SDG Success: Unlocking Scale Through Corporate Partners

Many programs supporting SDGs lack resources as well as appropriate governance to scale up. Corporate Investment Partnerships can offer good solutions to combine strengths and divide up risks – and accelerate on SDGs

Resources and Governance are Key Success Factors to Scale Up SDG Related Programs

What to Learn From Local Renewable Projects Which Fail to Happen?

A client selling low carbon energy solutions told me again the other day the following. Clients are actively looking for energy efficiency and low carbon solutions for their factories or processes. Technology is generally available. Willingness is generally there. But the deployment of many solutions is often facing two challenges:

• Diluted responsibilities and stakeholders’ agenda are difficult to get synchronized. Asset (e.g.: a factory) operates from within an industrial zone. Energy related programs are managed at the zone level. It is difficult to embark other stakeholders to cooperate and invest in shared energy solutions. If an agreement can be found to invest collectively in a renewable energy production unit, then the question of governance can also take endless discussions. Municipality may want to lead. But the main investor may prefer to have veto and priority on decisions. Local communities may also want to play a role. Difficulties to agree upon a governance system able to satisfy multiple parties may also hamper the deployment of the solution
• Cost mobilization upfront is difficult to get sorted out. Team management is generally held accountable for the quaterly performance and annual P&L. Longer term investments impacting these elements of financial performance are difficult to accept. A factory head may well understand to allow massive investments to improve competitiveness or ensure compliance. But so long as energy is not given its true carbon price, it remains difficult for these decision makers to engage massive investments in decarbonization plans, which are not directly related to the performance and compliance they can justify with the P&L they are held accountable for

We can draw a few interesting conclusions from this example:

• First, despite growing interest in renewables, energy efficiency and decarbonization programs, it takes time to design and implement solutions, at a time when… we have no time! We need to accelerate to amplify the deployment of low carbon solutions, if we want to get on track with a 1.5 degree trajectory before 2030
• Second, growing regulation incentivizing investments in low carbon solutions is not yet aligned with accountancy standards. P&L are not using rules encouraging decision makers to give priority to low carbon solutions. This may change and multiple initiatives are underway as part of the technical discussions implementing the Paris Agreement and its Article 6.
• Third, multipartite governance is complex and may require time and resources, which might well be just too complicated and may decentivize interest to cooperate and make decarbonization projects happen

Digital Transformation and value creation

Boards are often working already on the digital transformation of their organization. This area is overall covered and understood way more than climate and inclusion issues. That said, the speed, scale and depth of transformations underway requires high vigilance to protect assets, employees and long term value of most organizations. I can only flag two issues :

Solvay, for example, sells guar derivatives to cosmetics companies as a thickening agent in lotions and other products. In 2015, Solvay launched the Sustainable Guar Initiative (SGI) with L’Oreal and Hichem, a guar gum manufacturer. The initiative was designed to empower and educate farmers in climate-resilient agricultural practices, thereby ensuring a stronger supply chain.

By 2017 the Sustainable Guar Initiative had demonstrated a good track record, reaching 3,000 farmers in Rajasthan, India. It was then that Solvay brought in Henkel, which also uses guar gum in its supply chain, to double the farmers reached. Current plans to significantly scale up the project’s reach create an opportunity to attract additional donor and investor capital, particularly to generate the start-up funding needed for cooperatives to become self-sustainable. This type of approach is part of a bigger trend. The interests of corporations, investors, and providers of foreign aid are more aligned than ever before. More and more they are joining together in corporate investment partnerships that combine their strengths and divide up risks.

GDPR

General Data Protection Regulation took effect in May 2018 can cost EUR 20 million or 4% of global turnover and apply for any organization based within the EU or serving clients based in the EU… Over the past decade most organizations have started to collect data and explore ways to copy GAFA companies and strengthen their sales, marketing and other practices. GDPR came last year to encourage more ethical responsibility. In practice, Audit Committee for instance is expected to nominate a Data Protection Officer, review how data are collected and validate risks and risk mitigation plan ensuring GDPR compliance. This may often involve third party partners. Digitalization, automation, and development of Internet of thing may make the assessment very complex.

