COMMON TRENDS 2016; ESG, CSR & SDG s Parul Sharma Head of CSR Compliance, Advokatfirman Vinge
Agenda 2030 (SDGs)
Five most crucial ESG trend areas for investors 2016 Supply chain management becomes stringent (Social) A crucial case is the Rana Plaza incident Bangladesh. Stringent national laws such as the UK Modern Slavery Act 2015, introduces a requirement for commercial organizations over a certain size to disclose, on an annual basis, the steps taken to ensure that slavery and human trafficking is not taking place in their organization or associated supply chains. Focus on carbon emission reductions and growth of the alternative energy industry (Environmental) In the United Nations Climate Conference in December 2015, one thing was clear: countries have committed to reducing carbon emissions.195 countries, rich and poor, large and small, and at every stage of development have pledged to cut, cap or mitigate their carbon footprint. This means that significant coal reserves, oil from oil sands projects and many other sources of carbon intensive fuels will likely stay in the ground while alternative energy should grow at an escalating rate. Risk of higher tax expenses and tax transparency (Governance) The OECD launched what was described as an unprecedented international collaboration on tax reform led by G20 countries in 2015.The two-year initiative, known as the BEPS Project (Base Erosion and Profit Shifting), is aimed at introducing reforms that could eventually put an end to tax avoidance practices. Diversity at the Board of Directors (Governance) Investors may mitigate the risk of weak oversight by taking a more active role in nominating Boards of Directors. MSCI analyzed this topic further and, using data from its World Index, found that having female representation on company boards can be good for business. Pay gap and the minimum wage shocks (Governance) There is growing focus on the disparity of wages between the top 1% of earners and the rest of the population. This has resulted in regulations requiring pay disclosure in some countries, minimum wage increases in others, and, in some cases, employee lawsuits. This disparity is in constant civil society campaigning and increasing demands on firms. Complicating the compensation picture further will be minimum wage shocks over the next couple of years as the pressure to narrow the wealth gap increases. Industries that compensate a significant portion of its staff at the minimum wage could see their operating costs rise as the minimum wage level rises.
Pay gap and the minimum wage shocks There is growing focus on the disparity of wages between the top 1% of earners and the rest of the population. This has resulted in regulations requiring pay disclosure in some countries, minimum wage increases in others, and, in some cases, employee lawsuits. Industries that compensate a significant portion of its staff at the minimum wage could see their operating costs rise as the minimum wage level rises. Increased focus on paying a living wage, not only the minimum wage, throughout the supply chain. Resulting in increased risk of reputational damage, disruptions at the workplace, and higher operating costs.
Diversity at the Board of Directors Studies have shown that diverse boards can bring unique points of view which may help mitigate risks within the business and positively contribute to long term returns. A board that lacks diversity may be at risk of group think, be less innovative and more risk averse. Companies with a percentage of women serving on their boards above the national average, enjoy higher average annual Return on Equity (10.1% vs. 7.4%). Diversity is not only a question of gender. Potential new regulations and requirements on companies.
Risk of higher tax expenses and tax transparency Firms that rely heavily on minimizing tax payments to boost their profits rather than operational growth could be leaving themselves vulnerable to increased regulation and enforcement. The OECD BEPS Project (Base Erosion and Profit Shifting), is aimed at introducing reforms that could eventually put an end to tax avoidance practices. According to the OECD, annual revenue losses from the practice are estimated at around $100 - $240billion, or 4-10% of global corporate income tax revenues. Developing countries are especially at risk. Estimated revenue losses from tax avoidance in developing countries amount to 10 x the global aid budget. Increased requirements on country-by-country reporting.
Supply chain management becomes stringent Companies not mitigating social risks in their supply chains risk reputational damage, loss of revenue, production stoppage etc. Increasingly stringent laws regulating business conduct and requiring risk mitigation. E.g. UK Modern Slavery Act, Dodd-Frank Act, new public procurement directives, Duty of Vigilance, etc.
30 (20 MNC + 10 SMEs) Head of Procurement & CSR/Sustainability Managers responded 2015 How do you work with supply chain and CSR or sustainable procurement? 19 responded: by letting supplier sign the CoC Other responses: We have a code but no one knows how to follow up or verify even if supplier signs it. We are not able to determine a business case. We send out self-assessments every year and keep them in a database. We have declared importance of good suppliers in our sustainability report, but we don t verify whether CoC is complied with. We have outsourced compliance through audits. Otherwise these things are more head office concerns not really changing line-management so much. We don t buy from China, we buy from Europe. (Source: The Academy for Human Rights in Business/CSR Sweden)
Providing workers in your supply chain with clean water and sanitation
Provide your suppliers with environmental and climate friendly skills and methods, and anti-corruption checks Compliance risks related to local laws governing human rights, labor rights, anti-corruption, tax and the environment in all countries of operation.
World Economic Forum Global risk report 2016 Top Five Global Risks of Highest Concern for the next 10 Years Water crisis A significant decline in the available quality and quantity of fresh water resulting in harmful effects on human health and/or economic activity. Failure of climate-change mitigation and adaptation Governments and businesses fail to enforce or enact effective measures to mitigate climate change, protect populations and help businesses impacted by climate change to adapt. Extreme weather events Major property, infrastructure and environmental damage as well as human loss caused by extreme weather events. Food crisis Access to appropriate quantities and quality of food and nutrition becomes inadequate, unaffordable or unreliable on a major scale. Profound social instability Major social movements or protests (e.g. street riots, social unrest, etc.) disrupt political or social stability, negatively impacting populations and economic activity.
Water as a financial risk Worldwide, agriculture accounts for 70% of all water consumption, compared to 20% for industry and 10% for domestic use. In industrial nations, however, industries consume more than 50%. Risk of having stranded assets if the water resources needed to keep assets operational are no longer available. Business needs to consider the whole of the industrial water cycle, from extraction right through to wastewater treatment and reuse. Also, identify if the business or any suppliers are sourcing water from particular water stressed locations.
Let s do it!