Companies that aren’t SDG ready – in reference to the UN’s Sustainable Development Goals – run the risk of underperforming when compared to their competitors. To understand why the risk is concerning, we spoke with Robert Dornau, who has spent the past 18 years working on sustainability related topics in a diverse set of roles. He joined RobecoSAM in February of 2014 as Senior Manager in the Sustainability Services Business, and now serves as Director at RobecoSAM. In this role he has benchmarked the sustainability performance of hundreds of large multinational companies and helped leading companies understand the requirements of sustainability from an investor perspective.
Before joining RobecoSAM, Dornau worked in different roles in climate change and sustainability, including Vice President, Global Head Climate Change Service at technical verification and inspection firm SGS, Deputy to the CEO of the International Emissions Trading Association, Consultant to the World Bank and Conference Director for world renowned Carbon Expo.
Christopher P. Skroupa: You work at RobecoSAM, which provides the ESG research used for the Dow Jones Sustainability Indexes, among others as well. According to your observations, what ESG topics are currently of most importance at corporates?
Robert Dornau: Our Corporate Sustainability Assessment (CSA) applies a unique and industry-specific methodology. We use 60 industry specific questionnaires that cover on average 20 different criteria – leading to 110 questions on average – all of those are financially material in our view. In addition to asking different questions in different industries, we also assign a different weight to questions that are indeed the same in different industry. Talent Attraction and Retention for example has a weight of 8 percent in the pharmaceutical industry, where human capital is and essential factor for the company’s ability to grow. In the metals and mining industry, where talent can be easier replaced and there is maybe also less competition for talent, the criterion only has a weight of two.
In addition to the criteria that are predefined in the CSA, we also offer companies to describe what they consider most material to their business. The top five categories in the 2017 assessment across all industries were:
- Impacts from products and services;
- Human capital management;
- Environmental management;
- Occupational health and safety; and
- Long-term economic issues and trends.
The latter includes a diverse set of issues for companies, frequently mentioned items were digitization and changing customer expectations.
Skroupa: What about gender diversity in the corporate setting? Many asset owners have defined this aspect as an engagement topic.
Dornau: Corporate gender diversity, i.e. a representative balance of men and women in the workforce, is becoming an increasingly relevant issue for corporations. The evidence that gender diversity contributes to better corporate performance is credible and growing. Corporations around the world have made it a top strategic priority to increase diversity, and a growing number of countries are promoting greater female representation at senior management level through either mandatory or voluntary standards.
We consider gender ‘equality’ to be a broader issue than ‘diversity,’ encompassing pay equity and equal access to career advancement opportunities for men and women at all levels of the organization, as well as the relative gender proportions in the workforce. Some countries are starting to introduce legislation addressing gender inequality in the workplace, such as the U.K.’s announcement in July 2015 to require companies with 250 employees or more to publish the gap between average female earnings and average male earnings.
As gender equality becomes a more significant issue for companies, it naturally becomes a possible material issue for investors to consider.
Diversity is covered in different places in our Corporate Sustainability Assessment:
- Board nomination process – looking for board level gender balance;
- Retention of female talent – evaluating whether companies have a glass ceiling for females from junior to senior management;
- Equality of remuneration – comparing not just the base, but total salary; and
- Health and safety and work-life balance policies – policies supporting working parents, not just mothers.
Skroupa: How can a firm learn, if they are doing fine in terms of climate strategy, diversity and all other financially material ESG (environmental, social and governance) aspects?
Dornau: Long-term challenges such as climate change, resource scarcity and demographic change shape the competitive landscape, creating new opportunities and risks that companies must address today to remain competitive tomorrow. As a result, companies are increasingly recognizing the benefits of embracing corporate sustainability strategies. But how can companies measure these benefits? How can companies know whether their corporate sustainability strategies are in fact effective? This is where competitive benchmarking comes in.
Skroupa: And what does that entail?
Dornau: Simply put, benchmarking means learning from the best in order to improve one’s own performance. Benchmarking arms organizations with information about what is happening in the marketplace, including which strategies are working, which ones aren’t and what is driving growth.
Most importantly, it highlights ways to improve sustainability performance, and helps companies demonstrate the positive impact of their corporate sustainability strategies on their financial results. The challenge is that the underlying sustainability factors are, to a large degree, intangible. If a company wants to understand how they perform relative to its competitors, they need to conduct a detailed analysis of existing processes based on a consistent, rules-based methodology to measure a set of predefined sustainability criteria and data points. RobecoSAM helps companies do exactly that through our CSA.
Companies participating in the CSA value that we help them make these intangible aspects of their business comparable. Our unique methodology was developed and refined almost 20 years. It allows us to turn a company’s sustainability performance across the economic, environmental and social dimension into a tangible score. Companies receive a detailed scorecard from us that benchmarks them down to criteria level.
Skroupa: What is the next big thing within the ESG space?
Dornau: Clearly meeting the United Nation’s SDGs (Sustainable Development Goals). Large asset owners – or often called “universal owners” – have committed to steer their assets in way so that they help reaching the SDGs by 2030. We could very well foresee – and in some cases already do – that companies start reporting on how much their operations or products/services cater to the SDGs. Specialized asset managers like us have also launched respective investment strategies, which allow investors to invest along the SDGs.
Investing in the SDGs is a societal imperative, an economic necessity, as well as a great multi-billion opportunity for investors, who are looking for an opportunity to instigate positive, measurable impact.
Skroupa: According to your ESG metrics, how “SDG ready” are corporates?
Dornau: Corporate Social Responsibility (CSR) has evolved from an ad-hoc feature to a strategic imperative for corporations. A well-defined and aligned CSR program can help companies articulate an overarching purpose that motivates employees, inspires customers, gratifies shareholders and advances society.
The UN’s SDGs provides a useful framework to help companies target and align their CSR programs with the economic, social and environmental needs society and investors value most. Our analyses of corporate philanthropy and citizenship practices shows that companies already recognize the need to address SDGs and are using their CSR programs to apply, advance and report efforts. However, stronger metrics are still needed, especially for companies and stakeholders to fully maximize impact.
The 2017 RobecoSAM Corporate Sustainability Assessment (CSA) questionnaire asked companies whether they have a group-wide strategy that provides guidance to their corporate citizenship activities; and to indicate how this strategy aligns with their overall corporate strategy and the SDGs.
All scoring was based on evidence of clearly defined and aligned corporate strategy – via business drivers – with SDGs, and defined qualitative or quantitative KPIs to measure corporate contributions to SDGs.
The data reveals some interesting correlations between SDGs and specific industries. The Top four SDGs across all industries:
- Quality Education – SDG 4;
- Good Health & Well-being – SDG 3;
- Sustainable Cities & Communities – SDG 11; and
- Decent Work and Growth – SDG 8.
Robert Dornau will be speaking on a panel entitled Paving the Path: Institutional Investors, ESG Methodologies and the Drive Toward ESG Integration at the ESG4 Summit on April 5 in New York, NY.
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