Agricultural trader Olam’s “sustainable and traceable” way of sourcing products may be a harbinger of how businesses shape up in future, as multinationals make it a point to select suppliers with sustainable practices. PHOTO: OLAM INTERNATIONAL
Investors will like firms that are clear about the challenges they face and how to tackle them
Billionaire John Bogle, founder of giant mutual fund group Vanguard, once observed that to be a successful investor, a person needs to take a 10-year perspective on the investment about to be made.
He said: “None of us knows what tomorrow holds – not Bogle, nor anybody else. Any day, any week, any month, any year the market can do what it wishes but, over 10 years, it comes down to how corporations do and that is more important than how the stock market does.”
Considering the wild stock price swings that are traumatising investors, that is sound advice from an investment sage who pioneered the construction of low-cost funds to track widely-watched indexes such as the S&P 500.
But using his yardstick to assess investment opportunities poses a big challenge: How can an investor even be sure that the company he is about to invest in will still be around in 10 years’ time?
Going through a firm’s financials offers few insights into the sustainability of its business model. Its profit and loss account may give us an inkling of its profitability, while its balance sheet offers a glimpse of the assets and liabilities.
“If a company cannot even articulate the challenges it is facing and how it is tackling them, how is it going to convince investors that it makes a worthwhile investment – or, for that matter, convince suppliers and customers to continue to do business with it?”
But the numbers themselves do not tell us the challenges confronting a company and what it is doing to face up to them.
If anything, a company will try to depict its performance in glowing terms, leaving out its less savoury aspects. In order to enable investors to better their future prospects, some companies have turned to sustainability reports.
These are supposed to articulate the various challenges the firm faces in its businesses and map out its reactions to the different threats posed by environmental, social and governance issues.
Yet at the mere mention of sustainability reports, most of us would think that it is some kind of public relations gimmick used by big companies to keep investors of the bleeding heart variety happy on airy-fairy issues such as the environment.
This impression is reinforced by the fact that many of these reports are crammed full of details of the good work companies do, such as handing out cheques to charities – information that is not exactly useful to investors.
Some listed firms here share this dim view about sustainability reports. As former Singapore Exchange boss Magnus Bocker once observed, companies consider sustainability reporting to be a “nice-to-have” issue, even though some of them do take it seriously and a few have even won awards for it.
Hence, the SGX’s recent consultation paper in which it sets out the proposal that would elevate sustainability reporting to a “comply or explain” regime, rather than doing it voluntarily, is to be welcomed.
What is novel about the SGX’s approach is that rather than stick by hard-and-fast rules on how the sustainability report should be produced, it is giving companies the latitude to report in a way which best suits their industry and circumstances. This will also help them to manage the costs and overcome the difficulties involved in producing the report.
What a listed company has to do, however, is to include five topics in its discussion: identification of material environmental, social and governance factors; an explanation of policies, practices and performance; forward targets; the sustainability reporting framework the company is following; and a statement from the company’s board to affirm compliance.
If the SGX has its way, investors can look forward to all the 769 listed firms here putting out sustainability reports in two years’ time.
This will be a big improvement over the current situation. A 2014 report by the Global Compact Network Singapore and the National University of Singapore Business School showed that only 30 per cent of the mainboard-listed firms’ annual reports discussed sustainability in some form.
It will be a feat to be proud of, as it will put Singapore at the forefront in making companies more accountable to investors.
After all, a Canadian study in 2014 found that only 12 per cent of the world’s 4,000 largest listed firms offer detailed sustainability data.
But achieving such a lofty objective is not without its detractors. Business reader S. Kumar, for example, asked in a letter to the paper if small listed firms with market value of under $80 million could be exempt from producing sustainability reports.
“I am concerned about smaller companies struggling with corporate survival. Would this practice be of any value to them?” he wrote.
But his observations only lend weight to the argument as to why sustainability reports should be part of a listed firm’s staple diet.
If a company cannot even articulate the challenges it is facing and how it is tackling them, how is it going to convince investors that it makes a worthwhile investment – or, for that matter, convince suppliers and customers to continue to do business with it?
As Mr Kumar himself noted, there is increasing evidence that asset managers now take these factors into their investment decisions. This may well cause other investors to follow in their wake.
A good example would be agricultural trader Olam International, which was whiplashed by United States shortseller Muddy Waters three years ago for purportedly over-stating gains on its biological assets.
But Olam got the thumbs-up from Japan’s Mitsubishi Corporation last year, when it paid $1.53 billion, a fee well above market price, to take a 20 per cent stake in the company.
As the Financial Times noted, this was because Mitsubishi prized the “sustainable and traceable” way Olam had gone about sourcing agricultural products, while caring for the environment. If Mitsubishi had wanted to build up a similar sustainable network like Olam’s, it would have required years of catching up.
Olam may be a harbinger of how businesses shape up in the future, as multinationals such as Nestle and Unilever make it a point to select suppliers with sustainable supplies of commodities that also consider social and environmental issues.
And if management is able to sit down and articulate what matters most for long-term survival, so much the better.
In a cut-throat business environment where even well-established names, such as film and imaging company Eastman Kodak, can become passe because of rapid technological changes, sustainability reports must be regarded as a “must-have”, rather than a “nice-to-have”.
The sooner that companies realise this, the better this will be for them, investors and their other stakeholders such as banks, suppliers and customers.