True Corporate Value: How Water Can Affect Shareholder Value
A Q&A with Barend van Bergen, partner at KPMG in the Netherlands and global head of KPMG's Sustainability Advisory
By Julie King
In keeping with the post-Stockholm World Water Week takeaway themes, none was more prevalent than the vital role that the private sector — namely, businesses large and small — must play in the collective pursuit of the Sustainable Development Goals. Gaining force in Twitterdom as “#Global Goals”, this movement goes beyond being merely a United Nations campaign to include stakeholders from civil society organizations, communities, and from within business itself. Increasingly, companies are waking up to the fact that water is not merely a ‘cost’; it is about company profitability and stakeholder value. Water is a heavyweight ‘externality’ that can strongly influence the company’s sustainable future — or its demise.
KPMG has developed a methodology called ‘True Value’, which is a tool to understand how a business creates and reduces value for society and how that is likely to affect the value it creates for shareholders. Considering the impact of ‘externalities’ and megatrends and how — or if — a company ‘internalizes’ that threat, the True Value assessment is a tool that is scalable and can be applied to the company as a whole, a division, or a project.
In the fourth of a series of interviews that came out of Stockholm World Water Week, I spoke with Barend van Bergen, partner at KPMG in the Netherlands and global head of KPMG's Sustainability Advisory.
How can businesses effectively address the broader implications of environmental and social risks and create value for both shareholders and for society?
“This goes beyond reputation risk and into operations. If companies read papers, they know this is out there. They try hard to see how social and environmental risks effects or relates to them. It is much easier to see this when presented with actual numbers. When we deal with finance people, we avoid CSR language. We deal with them in numbers. That is the language they speak and understand.
“But businesses must be honest. They do bring a lot of value to society. But they can also have a very negative impact on it. They must minimize the negative as much as possible.
“We are working in eight sectors to help companies quantify and monetise the impact of their business. It is important to help in this way. Society likes business to be seen as being credible. Therefore, businesses must have complete insight into their impact on society — both positive and negative. We help to enable a fact-based conversation, in order to drive a win-win situation. There are still challenges and dilemmas. But there is also much middle ground.
“In winning over hearts and minds, some people feel it is not right to do this kind of financial quantification of social or environmental activities. But I feel it is the opposite. It allows companies to have a broader understanding of the full impact of their activities. It is really not an ‘either-or’ proposition; it is ‘and-and’. That is not to dumb it down. There needs to be a full discussion and for companies to bring quantification into assessing the social and environmental aspects of their activities.”
What does “engaging the private sector,” mean to you in the context of sustainability commitments made by global corporations?
“The private sector is getting more engaged. In September we have the launch of the SDGs. This has been driven by business input being heard. More than ever the UN has worked with the private sector [that has] contributed to the process [and more] than ever, business is weighing in on the conversation. I’ve seen this area grow. With the World Business Council for Sustainable Development (WBCSD), we see 200 companies engaging in more and more sector initiatives. There is seriousness about Vision 2050 and the idea of 8 pathways to 9 billion people living well within the planetary boundary conditions.
“Increasingly the private sector/leading companies are saying that in going forward we want to set science-based targets. Still, this is only a small portion of companies. But some of the leaders are getting serious. They are seeing that governments can’t make it on their own, that the world is more globalized and that business needs to step in and help.”
In 2012, Ambuja, the Mumbai-based subsidiary of Holcim, undertook a True Value assessment in order to “take into account the company’s effects on society and the environment, and ... to maximize future profitability.” Holcim, the second-largest cement producer globally, has an annual turnover in excess of $20 billion, with Ambuja accounting for 7 percent of Holcim’s revenue and 11 percent share of the Indian cement market. One of Ambuja’s three main negative externalities was extracting groundwater. Specifically, how were water externalities addressed in the Ambuja case study?
“[The True Value assessment of Ambuja] was broader and looked at environmental and social measurements. A lot of what we did applied to water. It was one of three key themes. The company was water positive by harvesting rainwater in their quarries and providing this to local farmers. Water was not a huge part of the equation. But it ended up being very important to what the company wanted to do. Their operations used a very large quantity of water. It is like many manufacturers who could not do without water. Water may not be the main element being considered. But it is always there.”
How do investors consider the True Value methodology?
“One of the messages of the WWF report [Ready or not: An assessment of sustainability integration in the European banking sector] is that the financial should and is increasingly looking at the true value of corporates. It is increasingly required to quantify their performance. This means going beyond checking boxes and to expand requirements for quantifying impact. Investors want companies to go beyond checking standard boxes and to integrate this kind of assessment into traditional cash flow and financial analysis.
“There are two very important roles that investors can have: to ask companies to provide this kind of quantification of their environmental and social impact; and, secondly, to integrate this kind of analysis — of social and environmental ratings — into their investment decisions and portfolios.”
In considering social and environmental impact — both positive and negative — this implies a proactive engagement with a broad range of stakeholders. How is ‘stakeholder engagement’ factored into the True Value model?
“Regarding stakeholder engagement — there is a struggle for companies with public acceptance and trust. We very much look at stakeholders’ perspectives. It is very important to look at externalities together with a stakeholder.
“Most companies do not disclose results. They only use it internally. The picture may not be ‘pretty’ as far as results. And only a fraction of companies step up to be leaders. But some do. For those companies that do disclose, we advise clients to talk to stakeholders before deciding on externalities. This is very important, especially for sectors under public scrutiny — like oil and gas, mining, pharma, finance, [and] transportation.”
Conclusions
Business is an increasingly important player in the quality and achievement of broader social and environmental standards. Corporate Social Responsibility and Sustainability strategies can no longer be relegated to a single department or section in the annual report. Sustainability means how well a company integrates that commitment at the operational level. Multinational corporations like KPMG and civil society organizations such as World Wildlife Fund for Nature, are leading the way in cross-sectoral collaborations to assist businesses in how to address and manage such risks and opportunities in order to create a positive impact, not only for society and the communities in which they operate, but also to create corporate value that can be demonstrated to investors on the balance sheet.