Robert Dornau has spent the last 17 years working on sustainability related topics in a diverse set of roles. He joined RobecoSAM in February 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, Robert 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. Robert is a regular speaker and chair at workshops, webinars and international conferences. He holds a Master in Economics from the University of Konstanz, Germany and has published articles in peer reviewed journals and contributed chapters to different books on among others carbon markets and climate change regulation.
Christopher P. Skroupa: Companies and investors around the world start to understand the financial materiality of certain ESG issues—how can one define, determine and report on the financially material ESG aspects?
Robert Dornau: Materiality is the threshold at which ESG topics become important enough to be disclosed. Any factor which might have a present or future impact on a company’s value drivers, competitive position and thus on long-term shareholder value creation is defined as material.
By focusing on the most material issues, companies are able to develop the projects they need for growth, while also meeting investors’ expectations for production, cash flow and value in developed assets. The process of defining material aspects is highly strategic and its results stretch far beyond just the production of a sustainability report—it touches on the company’s overall strategy, risk management, relationships, communications and even the design of products and services with sustainability impacts in mind.
When measuring materiality, RobecoSAM takes into account the following: revenue opportunities and risks arising from market share or competitive position, cost implications arising from compliance or operating licenses, capital efficiency trends reflecting additional investments required to maintain the business, risk exposure arising from governance, business conduct, environmental or other factors, and time—not only immediate impact, but also long-term ones. The time horizon for specific issues is typically three to five years, but longer time horizons have also been considered when integrating sustainability metrics into valuations.
Skroupa: Not all companies understand the benefit of measuring, managing and reporting on financially material ESG aspects—what do you recommend them to do first?
Dornau: Companies still on the fence need to understand that ESG reporting is in fact about linking intangible issues of strategic importance with your company’s business case. It is not simply about reporting a company’s operational efficiency numbers or having nice procedures in place. At RobecoSAM, we call this corporate sustainability.
In order to be successful in the long-term, a company needs to understand how it is affected by the global megatrends (energy and climate, resource scarcity, digitization, globalization, etc…). As a first step, every company needs to realize that they cannot simply look into the mirror. They need not only to understand what the most material aspects from the company’s perspective are, but also from the perspective of their stakeholders (customers, employees, etc).
What is most material? Is it the ability to innovate around green market trends? Is it human capital development with a measurable return on investment as the company follows through on a new strategy? Or is it the minimization of supply chain risks stemming from human rights or greenhouse gases? Or the ability to leverage opportunities such as innovation cooperation or energy efficiency?
Of course, more than one issue can be identified as highly material. Once the issues are identified, they need to be linked to the company’s business case (revenue generating, cost or risk reducing), key performance indicators, related metrics and targets. A strategy to meet those targets also needs to be set. In order to guarantee delivery of these targets, they should be linked to executive compensation. Once this link is in place, the benefits of measuring, managing and reporting are clear.
Companies need to measure the metrics set, ensuring that they can correctly manage the strategy to meet their business goals. Publicly reporting company sustainability targets and progress towards these targets will keep managers accountable and investors well-informed. If you are looking for investors that stick with you in the long-term, this is the way to do it.
Skroupa: In your experience working with companies that undergo regular sustainability assessments, what do they see as the overall pros and cons of the analysis and reporting process?
Dornau: One of the biggest advantages of our sustainability assessment is that it allows greater collaboration within a company itself. The manager responsible for completing the assessment for a particular company usually needs to meet with several departments, such as Human Resources, procurement, environmental footprint management, and others. These meetings are part of the process of collecting the right data, and they help the manager better engage with departments, set responsible targets and improve the ESG integration process.
On the other hand, one of the disadvantages of the assessment is that companies can fall victim to “reporting fatigue.” Many companies report that they devote over 100 hours to answering the questionnaire.
However, in spite of the fact that filling out the assessment can be a demanding process, most companies report that they do not view the many hours put into answering the survey as a reporting burden, but instead part of the value added as a company engages different departments and integrates sustainability into its DNA. The visibility generated through higher rankings on sustainability metrics also adds a benefit to external communication with business partners and investors. Many companies report that high scores add credibility to their business models, and thereby, help them gain business.
Skroupa: How have you seen the corporate ESG atmosphere change in recent years?
Dornau: Companies are still operating at different levels when it comes to addressing sustainability. The laggards are stuck at limiting their efforts to compliance, and the more advanced think of it as protecting the company’s reputation and as risk mitigation. The last big wave was about integration of sustainability issues into the business case.
Today, companies are increasingly facing pressure from a range of stakeholders, including customers, employees, local communities, governments, and investors, to make a positive contribution across the triple bottom line. Not only are companies expected to move from “doing less harm” to doing more good, but they are also expected to continue delivering financial returns.
In our 2016 assessment, we introduced a set of questions on impact measurement and valuation in the industry specific questionnaires of 1/3 of the 60 industries we cover. As always when we introduce new questions, this is a great way to identify leading companies that were ready with an answer. However, regarding impact valuation, we made a special observation among the companies that answered these questions (184 companies from 30 countries). While globally 78% of companies think they are able to measure and value their impact, we only agree with 1/4 of them, i.e. 19% of the total. Only these 19% of companies are able to not only measure the output of their actions, but also the outcome. This means if a company addresses sanitation as an issue, the amount of soap sold and the number of people that bought it is an output. The real impact on society is the impact that better health has on lifelong productivity. Studies by the world bank show that every one dollar invested in sanitation creates seven dollars for society.
If a company’s decision makers are not able to understand the positive (or negative) externalities of their actions, then they are not able to make the right decisions. Most financial reporting does not paint a complete picture of a company’s real value; it is typically limited to a company’s financial earnings and the economic value generated for beneficiaries such as employees, governments, shareholders and creditors, and excludes the environmental and social value generated or destroyed by a company’s activities. Leading companies internalize their material externalities by quantifying environmental and social impacts in financial terms and examine these alongside financial reporting. As a result, the company’s true value appears quite different, and other issues besides financial emerge as value drivers.
The information in this document does not constitute an offer and is for information purposes only. No guarantee is given for the correctness and accuracy of this information. There is no liability for damages resulting from the use of this information.
Christopher P. Skroupa is the founder and CEO of Skytop Strategies, a global organizer of conferences.