Johan Trocmé,
Nordea: Investor and corporate focus on sustainability has grown sharply in
recent years. How has your focus on ESG (Environmental, Social and Governance)
issues evolved over the past five years? Is it an added dimension for
management to consider, or do you see it as an integrated part of your
business?
Thomas
Schulz: Over 60% of our business is in emerging markets, where I would say
running a company with a proper value set is mandatory, so it is very much an
inherent part of our business. You will find ESG intertwined with business
throughout the company, in areas like safety, compliance, listings, commitments
and community engagement. This is particularly crucial when operating in parts
of the world where value sets are typically not as developed as they are here
in Scandinavia, for example.
Having a strong ESG profile and scoring highly on
transparency is very helpful in attracting talent to the company and for
customers to want to do business with us. The interest in ESG has increased
over the past 20 years, but has shifted over the recent five years from talk to
more concrete action. In the mining industry, for example, we are currently
seeing permits being revoked owing to insufficient environmental testing and feasibility
studies. New mine or cement plant projects are being planned in more detail than
ever before. We do not operate a single site without health safety monitoring
and checking also of contractors and suppliers.
JT: Has
sustainability been a factor in determining what your business looks like today,
impacting which areas you want to be in and which you might want to exit?
TS: What
customers expect from a premium player like us is to buy productivity, taking a
life cycle approach to optimise their total costs of ownership. This inherently
contains all elements of sustainability, which are typically important
variables for determining that cost. What we supply is not only the steel and
hardware for a plant, but also training (both technical and compliance), which
may have a great impact on the community in which the plant is located. The
plant needs to operate in a sustainable way, and the community will benefit
from its staff having the competence to operate it sustainably and in
compliance with local regulations. Sustainability
is of course critical in our decision to enter a business, but it is not always
obvious in what way sustainability plays its part.
Take coal mining, for
example. A growing number of countries are banning coal-fired power generation
for environmental reasons, but it remains by far the biggest energy source for
two of the world's biggest economies: China and India. Our involvement in coal
mining could be seen as very negative from a sustainability point of view. The
question is why are we doing business in coal? And the answer is that we go in
and reuse solutions from other industries to greatly improve the environmental
performance of coal. We consider this to be taking more responsibility than,
for example, just withdrawing and saying that we will have nothing to do with
coal. Attitudes to sustainability as well as performance levels can vary from
time to time among countries, and companies across our supply chain. We
therefore need a good screening capability, with a dedicated department
continuously monitoring and evaluating, and employees trained to look for signs
of sustainability problems.
JT: There
are obvious moral, regulatory and legal drivers for focusing on sustainability,
but do you consider commercial aspects of sustainability as well? Potential
costs from ESG failures, or additional revenues, competitive advantage or
business opportunities from being an ESG champion?
TS: Putting
it simply, sustainability has to give customers an opportunity to earn more money.
And it doesn't matter if it is by avoiding costs or through more or better
output, as long as there is a commercial impact. Imagine if a country
introduces emission regulations, but no penalty for violating them. There would
not likely be much progress on compliance with the regulations until violation
starts leading to companies being fined significant sums, or directors being
sued for damages.
It is important to
also consider the sustainability impact beyond the running of our business. Our
emissions, water consumption, etc., must be seen in the light of our delivery
of, say, a new cement plant which could have ten times better environmental performance
than an old installation that it replaces. We impact sustainability worldwide,
way beyond the sustainability footprint of our own production output. It is up
to us to build a core value set in the company built on this view of how we contribute,
and that begins with how we work within the company, like our safety standards,
setting an example in reducing water usage, etc. This sets the tone for our ambition
to have a great positive impact beyond the company.
JT: Are you
noticing any difference in how much focus or what messages you get from your
shareholders and bondholders on sustainability issues, compared with five years
ago?
TS:
Investor interest has grown, but is still moderate. We currently talk more
about sustainability with suppliers, customers and our own staff, than with
most investors. Disclosure and reporting on sustainability has improved
dramatically compared with 20 years ago. And investors and analysts can and do
read up on our sustainability performance before meeting us. Armed with this
knowledge, they ask less about the details of our ESG performance, and more
about how we can help our customers make money from a stronger sustainability
performance.
The Nordic region is widely regarded as very compliant from a
sustainability perspective, so being a Nordic company it is often assumed or
even expected that we are strong on sustainability, and are thus not often
asked in depth about how we perform in investor meetings. But it happens, and
we are then typically able to satisfy their needs with our sustainability
reports and invitations to meet our sustainability manager. Five years ago, we
hardly even got these requests from investors.
JT: The
Task Force on Climate-Related Financial disclosures of the BIS’ Financial Stability
Board and the EU Commission’s action plan on Financing Sustainable Growth are
both calling for increased and improved corporate financial reporting on
sustainability. Do you think this is needed, and are you ready for it?
TS: We are definitely ready for this. Is it needed? If you define yourself as a
premium player, you need to deliver premium sustainability reporting, too. It
is an additional way to differentiate yourself from the competition, and having
a sustainable approach and footprint helps explain and justify why you are not
the cheapest supplier. Will increased sustainability reporting lead to improved
ESG performance? I don't know. But I think it will be a good tool for companies
to demonstrate that they are ploughing major resources into creating and
maintaining a sustainable business, making the company's ambition clear and
credible.
This
article is reprinted with kind permission from Nordea Markets. The original interview
with Thomas Schulz appeared in the Nordea Markets Nordea On Your Mind
publication “ESG: Money Talks” in September 2018 under the headline “Sustainability
has to give customers an opportunity to earn more money”.
*this article was published in 2018 when Thomas Schulz was CEO at FLSmidth
