Swire Pacific did something different this year. Water and energy usage numbers were right up there alongside Attributable Profit, Dividend per Share and Return on Equity, on page two of the Annual Report. In fact, sustainable development numbers made up a quarter of the page.
The following page comparing 2011 and 2010 Financial and Sustainable Development Performance confirmed the company’s commitment and the ensuing five year summary of sustainable figures just before the Chairman’s statement showed that they can walk the talk.
Swire Pacific had integrated its sustainable development numbers into financial reporting.
China Water Risk talks to Swire Group’s Head of Sustainability, Philippe Lacamp on going ‘mainstream’ with sustainable reporting.
We were lucky as Philippe had just returned from Europe from a non-deal roadshow on Swire’s sustainability initiatives at the time of the interview and shared the feedback from investors with us.
CWR: Swire Group is recognized for its sustainability leadership across several industrial sectors and has been issuing high quality Sustainable Development Reports accordingly. Why the change now?
Philippe: A very simple reason; Peter Kilgour, Finance Director of Swire Pacific, understands the value of articulating a fuller picture of what our group is about. It’s not just about financial returns. It is much more than that. Incorporating all the sustainability criteria lays out clearly for all our stakeholders, and in particular the investment community, who we are and why we do what we do; we recognise that we have impact and are being proactive about it.
The key message we are trying to highlight is that there is financial value in an organisation that is managing these ‘non-financial’ areas. If you are reporting on them, you are probably better managed than companies that aren’t. The fact that, as you quite rightly pointed out, we have been doing this for some time means we already recognise that there is value. This is just taking a step further to make sure that our stakeholders can see that too.
CWR: Did you succeed?
Philippe: This report was a start. It is an internal initiative, not driven by questions from investors at this stage, but it has already resulted in deeper engagement with the investment community. From the non-deal roadshow in Europe, highlighting the integrated report, we know there are many fund managers / institutional investors who are increasingly taking ESG seriously
CWR: Was there a difference in response on the roadshow between socially responsible investors and ‘mainstream’ investors?
Philippe: : There was genuine interest from both groups. There is still some ESG box-ticking, of course, as both SRI investors and traditional investors work out what is really important to them, and it was an interesting mix. You can tell the people who ‘get it’ as their questions are more around substance of why certain things are being done and what opportunities have come out of it, rather than shorter term ROE interest. I did get the sense that the line between SRI and mainstream investors’ concerns is beginning to converge.
CWR: We have heard that some investors prefer to stay on the sidelines and not invest if they cannot get on top of reputational/ environmental risk issues instead of engaging as stakeholders to push for change and therefore reap efficiency gains. What are you views on this?
Philippe: It was striking to find out that the average length of time a stock is held is now seven months, down from seven years a few decades ago. So your point is well made. A seven-month time-frame makes gains from most sustainability-focused investment unlikely, as the payback period tends be longer than that. Also, such projects can be viewed as a waste of potential dividend to the short-term focused shareholder.
From a sustainability perspective, investors with a three to five year investment horizon are probably a better fit with our longer term view. That allows for those stakeholders to be more engaged and encourage us to carry out initiatives which will benefit the group longer term.
CWR: Swire Pacific and Cathay Pacific are amongst the first Hang Seng Index constituents to merge financial and sustainable development reporting. Do you see a general trend of sustainability moving from being viewed as “costly distractions” to potential cost savings and business opportunities? Will others follow suit?
Philippe: Yes, others will follow suit. If you view sustainability as a costly distraction, it says something about the effectiveness of your risk management generally. One of the most important sustainability initiatives we have used is Futures Scenario Planning (FSP) facilitated by Forum for the Future, a thought-leader in sustainability. The FSP exercise enables us to think 20 or 30 years ahead, stress test our business plans and identify risks and opportunities that we should be mitigating or investing in today. Our marine division has just completed this exercise and it has helped identify new business streams. Now, we don’t see that as a costly distraction – it’s business development and risk management. We are amongst the first to do this in Asia, though not globally. We hope increased transparency in reporting becomes a trend that is more widespread.
CWR: 75% of Swire Group’s water usage comes from Swire Beverages, which operate in some of the Dry 11 regions and are consequently the most water efficient Coca-Cola bottling plants globally. Given climate change and limited water resources, can businesses / investors continue to ignore reputation risks or perceived social injustice?
