The Consequences of Not Caring. Henry Boucher/Paul Fairbrother

Transcription

1 The Consequences of Not Caring Henry Boucher/Paul Fairbrother

2 Negative externality

3 Uncosted negative externality

4 The consequences United States Securities & Exchange Commission Form 10-K Coca-Cola Company Risk Factors (Extracts) Obesity concerns may reduce demand for some of our products New indirect taxes may negatively impact our profitability Changes in laws relating to beverage packaging could increase our costs and reduce demand for our products If negative publicity damages our brand image, our business may suffer

5 The Circular Economy We re rethinking our products, our purpose and our impact on the world We ve announced a bold, ambitious goal: to help collect and recycle a bottle or can for every one we sell by 2030 We believe in the circular economy, where plastic, glass, and aluminum are reused many times instead of being used once and thrown away. We want others to believe in it, too James Quincey, president and CEO of The Coca-Cola Company 19 th January 2018

6 RECYCLING The Circular Economy MANUFACTURING RESOURCES WASTE CONSUMPTION &USE

7 Uncosted negative externalities The Coca-Cola Company and Subsidiaries Condensed Consolidated Statements of Income* (In millions ) For year ending December 31, 2016 Net Operating Revenues $41,863 Cost of goods sold $16,465 Selling, general and administrative expenses $15,262 Other operating charges $1,510 Operating Income $8,626 Interest expense, other net income & taxes -$2,099 Net Income Attributable to Shareowners of the Coca-Cola Company $6,527 Uncosted negative externalities???? Fully Costed Net Income Attributable to Shareowners???? *Source: Coca-Cola 8K Filing / Simplified by Sarasin & Partners

8 Examples of other negative externalities We can t think of any companies without uncosted negative externalities Aircraft Noise Supermarket Waste Plastic & Rubber Fashion Industry Gambling NEGATIVE EXTERNALITIES Internet Platforms Agricultural Pesticides Bees Banks Systematic Risks

9 Climate Change - the biggest negative externality of all Current path 3-4 o C

10 Keeping a global temperature rise this century well below 2 o C above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 o C 2100 WARMING PROJECTIONS EMISSIONS AND EXPECTED WARMING BASED ON PLEDGES AND CURRENT POLICIES Cool pledges warm policies Source: Climate Action Tracker

11 Looked at another way, time is running out Source: UK Met Office, November 2017

12 Policy remedies for net zero carbon emissions Economic growth must be decoupled from greenhouse gas emissions Put a higher price on carbon - such as carbon taxes Increase energy efficiency and use of renewable energy Implement climate-smart agriculture and nurture forest landscapes Make all new buildings and infrastructure carbon efficient Provide developing economies with financial assistance to develop low-carbon economies All industries must aim for zero carbon emissions within 20 years

13 Climate Active Investment Approach Why: Climate risks are material and clients wish to respond proactively Goal: Enhanced long-term returns through careful stock selection and robust climate risk management Tools: Combines an active approach to stock selection with an emphasis on targeted climate-related engagement to protect and enhance value Expert advisory panel: David Pitt Watson (ex-founder Hermes Focus Funds, former co- Chair UNEP Finance Initiative) Sir John Beddington (Acting Chair of Met Office; former Chief Scientific Advisor to Prime Minister) Heidi Hellmann (Head of strategy at Centrica; former head of strategy at BG Group) Dr Cameron Hepburn (Professor of Environmental Economics at Oxford University and LSE)

14 It s not that most of us don t care There are significant systemic problems

15 Measurement What gets measured gets managed No recognition of negative externalities Failure to include foreseeable losses Poor oversight of accounting and audit

16 Ownership Nobody owns the global commons Property rights are not defined Anyone can use and abuse them Effective management requires internationally agreed laws and cooperation

17 Behavioural biases We have entrenched views Solution: the art of persuasion Shareholder advocacy

18 Concentration of power Of the 150 largest economic entities in the world, 87 are corporations Both a threat & an opportunity

19 Time living for today or planning for tomorrow? 4 or 5 year timeframes are too short It is brave to invest today for a payback in 20 years

20 Why now? Change is coming: - Millennial attitudes different culture & expectations - Populism / against exploitative capitalism - Changing tax regime sugar, carbon, plastic etc. - New laws / leadership - Evolving definitions of fiduciary duty - Big data externalities get measured - Activists seeking to exploit weaknesses - Bankruptcy recognizing costs of externalities Investors and companies that don t recognise this change will see sales and margins suffer and share prices fall

21 Careful and careless fund managers CAREFUL CARELESS Invests on a long-term horizon Integrates ESG in fundamental analysis Considers costs of negative externalities Uses voting actively to encourage improvement in corporate behaviour Active discussions with company management teams Engaging with policy makers to encourage systemic change Focuses on short-term share price movements rather than long-term corporate performance Passive parasites Votes but box-ticking Doesn t engage with the company Cuts costs by doing nothing Greenwashes

22 Careful investment: Stewardship Environment Society Governance Policy Climate Change Accounting Diversity Audit Director Pay

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