How investors and capital markets are about to transform corporate approaches to responsible sourcing
The views expressed in this article are the author’s considered opinion.
The rules for doing business have changed: without visibility there is no accountability, says Stephen Whyte, Managing Director, QADEX.
Only those most adaptable to change will survive. Darwin’s view, taken from his famous quote, has never been so true as it is in today’s business world.
Transparency in all walks of life is changing the way investors allocate capital. Increased awareness of the impact companies have on people, communities and the environment have led to demands from investors, stakeholders, shareholders, management, employees and customers for more insight and more honesty in terms of how goods and services are delivered.
It would be foolish to ignore them. Companies who do so should expect to face calls for governance or even business model changes, including the forced reshaping of boards and the redrawing of strategies. They may even suffer reputational damage or regulatory censure.
Those who heed those calls, however, are likely to see their actions translated into better, more sustained, earnings, enhanced reputations and more productive – and satisfied – workforces.
These are the factors that are increasingly playing on investors’ minds, and for good reason; capital allocated to assets backed by ethical standards are offering dependable returns.
A 2015 paper by the Journal of Sustainable Finance & Investment found that 90 percent of studies concluded that corporate financial performance was either enhanced or at least unharmed by following an ESG-forward approach to portfolio management. Even during the volatility of the first months of 2020, higher-rated stocks with an environmental, social and governance (ESG) link outperformed the S&P 500, according to Fidelity.
Much has been made of the consumer revolution in making purposeful purchasing decisions based on a sense of social responsibility. But the same is increasingly true of investors. As well as a sense of doing the right thing, they are motivated by a growing body of evidence that shows socially and environmentally responsible companies are better-performing companies.
“By following ESG guidelines you’re typically applying better processes to whatever you are doing and, as a result, you tend to get to a more efficient place over time,” comments Joe Concannon, Managing Director at Novacies Capital, a tech-focused private equity firm based in Dublin.
“I can absolutely see how increasingly private equity investors, when they are doing their due diligence on companies, will be gathering the back-up data, to confirm that the company isn’t in breach of any standards that are expected on the ESG side, whether it’s climate, slavery, governance or any other measure.”
Capital allocation behaviour in the past few years bears this out. A recent conference hosted by Bloomberg established that by the summer of 2019, about $12 trillion of invested assets had some environmental, social and governance element. Further, Morningstar calculated that ESG-mandated funds saw more than $20 billion of inflows in 2019 – four times that of 2018.
Establishing a clear route to the summit
For the mountaineer setting off on his or her journey to the summit, it’s important to have a clear plan – one that’s based on reliable weather data, a proven route and preparations for dealing with unforeseen dangers. Similarly, companies starting their “ascent” into the new territory of responsible sourcing and transparency need a solid foundation of strong data, clear goals and a risk-based approach.
It’s clear that only by baking strong ESG values into corporate purpose can they make a successful bid for their own peak. But how can that mission and its achievements be communicated to investors? If businesses aren’t clear and confident about whether their targets are being met, how can they expect investors to financially propel that journey?
If a manufacturer wants to raise funds in the capital markets, it needs to be able to offer money managers clear information on its own ESG track record and also that of its partners and contractors. Because money managers balance the relative risks of every asset in their portfolios, it’s critical that companies are able to guarantee that every part of their business adheres to their stated ESG mandates.
For food manufacturers, or any other maker of a product with complex supply chains, providing that granular level of detail can be difficult. It’s made doubly tricky in the absence of standard measures for ESG compliance. The answer lies in equipping these businesses with tools to effectively monitor their performance and to show how they can manage and mitigate risk.
Key questions businesses should be ready to address include:
● How many suppliers and products at tier one and beyond are in our supply chain at any given time?
● Are we communicating our values and codes of practice to them? And are they being adhered to?
● Are there slavery or sustainability risks within these supply chains that could undermine our ability to continue trading successfully?
● Do the UN’s Sustainable Development Goals (SDG) impact our business?
● Are our supply chain technical approval and risk management processes optimised?
● Does our supply chain utilise natural assets/resources that are finite? And would our business be able to trade successfully without easy and cost-effective availability of these assets?
● Would a failure in our responsible sourcing policies – such as a modern slavery scandal – damage the value of our brand?
A strong sense of corporate social responsibility is no longer a trendy “good-to-have” sticker on a company’s front window. Today, good ESG is expected as a given, increasingly by investors. Profitability is far less likely to be the only bottom line they’ll consider when making their own purchasing decisions. They’ll check procurement policy sustainability, labour and product safety records, staff safeguarding measures and a whole range of other metrics. They’ll want to know that they are doing good for the planet as well as for their balance sheet.
For many companies, getting to a position of trust that inspires confidence can be, like the mountaineer’s assault on a new peak, a hard climb. And like the best climbers, companies will only be successful if they take care of the basics.
It begins with a corporate ethos that is rooted in the principles of ESG and expressed in a business model that puts those values into action. But that’s only the start – keeping to the summit path requires constant monitoring, review and reassessment of the new business terrain. Businesses which are able to deliver demonstrable progress over time, in a volatile, uncertain, complex and ambiguous world, will gain a market perception edge that can make all the difference when seeking investor support.
About the Author
After a childhood of climbing trees and milking cows on an Irish farm, Stephen studied business, followed by a career as Finance Director in the food industry with Kerry Foods and Samworth Brothers. Stephen left the finance dark side, and founded QADEX to develop innovative solutions for food safety teams to break the endless spiral of manual systems, mountains of paperwork and firefighting.
With encouragement from over 16,000 engaged customers QADEX has grown steadily to a team of 50, including 30 engineers, providing a range of scalable and configurable modules covering Food Safety & NPD, such as supply chain mapping, risk assessments, supplier and product approval, QA/QC checks, document management, customer complaints and the herding of cats necessary to deliver successful new product development launches.
Building on its leading position in supply chain risk management QADEX launched STARIndexTM during late 2019. STARIndexTM is being used by progressive businesses to identify ESG risks across their supply chains and deliver risk mitigation plans in partnership with suppliers. These businesses can then demonstrate tangible progress to stakeholders in what they are doing to protect the planet and people in their supply chains, alongside delivering safe and legal products.
In his free time Stephen can be found farming, at his son’s hockey matches or figuring out how to get to another Bruce Springsteen concert.