Triple bottom line: credit, market and op risk in ignoring the environment

Koch will be the keynote speaker at the International River symposium in Brisbane in September and his central message is business needs three licences for using water: physical, regulatory and emotional.

" Corporate social responsibility… should be considered shareholder or financier responsibility."
Andrew Cornell, Managing Editor

It sounds a lot like what used to be known as the “triple bottom line” where accountants tried to measure social and environmental impacts as well as financial ones. Sometimes the TBL as it was known just stated the obvious. At other times it smacked of marketing – like the “greenwashing” of faux environmental responsibility.

But where the corporate intent is serious, such cynicism is misplaced. Companies which simply focus on returns to shareholders over shorter time frames while ignoring community expectations and often those of their own staff don't deliver to shareholders in a sustainable fashion.

Mining companies, for example, talk about a “licence to operate” in a community. If the state or the local community revokes that licence, the mining company loses the opportunity to exploit a resource where returns are often measured in decades. And investment is upfront.

These are direct challenges of what broadly can come under the heading of corporate social responsibility. Really though it should be considered shareholder or financier responsibility.

There is another dimension that is starting to become far more pronounced: the role of investment capital and its sense of social responsibility. And as with companies, these investment decisions recognise returns need to be sustainable and hence must consider social and environmental risk as well as traditional risks such as credit, market or even regulatory.

Norway's seminal sovereign wealth fund is shifting investment away from fossil fuels – despite the irony that the fund's seed capital came from oil. So too the NSW city of Newcastle and its decision to tilt towards renewable energy and away from its historic resource of coal.

And, despite the somewhat hysterical reaction when it made the moves, Australian National University's decision to divest a range of investments it didn't consider environmentally responsible has paid dividends not just in its stated ethical intention but in investment returns.

In his address to ANZ's annual meeting last year, Mike Smith spoke of four major shifts and the imperative to recognise society expected business would be part of the solutions needed to address them. The four shifts are global integration, demographics, resources and technology.

He noted there is “undeniably a widespread concern about the world's ability to manage its resources fairly and efficiently”.

“There is also concern about the use of carbon-intensive resources in the generation of energy. We know that our customers are concerned about climate change.”

Smith added: “We know that many shareholders are also concerned about it.”

He went on to explain the role he saw banks such as ANZ playing in addressing environmental concerns as a provider of finance: “Environmentalists … are critical of ANZ and other major banks for providing financial services to the coal industry. However, ANZ is also the country's largest financier of renewable energy, supporting wind and solar power projects as well as hydro and geothermal power stations.”

Banks like ANZ and other investors face the same challenge: a return for shareholders that is sustainable. Like Coca-Cola, they can't dismiss the cost of ignoring community concerns and the realities of environmental challenges.

But these risks are not actually new. Banks have always had to price risk – credit risk, market risk and, perhaps more often today, operational risk.

Environmental challenges pose all three. This is where the emerging notion of “double ROI” – double return on investment – comes into play. Not only is there a cost to returns of getting something wrong, there is also a benefit of getting it right.

Those global banks which have now had to pay hundreds of billions of dollars in fines for what is poorly managed operational risk – rogue trading, market rigging, unconscionable lending – are now being discounted by investors.

There are operational risks in environmental management, whether that's breaching regulations or mismanaging community issues – and these can also play out in not being as attractive to potential employees.

But there are also credit and market risks. The most obvious is the credit risk of lending to stranded assets – that is assets such as mines or resource projects which become uncompetitive, whether due to commodity prices, emerging alternatives or the rise in taxes or regulatory costs.

Financial institutions will also increasingly be called upon to play a role in the market for environmental securities, whether they are carbon credits or more traditional derivatives which will be even more leveraged to the sway of community and hence government opinion.

In his preview for his Brisbane address, Coke's Koch notes “as a business, you need physical access to water with the technology to access, store, treat and move ample supplies of water on a long-term basis”.

“Then you need the regulatory licence such as permits, contracts, and plans that grant you legal access to the amount of water you need in the time and place that you need it. Then there is another licence, and that has been the biggest learning for us all – the emotional connection to water.”

Coke has long been aware of the importance of addressing these issues. Two of its key inputs are water and sugar. So, along with its water initiatives, it has been working with sugar cane farmers and local communities to ensure it is not embroiled in issues which not only affect supply but consumer demands and profits.

Coke's Project Catalyst has brought together farmers and the World Wildlife Fund to ensure sugar cane farms don't damage the Great Barrier Reef. Project Catalyst aims to reduce the environmental impacts of sugarcane production by providing funding for technical expertise, economic analysis and opportunities for learning and networking to innovative farmers in the Queensland region.