Traditional Companies’ Dilemma in the Transition to Sustainable Business

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NRG’s former CEO David Crane wrote a very thought-provoking piece on how it is never easy for traditional non-green companies such as that of a coal company to become green overnight. The company recently announced a divestment from renewable assets, as well as a sale of their renewable business arm. This is a cold and cruel reminder for all of us on the realities and difficulties of change in profit-driven businesses, regardless of how good the intention for change is.

NRG’s capital allocation strategy — reinvesting coal profits into clean energy businesses — fell into disfavor with NRG’s traditional investor base. – Crane

Back in 2014 when Crane was still onboard, he pushed for green goals of steering the business towards a less carbon-focused energy portfolio, in proportions as astounding as 90% carbon reductions by 2050. Many employees were excited by this green revolution and were extremely motivated by the notion of doing good while doing well. The management painted a very rosy picture of how businesses can keep improving whilst switching to cleaner alternatives. Sure enough, the board was sold. They started to publicly announce the transition to cleaner energy.

But not long after this shift to renewable energies, share prices dipped and investors started to turn their backs. The board thus had no choice but to salvage the situation by abandoning ship. One of the main reasons why investors had lost faith so quickly is because they are only focused on short to at best, medium-term profits. This goes entirely against the tide of the renewable energy business where profits precipitate more towards the end of a longer term.

This is also one of the road blocks that companies like Solar City will face in their pursuit for green energy. In the short-term, finance reports will start to look less attractive when, for example, solar projects do not generate quick returns by running a zero-down payment model. Then it seems to turn into a self-fulfilling prophecy. Investors start becoming apprehensive which in turn hurts the business potential.

If we are going to make meaningful progress on carbon emissions, chronic emitters cannot be given a free pass simply because they have announced long-term reduction goals. If we are to maintain the integrity of the collective corporate effort, the climate movement needs to demand visible and meaningful progress from companies that have embraced long-term carbon reduction goals.

An important point for the transition to green business models is this: to understand and portray the full value of the transition to sustainable business by laying out a clear picture of costs and benefits of doing so. That is why sustainability reporting and more importantly, integrated reporting where investors see a full picture of risks and opportunities is crucial. Investors, on the other hand, ought to also be educated on how to invest and where to invest. Although NRG investors can cheer for now, their joy may not last beyond the decade or even the next few years.

NRG’s return to their old dirty coal business, in the mean time, serves as a harrowing wake-up call for us to reflect on the realities of chasing after green dreams and whether we are truly resolute with our green targets in the face of challenges and road blocks.

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Sustainability and SMEs

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In Singapore, SMEs take up a majority share of the economy. Over 90% of the businesses are SMEs. Back in 2015 The UN developed a set of 17 Sustainable Development Goals (SDGs) for all countries in the aim of curbing poverty, inequalities and climate change worldwide.

The relevance of the SDGs however may be blurry to Singapore SMEs. Some feedback on the friction SMEs feel for SDGs include:

  1. They need government regulation and framework as guidance
  2. Tendency to focus only on sustainability costs rather than opportunities
  3. Time is needed to change consumer’s demands for more sustainable products

Suggestions for improvement in the adoption of SDGs in SME’s business strategies include looking at long-term partnerships and relationships, through factoring in not only finance but social and natural capital. Adopting the SDGs would also enable them to make better decisions based on more holistic considerations such as security of the supply chain and more reliable production. The companies would also need to be more creative and resourceful, equipped with the knowledge and ability to think ahead.

Companies need to up their innovation in greening their businesses, but they also require help from the government, public sector and policy side. Successful transition lies in having a well-developed ecosystem, not piecemeal efforts. Singapore’s recently opened Sustainability Academy between CDL and SEAS serves as as a good role advocate and platform for engagement in sustainability, underscoring the importance of partnership with such entities as NGOs.

Deloitte’s survey: what motivates Greening?

The buzzword is Greenovate. The shift of creation and usage of technology to help processes and systems, corporations and consumer lifestyles become more “green”. Deloitte published an interesting read on why it’s not easy being green. It all boils down to cost-benefit analysis at the end of the day. It is about weighing how risky the investment of time and money is into greentech and what the ROI and benefits in the long-run would be for the company. Some companies decide that adoption of greentech is costly in the beginning especially when there are few players doing so, and think it to be better off to wait a year or two.

Bets are mainly placed on two developments: solar and electric vehicles. In China alone, USD$294 billion would be invested by 2015 in renewable energy sector. The main propeller would still be regulations.

Here we glean some insights on the top motivators for companies to adopt a Resource (specifically energy resource) Management System. Unsurprisingly, priority is given to saving costs.

To view the full survey by Deloitte on energy customers, click here.

Q: What is the primary driver for you to implement a resource management system? 

1. Cut Cost – 63%

2. Internal Motivation – 50%

3. Just the right thing to do – 43%

4. Betterment of corporation – 39%

5. Regulatory Requirements – 36%

Six Pillars of Sustainable Business and Reporting

ACCA released a policy paper on sustainability business and reporting matters, comprising 6 pillars that would facilitate a better and more responsible business environment —

  1. sustainability reporting
  2. integrated reporting
  3. assurance of non-financial reporting and disclosures
  4. climate change
  5. natural capital
  6. green economy

Like how good audit standards and regulations would help prevent potential financial frauds and scandals such as Enron, non-financial reporting and accountability for companies’ insidious impacts on social and environmental aspects are certainly needed as well.

Currently, businesses are not required to adhere to any sustainability reporting requirements. The traditional model of reporting tends to however be restrictive and short-sighted, not accounting the potential non-financial damages that can be done to the environment around us.

After having spoken to some of the professionals working at Big Four firms in Singapore, I was told not many companies are paying attention to the external impacts made from their business decisions, nor are they invested in sustainability reporting. Only large companies that come under public scrutiny such as BP would try to comply with corporate social responsibility frameworks. Furthermore, end-users of financial statements themselves are generally not as keen in understanding beyond the financials of companies.

However, it is truly important that regulators start realizing the importance of laying out the ground rules for sustainable accountability. Companies should start developing metrics, information systems, reporting and designing economic instruments that help make our economy greener, looking beyond economic output to factor in non-traditional measures, such as human well-being and natural capital.

Note on ACCA and sustainability reporting:

ACCA works with standard setters, governments and regulatory bodies to ensure that standards and regulations concerned with corporate sustainability are fit for purpose. They are involved with the 2012 Rio+20 Earth Summit; technical working groups and governance boards of key standard setters, for example the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC), the Climate Disclosure Standards Board (CDSB), the Sustainability Accounting Standards Board (SASB) and the Natural Capital Declaration (NCD).