Cybersecurity

Cyberattacks try to access, change or destroy sensitive information, extort money from clients or decision makers, or interrupt operations. Actual risk mitigation is complex and connection between operations, IT and cloud or third party services is critical. There are multiple examples of cyber attacks costing billions or even bankrupt of organizations. Boards of Directors are expected to include cybersecurity as part of regular discussions to monitor cyberisks and assess effectiveness of risk mitigation plans defined. I’ve been part of discussions using real world examples testing how the system had proven to work or fail in response to specific attacks, and what measures had been implemented to strengthen security. Discussion combining diversity of perspectives is very useful to address the complexity of this agenda.

Climate resilience of assets

This really is the elephant in the room. Climate is no doubt the major macro level variable shaping right now, as we speak, a very different operating environment. Every business or organization is impacted. Should we make appropriate level of efforts to mitigate emissions below high risks levels, we would need to basically halve emissions before 2030 – and much more is expected for some industry segments. Regulations, carbon price impacting profitability of business models, customer demand, consumer acceptability… climate is a game changer shaping very different market demand. Generation Foundation, UNEP FI, PRI and Finance for Tomorrow Paris Europlace defined good priorities to revamp fiduciary responsibility of Boards of Directors in a climate constrained world. I think the following is very important for any Board:

ESG priorities

Clarify, map and align across the board on the priority Environmental, Social and Governance issues relevant to the organization. I’ve worked on examples in the food industry where the real issues with climate aren’t really climate itself but several other ESG issued amplified with climate: water stress impacting yields, migrations impacting access to skilled labor, carbon price embedded across sourcing and processing activities triggering questions whether and how to maintain production at competitive price on the long range…

Climate scenarios

A growing number of regulations – art. 173 in France – or global initiatives – TCFD reporting are overall calling for greater reporting and transparency on exposure to climate and carbon risks. A very interesting piece attached to a lot of this flow of information comes with the development of climate scenarios able to show whether and how to define a carbon pathway for the organization and its value chain below the 1.5 degree trajectory. There are multiple assumptions. These scenarios are expected to refine over time with level of data and science getting more detailed and specific every year. Technologies can often be a major variable of uncertainties – a major innovation may dramatically change the carbon profile of an organization. That said, these scenarios can help to generate alignment overall across Board members to guide decisions and protect assets with best level of information available.

Impact of programs on ESG priorities

Organizations are often already developing and implementing various sustainability, ethics and other programs exploring ways to mitigate risks and seize ESG opportunities relevant to their business. There is already a lot of reporting, data and examples available here. To what extent these programs can prove to be effective, deployed at the right level of scale, with capacity to drive the radical transformations needed to adapt organizations to their climate constrainted environments ? Reviewing and challenging impact of programs addressing ESG priorities must become a primary priority for Boards to encourage and push transformation needed to adapt to the climate challenge and protect assets accordingly.

Active management of an Inclusive Growth agenda

This can really be the most exciting part of the discussion. Everyone is opinionated about questions of inequalities, inclusion and role of business to address this agenda. In fact, question is not any longer whether companies should care. Digital transformation and climate are already reshuffling the cards and impacting the way every organization has to play a role to adapt, manage or even seize opportunities generated by the profound social transformations underway. I have been part of discussions where every new infrastructure project generates huge social expectations or challenges. Understanding the social agenda and local dynamics is really important to confirm whether and how assets and investments can make sense between the formal glossy financial numbers showing good return. Boards all to often tackle this agenda in reactive mode when they need to respond to social crisis. It is time to work on a more proactive manner and here are four ways to do that.

Conclusion: Let’s Build Corporate Investment Partnerships to Combine Strengths and Divide Up Risks

All in all, these topics of digital transformation, climate constraints and social changes are unsufficiently tackled by Boards. These topics are of huge importance to understand and make pertinent decisions to protect assets. Responsibilities on the shoulders of Board of Directors is important and exploring these issues is no doubt part of what’s expected to properly make strategic decisions with best judgment in 2019 !