UBS Q-series Inflection Points: Towards Sustainability

*by Candice D. McLeod

Last month, UBS hosted Inflection Points: Towards Sustainability at the Bloomberg headquarters, as part of their annual Q-series initiative. The Q in Q-series stands for asking questions, particularly tough questions, as noted by Penn alumna and UBS Head of Global Sector Research, Erika Karp, who helmed the event.

Erika Karp, UBS, Head of Global Sector Research

The event’s main tough question: How do companies not only identify the inflection points in the their industry –“defined as accelerating rates of system-wide change that alter the manner in which industry leaders think and act”- , but also leverage these changes into driving sales and profits?

The conference facilitated open discussions between speakers and the audience in order to articulate both opportunities and risks regarding inflection points, with the emphasis on integrating environmental, social and governance (ESG) measures into everyday business.

Inflection Points featured two keynote speakers — Harvard Business School Professor Dr Michael Porter and Whole Foods co-founder and co-CEO John Mackey — and assembled an all-star supporting cast of experts and specialists, including academics, industry executives, and investors, that ranged across a spectrum of sectors, including Alcoa, American Electric Power, BlackRock, Bunge, Cisco, Gale International, GMI Ratings, Holcim, Intel, KKR, Morgan Stanley, Nestlé, Novo Nordisk, PepsiCo, PIMCO, Starwood Hotels and Verizon.

A snapshot of the themes discussed include:  resource scarcity, climate change mitigation, risks and opportunities regarding HR strategies, the changing consumer, community relations, corporate governance and the role of governments in implementing necessary policies.

Highlights

Rethinking the challenge – Coupling Sustainability with Resilience

The speakers, particularly the first panel, aptly titled, “Setting the Stage,” called on investors and clients alike to rethink their current business challenges, taking into account the world’s current rapid pace of advancement and population growth, and accompanying issues, particularly resource scarcity and climate change.

Professor Goldin, Director of the Oxford Martin School at Oxford University, highlighted the importance of growth coupled with resilience. He also pointed out that not only are emerging markets growing at twice the rate of G7/industrialized Western economies, having learned lessons from them, but they are becoming more resilient.

Professor Goldin, Director of Oxford Martin School, Oxford University

Professor Goldin’s suggestions for resilient growth included closing governance gaps among global, national and local networks, and more importantly, becoming science literate, in order to better build out the necessary framework to identify risks and opportunities. He particularly stressed the need to incorporate climate change mitigation strategies into government policies, as well as one’s business model. He challenged climate change skeptics with the argument of hedging one’s bets and taking precautionary measures, even when the potential risk is small, stating “although you may not think it is not probable that your house might burn down, you still purchase insurance”.

He concluded his presentation by urging both business and government leaders to periodically rethink challenges, and adapt to societal and environmental changes when making thorough decisions.

Panelists then provided successful examples of rethinking business practices and adapting to challenges.

Susanne Stormer, Vice President of Corporate Sustainability for pharmaceutical giant, Novo Nordisk, and panelist for “The Changing Consumer” discussed the advantage of adapting business to different consumers. She highlighted that Novo Nordisk was able to acquire $5 billion in 5 years because of the firm’s capability to design their product to reflect changing patient demographics & culture, citing their Chinese market as the primary example.

One of the conference’s best examples, however, came from Nestlé. Janet Voûte, Vice President, Global Head of Public Affairs, discussed how the global conglomerate had to restructure their business model in order to address water scarcity. Water is currently being used faster than can be naturally renewed, particularly in regions that host many of the company’s operations and as a result, Nestlé developed several training programs for local farmers. Nestlé realized that if the firm did not train local communities to preserve local water quality and their surrounding environment, both the communities and Nestlé would suffer. In fact, Ms Voûte noted that the company no longer separates the social and environmental issues from business, because if these communities did not survive, there would be no Nestlé.

Andrew MacLeod and Kevin Anton, representing copper producer Rio Tinto and aluminum producer Alcoa respectively, also echoed Nestlé’s sentiments about local community development. Mr Anton discussed Alcoa’s policy of including community dialogue when developing projects, which he says has been pivotal to Alcoa’s success as a global leader in aluminum production. He summarized by stating that community relations are no longer a risk but rather an opportunity.

Creating Shared Value & Conscious Capitalism – Integrating Social and Environmental Issues into Competitive Strategy

Can business have both economic and social purposes?

Harvard Business School’s Dr Michael Porter encouraged the audience to think about how investing can create more value in society. Socially responsible investing (SRI) or impact investing opened the door for marrying financial mechanisms and social purposes but challenges have included a limited pool of investments as well uncertainty surrounding proving the economic value of such investments. Dr Porter stated while SRI has been a logical first step, the next phase is the Creating Shared Value model (CSV).