Philippe: If you are not measuring your output, you have no idea how efficient you will be. If you don’t know how much water you use, you don’t know how much risk you have. So, should we seek to use as little of a resource as possible? Yes, by default of being a good business. But even more so when you start overlaying risk scenarios on top of that, which in the context of water, is more about risk management than sustainability.
So the short answer is no, you cannot ignore those issues. There are many ways that businesses can be an integral part of the local community and address those risks from a business, investor and sustainability perspective. For example, through their zero wastewater discharge plants, Swire Beverages are an integral part of the local infrastructure, with the treated water being used municipally. When using a resource as precious and stressed as water you should have to constantly earn the social license to use that resource.
CWR: We have always thought that water more than carbon, would be a key driver of the convergence of sustainability and money making objectives. What are you views on this?
Philippe: Water awareness has only just started. Those of us who have had the benefit of CWR’s presentation understand water far more comprehensively than we would otherwise. In my experience, energy/ electricity is easier to understand than carbon. And through energy, we can discuss the water-energy nexus, and identify efficiencies and opportunities.
In China, which has experienced significant drought and flooding, water is probably a more immediate issue than carbon. Hong Kong has not got the pressing urgency of water scarcity that exists in China, thanks to the current water contract. China has prioritized water and put measures in place. Hopefully, Hong Kong won’t wait until there is a crisis to respond. Perhaps when the contract is re-negotiated in 2014 the absolute value of water will be more realised and innovations or better practices will be adopted.
CWR: Do you think investors understand risk component or a water/ energy crisis and the implications of the policies and targets by Beijing. Has it filtered down?
Philippe: Based on my experience to date, I’d say probably not fully. There is definitely opportunity for those investors who understand the longer term water/energy perspective. It is likely that you will find an increasingly engaged audience for your advocacy.
CWR: How have you/ are you planning to ‘tap in’ to opportunities arising from limited water resources?
Philippe: I will share one related initiative with you. There is an opportunity to expand our existing global expertise in cold storage into China, where some data suggests 20-30% of food waste/loss occurs when food is in transit due to poor logistics. This is extremely high compared to developed countries where the loss is in the low single-digit.
Of course this has potentially massive environmental and cost savings on the water front with agriculture being the largest user and polluter of water. Lessons learnt from our cold storage facilities in Australia and the US about energy and water efficiency, mean we can implement and operate an optimal facility from the very start. So not only is it a viable business, but it has tremendous impact.
CWR: Many companies complain about questionnaire/disclosure fatigue, is this something you feel too? If finance can draw up a set of international accounting standards, why can’t standard setters in the sustainability space? What are the key stumbling blocks here?
Philippe: I don’t want sound melodramatic but it took over five centuries from Luca Pacioli in the 15th century to early the 20th century to settle on GAAP, It takes a LONG time to get an accepted set of standards. It’s clearly not an easy process. I hope it won’t take a century to get an agreed set of sustainability/ water standards, but yes, it certainly adds to the feeling of questionnaire fatigue.
The key question is ‘what is the value of reporting’? We need to look hard at what benefit there is to our businesses by reporting to Carbon Disclosure Project, Dow Jones Sustainability Index, FTSE4Good etc. If we report publicly to GRI A+ is that sufficient? Who is interested? Is there value in it for us and our stakeholders? It can’t be reporting for reporting’s sake, which benefits no one.
We have committed towards a “Net Zero” impact. We clearly need to have some form of metrics that allows us to measure this internally. We will continue to work on metrics that we feel make sense until there is a GAAP equivalent.
CWR: Any other interesting initiatives you would like to share?
Philippe: To work towards our aspiration of a Net Zero environmental impact, we have set up a small fund for seed round /second round capital funding in interesting technologies that would assist us in our furthering our sustainability aims. There are essentially two parts of the Sustainable Development Fund – one that focuses on R&D projects with direct relevance to our businesses, such as truly sustainable bio-fuels, and a smaller portion earmarked for slightly more speculative investments.
We believe we can leverage our group expertise in making these investment decisions. A potential weakness of being a diverse conglomerate can be a very tangible source of benefit. An example – lighting efficiency. We have some of the world’s most efficient LED tech in our cold storage operations. We can make use of this research in Swire Properties or HAECO and cut down on potential duplication of efforts to get the best-in-class equipment. In fact we have set up an Energy Committee specifically to capitalise on our extensive Group expertise more effectively.
Bottom line is that this first integrated report sets a good marker for us. Operating companies engaged in reporting on a broader range of issues in a more comprehensive way, allow us to leverage the Group’s capabilities and to help work on being around for another 200 years.