the South African government to investigate the shooting deaths of 34 employees at UK-based Lonmin’s Marikana mine will deliver its final report.
“We would rather not speculate on where or how the commission will assign blame for the incident, but it seems unlikely that Lonmin will emerge unscathed,” Sustainalytics says.
The company’s report takes “a strongly negative stance”, arguing that the fallout could include impacts on the company’s reputation, to criminal prosecution of Lonmin officials and short-term pressures on its stock.
2. National Commercial Bank faces risks in Saudi equity
When Saudi Arabia’s National Commercial Bank went public in November, it announced that, beginning in November, the Kingdom’s equity markets will be open to foreign investors.
Sustainalytics sees this as “a unique opportunity for investors”. But the analysts also note a number of risks that, it says, could ultimately dampen the company’s competitiveness and discourage interest among investors.
The biggest concern is that the bank could be vulnerable to what the report calls “terrorism financing”, especially because of the bank’s location and the fact that it does not report the results of its money laundering practices.
3. Coca-Cola’s monstrous market move
With over 500 brands, Coca-Cola has long since diversified away from soda. But its latest move into energy drinks – through a minority stake in Monster Beverage – is risky, warns Sustainalytics.
The report cites “growing health concerns” over energy drinks, including a US government investigation “over five deaths possibly linked to Monster Energy”.
Adding to the worries, a federal advisory committee on the government’s 2015 dietary guidelines also is exploring safety concerns related to energy drinks.
4. Is DuPont sowing unsustainability in Africa?
In an admittedly contrarian view, Garz and his team argue that DuPont’s business in the African seed market “may be misaligned with the needs of smallholder farmers”.
Furthermore, they suggest, DuPont’s focus on a limited array of hybrid seeds “could contribute to biodiversity loss and Monsanto-type reputational risks for investors”.
Unsurprisingly, DuPont disagrees. In a statement supplied to the Guardian, the company said that it is “applying global science to create local solutions that improve the productivity and livelihoods of smallholder farmers”.
To Garz, that sounds too good to be true. “I am always getting skeptical when things sound so smooth. That’s a warning signal for me. I tend to look at possible risks,” he says.
5. Netflix’s house of cards
While Sustainalytics predicts that many companies will benefit from setbacks, it also suggests that others may be undermined by success.
California-based Netflix, for example, has successfully transitioned from a tech company focused on mailed DVDs into a “full-fledged ‘internet television network’”. However, Sustainalytics’ report says that “questionable board practices” resulting from this transformation will be a negative drag on the company.
Citing shareholder discontent and corporate governance challenges, the analysts speculate that investors “will be faced with a difficult choice if a takeover offer emerges in 2015, as they have been largely rewarded to date for sticking with the board’s strategy”.
Cliff Edwards, director of corporate communications and technology at Netflix, declined to comment on “rumors and speculation”, but said in an email:
I’d point out shareholder resolutions at odds with a company’s board decisions are hardly unusual in the US. Shareholders also tend to vote with the feet, and last time I checked, our shares are up quite a bit.”
Stock price volatility could provide “ongoing opportunities for potential acquirers”, according to Sustainalytics’ report. Edwards counters: “Until then, there’s nothing much more to say.”
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