Embedding shared value into one’s competitive business strategy, such as Nestlé training its farmers to preserve local water quality, is the idea of solving social issues from within a business model. The underpinnings of his argument were that capitalism is self-sustaining and scalable, while social needs represent a huge market opportunity. Therefore, if social and environmental issues were observed through a business lens, not only could pertinent problems be solved, but also profits could be made, allowing one to “do well” and “do good” simultaneously.

Meanwhile, the second keynote speaker, Whole Foods Co-Founder & Co-CEO, John Mackey, also discussed how capital investments have the capability of solving social and environmental issues. He focused on the theory of “Conscious Capitalism” and also recently founded a non-profit by the same name.

He differentiated Conscious Capitalism model from traditional CSR, stating that Conscious Capitalism adopts a holistic approach to business, providing an avenue for a long-term competitive advantage, while CSR can sometimes be simply reports of the philanthropic arm of a firm, “with no higher purpose.”

John Mackey, co-Founder and co-CEO, Whole Foods

Mr Mackey’s strongest statement was that the 21st century belongs to conscious businesses, citing Google, REI, Southwest Airlines, and of course, his enterprise, Whole Foods as examples, as “they outperform and outcompete up to 10x”, producing more profit, as well as more value. He urged the audience to explore the heritage of one’s business, and identifying its DNA. He stated Conscious Capitalism courses through the entire of vein of one’s business from the leadership, and culture, to the supplier network and community development.

Overall, John Mackey explained that Conscious Capitalism is the result of creating value for all stakeholders – customers, investors, community and the environment – by identifying purpose first, then strategy.

Metrics, Timing and Reporting: Tools for Investing in Sustainability

Speakers and audience alike discussed the evolution of sustainability reporting. Although CSR reporting has advanced significantly in a short period of time, there was general concern that existing accounting standards were insufficient. Jim Gowen, Vice President of Supply Chain Operations and Chief Sustainability Officer of Verizon expressed frustration with the multitude of green labels, and sustainability ratings available.  He stated that there was difficulty in deciding which rating system to invest in. Also, there was concern with the general subjectivity of some systems because depending on the weighting metrics used, some ratings do not illustrate the great strides being taken in one particular aspect, because a company can do great on one element of a system but do poorly on another weighted area.

Meanwhile, some panelists discussed how to make a niche field, such as ESG, integral to mainstream investing.

Dr. Kimberly Gladman, Director of Research and Risk Analytics at GMI Ratings expressed that they “still agonize over how to get the data that [they] need”, while Elizabeth Seeger, Principal at private equity firm, KKR, mentioned that they are often actively introducing SRI investing into conversations and wished that more investors brought ESG to the table.

However, optimism was also expressed surrounding the advancement of metrics, as sustainable business has been gradually getting the attention that it deserves. Verizon pointed out that they would publish the first annual report dedicated solely to sustainability, as opposed to it being a slice of the annual CSR report. Meanwhile, GMI Ratings, which maintains ESG ratings for nearly 5,500 companies worldwide, noted that private equity firms do indeed price environmental and social factors into valuations of companies. This alone is a huge indication of the changes that have happened.

Morgan Stanley’s Executive Director, Jeremy Shapiro, expressed that these positive changes will continue and sustainability reports will be better, get cleaner, and investors will learn how to best use the data. Proof of that is the institution of the Sustainability Accounting Standards Board (SASB).

Erika Karp, UBS Head of Global Sector Research and board member of the Sustainability Accounting Standards Board (SASB), pointed out that SASB potentially reflects an inflection point in metrics and standards, as it will help investors navigate sustainability as a material decision. In fact, many speakers agreed that looking at sustainability data in combination with other material data and adjusting behavior accordingly is how a company can improve its batting average.

One of the main takeaways from the conference came from Tammie Arnold, Managing Director of PIMCO, who suggested that investors needed to stop thinking short-term and start aligning business decisions with longer-term periods. She noted that short-term orientation may cause one to look at costs in a different, and not necessarily productive way as opportunities could be missed.

Overall, the closing points of the conference were that investing in sustainability requires a longer-term outlook for business decisions, a willingness to rethink business challenges and adapt to changes, as well as, access to specific, measurable data.

While the keynote speakers addressed the question of “what” businesses should be doing – incorporating ESG into competitive business strategy-, the answer to “how” seemed to lie within adopting a clear plan, developing the appropriate metrics for sustainability reporting, adjusting the time horizon for business decisions, and investing in companies that actively incorporate sustainability within their business motivation.

Candice received a master’s degree in Environmental Studies, concentrating in Energy Management & Policy, as well as a bachelor’s degree in Chemical & Biomolecular Engineering from the University of Pennsylvania.

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