Making dollars as well as ethical sense

PHOTO: Making dollars as well as ethical sense

At a forum last week, Singapore Exchange (SGX) chief executive Magnus Bocker gave a significant speech to hundreds of business and government leaders, offering investors food for thought.

Describing the current investment climate, he noted that recent natural disasters, rising debt levels and fast disappearing resources have sent "crashing waves unsettling investors' confidence and created market instability".

And even while we face these global challenges, the world continues to grow, with the middle class in Asia expected to triple to 1.5 billion to 1.7 billion people by 2020, and the region needing US$8 trillion (S$10 trillion) of infrastructure investment to meet the growing needs of the population.

"So who's responsible for the future and its needs?" he asked delegates at the Responsible Business Forum on Sustainable Development held at Marina Bay Sands.

"I'm afraid we may all have a part to play… We need to convince an even bigger audience outside of the intensifying importance of responsible business and sustainable investments, " he said.

He cited some challenges such as the difficulty of quantifying the benefits of such initiatives to a company's profit and loss statement, especially when these strategies increase costs.

However, there are tools for companies to measure the long-term impact, and the upfront investment is often paid off in cost-savings or improved yields, he added.

For example, the Environmental Defence Fund, a New York-based non-profit organisation, has worked with private equity groups such as KKR, Carlyle and Oak Hill Capital Partners to develop a tool that allows private equity investors to integrate social and environmental factors into their investment processes, he said.

Acknowledging that even though the primary aim of companies is still to make money, he observed that there are a growing number of consumers who want to match their ethical and environmental values with their purchases.

Companies failing to manage their sustainability reputations are also subjecting themselves to operational risk, he said.

This is particularly important if a company uses a large amount of resources such as water or raw material in its operations, for example, and does not consider the reliability or integrity of its supply.

He also observed that, in Asia, an increasing number of responsible global investment firms are allocating more resources here, and regional financial institutions are also monitoring sustainable investment issues and integrating such aspects into their investment policies.

He called on all Singapore-listed companies "to review how they can better disclose and report their environmental, social and governance footprints".

"Ultimately, transparency and disclosure are part and parcel of responsible business practice," he said.

One bigger point he made was that while stock exchanges as custodians of corporate responsibility have a role to play in pushing for good governance and sustainability practices, efficient capital markets that reward and invest in companies that "do the right thing" are also needed.

This means investors should invest in companies that behave responsibly, and sell the shares of companies that do not.

What does this all mean for investors like us?

There are two takeaways. Firstly, that increased accountability and sustainability practices are trends that both companies and investors can no longer ignore.

Companies that carry on with business as usual run the risk of failing to prepare for a world grappling with increased demands and dwindling resources. They may find their suppliers embroiled in, say, human rights violations or suspended by regulators, and lose a critical source of supply overnight.

Or perhaps, a water or energy crisis they have not anticipated may wipe out all profits in a short time. Sustained campaigns by non-governmental organisations against irresponsible companies also affect brand, reputation and image, hitting revenues and bottom lines.

So for investors, it does not make sense to invest in companies that fail to display any considerations for the sustainability of their operations.

Secondly, for capital markets to be efficient, everyone - from retail investors to big institutional investors such as banks, insurance companies, pension funds, hedge funds or sovereign wealth funds - has to play a part.

Collectively, everyone has to make a conscious decision to do what Mr Bocker urged - put money in companies that behave responsibly, and sell the shares of companies that do not.

In other words, it is not enough to boycott - divesting is more effective.

And the more efficient the capital markets are in allocating resources to the right companies, the better they can help fund these companies in their growth plans and add value to the local and global community.

In his speech, Mr Bocker noted that some companies struggle to explain to analysts and investors that environmental and social responsibility and profitability are not mutually exclusive.

The way I see it, analysts and investors are the ones with the power to send strong signals to companies that there is no choice but to be responsible.

All we have to do is take our money and walk away.


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