Sustainability is not only about being green, it is about sustainable earnings and a better future
The inter-dependency between corporate profitability, reputation, and longevity with environmental, social, ethical, health and safety policies, practices, record and risks has influenced the corporate strategic business initiative and governance of corporate, bank, financial institutions, their customers and corporate stakeholders.
The activist movement against unsound unreliable sustainable practices that impact climate change, devour of social good, justice and safety, lacks community and human development, and is raising awareness, concerns and reputation risks for institutions that deal with non-compliant institutions, customers and stakeholders. Employees, customers, supply chain partners, stakeholders, millennial talent, government, and general public are reluctant to associate themselves with institutions that do not subscribe to sustainable practices or have gained negative reputation due to unsound sustainable practices.
In the meanwhile, the slow evolution of regulations, ambiguity over achievable benchmarks, and implementation challenges is also creating confusion, fake news, and potential reputation risks for the institutions, its customers and stakeholders. However, an open, candid and proactive communication and follow-up action on sustainable practices is helping clarify issues, solve challenges, ensure compliance, and improving reputation.
Governments have recognised and underwritten international policies on climate change control, nuclear disarmament, human rights, social justice, poverty alleviation, ethical behaviour, promotion of peace and positive socioeconomic contributions, community development, and human good which have become foundation for sound sustainable practices.
Institutions also recognise that unsound sustainable practices create potential financial, reputation risk, moral hazard and adverse selection issues, structural and systemic business risks. Whereas, sound sustainable policies mitigates these risks, enhances institutional reputation, enhances employee engagement, attracts good talent, improves community development, improves quality of earnings and enhances shareholders value that is sustainable.
Financial losses and reputation risk considerations
Financial losses could directly arise in the form of fines, cost of cleaning up, liquidated damages, class action suits, etc. Collateral financial damages result from loss of customers and stakeholders, reduced access to capital and/or financing from financial institutions, deterioration of credit quality and defaults, devaluation of collateral, potential civil or criminal liability, high risks and poor quality returns, and deterioration of shareholders’ value.
Sustainable liability and fines directly impact institution financial performance, impairs assets, arrests business activity to make it redundant, deteriorates credit quality. Reputation risk also impacts institutional brand, credit quality, and equity valuation. It is estimated that the loss in equity valuations could be in multiples of total amount lend or exposed to companies with unsound sustainable practices.
Institutions have increasingly started assessing sustainable risks to mitigate the potential risks that impacts institution’s performance, financial and credit quality of their clients and stakeholders. Institutions have developed mechanisms to assess the sustainable risk exposure of their customers and stakeholders to protect from potential financial losses arising from redundancy and or non-performing loans and falling equity valuation.
Civil, Criminal, and banking regulations and/or guidelines on sustainability sound banking and business practices
Regulators and central banks are also cognisant of financial and reputation impact of unsound sustainable practices on institutions and the financial system. Civil, Criminal and banking regulations are strictly enforced for unsound and unethical business practices.
Government and central banks have enacted laws and guidelines or have subscribe to international legislations so institutions ensure sound lending practices that also include sustainable assessment that forces institutions to manifest and comply with sustainable policies in their business models.
Governments in many countries are also providing subsidies and tax breaks to institutions to alleviate the cost of adapting sustainable practices.
Environmentally and socially sound solutions, a strategic initiative that mitigates business risks
Institutions, governments and regulators are increasingly demanding sound and sustainable from their customers and stakeholders. Therefore, institutions are including sustainable practices in their mission statement, institutional governance, and also strategically pursuing sound sustainable policies, practices and solutions that mitigates systematic and structural risk.
Sustainable policies are therefore manifested and integrated in institutional ethics and guiding principles, due diligence and credit analysis, lending and investment charters, risk assessment, institutional governance, policies, practices, institutional social responsibility activities, employee performance, and assessment of leadership qualities that help promote ethical and sustainable behaviour. Sustainable initiatives are also becoming integral part of CSR activities that help engage employees, stakeholders and local governments.
The compliance with sound sustainable practices and policies are becoming a norm for government and institutions; compliance to sustainability policies are treated at par with compliance with social, ethical, tax, and other regulations.
Customers, suppliers, shipping companies, supply chain partners and stakeholders are demanding sustainable products, practices, etc. to ensure that there is no breakdown in supply chain and business continuity. Many shipping companies ply or hire double hull vessels to haul cargo. FMCG companies are demanding products, services and processes that are ethical, environment and socially friendly, produced with free and fair consent, do not use child labour or slavery, and are compliant with sustainable policies. Many institutions invest in safe and environment friendly renewable technologies and avoid high polluting, hazardous and genetically modified products and industries. Food and employee safety, pollution control, water conservation, and avoidance of tobacco, opioid, defence, and political affiliations are paramount to many institutions. Sound sustainable and corporate social responsibility (CSR) initiatives have also become cornerstone for community development and attracting talent particularly millennial.
New lending products and funds structured to support sound sustainable compliance
Green bonds, environmentally friendly activity investment funds, green securitization products (climate control bonds), energy efficient mortgages etc. have been structured to support funding needs of sustainable sound and compliant institutions. These loan structures are risk light and are available at competitive interest rates and longer tenors; lower cost of funding compensates for cost of sustainable practices, tapping alternative source of funding with longer tenors.
Mergers and Acquisition activities
M&A activities now require stringent assessment of sustainable to ensure that future tail and reputation risk is mitigated and or factored in valuations; sound sustainable practices help mitigate tail risk and/or improve enterprise valuation.
Sustainability is not only about being green nor costs but is a strategic corporate initiative that insurers risk, reputation, better quality of return on investments, corporate governance, positive socioeconomic contributions and impact on the society, mitigates moral hazard and adverse selection problem, protecting the mother earth, environment, and her resources that assures business longevity, brand equity and reputation, quality return on investments and better future for generations.
Institutions cannot ignore their "circle of life' that revolve around supporting mother earth and people. While, mother earth supply resources and environment to people, people furnish their intellect, talent, and customers that use of resources. Sustainable practices and associated reputation risks when ignored become "tail risks" that "wags the dog by surprise" resulting in a bad outcome while "catching the bull by the horn and knowing it's strength" leads to better outcome.
15 Sep 2017