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.

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.

Thomas SchulzCEO, FLSmidth

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”.

The full publication is available here

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