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Why sustainability is a risk issue for businesses

At its first risk management and sustainability summit, Ayala Corporation gathered 350 business leaders in Manila to begin the conversation on why it is crucial for companies to look at sustainability and risk for survival.

If companies in the Philippines want to survive in the decades ahead, they must look at risk through the lens of environmental, social and governance (ESG) factors, said business leaders at a recent summit in Manila.

“Future cash flows of a company are at risk if the company is not ESG-oriented. The only way to manage risk is to put sustainability at the heart of business,” said Sunny Verghese, co-founder and group chief executive officer of global agribusiness company Olam International at the inaugural 2018 Ayala Integrated Risk and Sustainability Summit on Friday. 

Pointing to how Facebook’s stocks dipped after a series of controversies this year raised questions about how the social media platform uses the personal information it collects, Verghese said embedding ESG considerations in operations could have prevented such a fallout.

After Olam launched a tracking platform called AtSource to help its partners ensure transparent and sustainable supply chains, the company was able to get cheaper loans because its business was perceived as less risky, said Verghese at the event in Makati City, Metro Manila.

It then became easier to convince sceptical shareholders that there is value to sustainability, and to persuade them that Olam should spend 10 per cent of its revenue on sustainability initiatives, he added. 

Future cash flows of a company are at risk if the company is not ESG-oriented. The only way to manage risk is to put sustainability at the heart of business.

Sunny Verghese, co-founder and group chief executive officer, Olam

By looking at the impact of operations against ESG factors and adopting sustainable development principles, Philippine companies could unlock the US$5 trillion in business opportunities in Asia, Verghese said. 

He pointed out that while the average life span of a company is 12 years, Ayala Corporation has lasted 185 years because it has been incorporating sustainable development objectives into its business for a long time, even before the 17 United Nations’ Sustainable Development Goals (SDGs) came about. 

Eco-Business managing editor Jessica Cheam, who moderated the panel discussion, pointed to a report issued by the World Business Council for Sustainable Development (WBCSD) on enterprise risk management and sustainability, which revealed that on average only 29 per cent of the areas deemed to be “material” in a sustainability report were disclosed in a company’s legal disclosure of risks. 

It showed that 35 per cent of its member companies did not disclose any of the sustainability risks identified in their sustainability reports in their legal filings.

“This is a worrying trend, the question is: How do we get companies in Asia to realise that sustainability concerns are a real risk issue and that there’s an urgent need to address them?,” she asked.

Verghese, who is also the chair of WBCSD, noted that this shows “a disconnect among companies”.

He added that companies need to understand the risk intensity of each business unit.

“I don’t want the audience to feel that when you talk about sustainability and risk, we’re only talking about risk in the negative connotation and what it can take away from business. It’s also about the opportunity,” he said.

Expanding client base to include Filpinos in lower income brackets

Companies that align themselves with sustainable development will find a bigger market for their products and services. Ayala Corporation chairman Jaime Augusto Zobel de Ayala said sustainablity is something the company implemented years ago in order for it to be relevant to Filipinos. 

“Twenty years ago, we only touched a minority of the population. We asked ourselves, how can we be more relevant to the vast majority of the Filipinos?,” said Zobel. “That created a new impetus to be inclusive in the way we did business.”

The country’s oldest conglomerate did this by changing its business model. Its real estate subsidiary Ayala Land used to have one product line for high-end customers, but now has five options for different income groups, said Zobel. This has helped the company grow its client base. 

Providing another example, Zobel said the family-owned Bank of the Philippine Islands grew its client base from 3 million to 5 million by expanding its services to microfinance and smaller business communities.

“Increasingly, there is inclusiveness and we are engaging with our people at all income levels,” added Zobel. “The continuity of businesses in the Philippines will depend on companies incorporating sustainability into their core strategy. What other sustainable services and products can businesses offer?”

For more companies to start adopting principles of sustainability, senior leaders must communicate to their managers that performance will be measured in non-financial terms as well. 

That was the goal in Ayala’s first integrated report published in 2016, which combined the company’s annual report with sustainability reporting and outlined how Ayala is working to advance the SDGs by investing in poverty alleviation, affordable medicine, and education.

“The report reflects the way we would like stockholders to view us. I’ve always believed that corporations have a far greater role in the country than we are given credit for,” he said.

To this, US-based consulting firm Resonance Global founder and chief innovation officer Steve Schmida noted that an integrated sustainability report is only “the first step” towards sustainable business.

“It’s how you use and integrate that report into strategy and execution that’s going to be more important,” Schmida said.

“The number one is that what we need is alignment of people, processes and values. We have the commitmment at values level, Ayala has the people to do it, so what we need are processes.”

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