Anna Simpson: Recently we’ve seen business leaders argue that long-term success can’t be achieved by always maximising shareholder value. Is this a trend you’re also observing?
Edward Hanrahan: Traditionally, if a company is having a strong financial year, it may increase investment to grow or protect the business, rather than pass on that profit immediately to shareholders. Analysts have always taken this into account when looking at future shareholder value or share prices.
What's happening now is that people are looking at long-term value: not just how companies protect themselves or grow within the competitive framework they’re used to working within, but also where their license to operate is going to come from in future. Part of that involves how they respond to the negative impacts they create in the world, but it’s also about what positive impacts they proactively create.
Say you’ve got a company that has a supply chain that is predominantly in the developing world, and they’re a large water-user. The price (perhaps negligible now) of using that water might go up in future because they’re competing for this resource with local communities; and over the long term, the needs of these communities will generally win out with governments. So I think these companies will be saying, “Look, we have to spend more money now in the communities that we either affect directly, or which might affect us moving forward, in order to safeguard against risks”.
AS: How do you think this trend in investment impacts on the relationship between companies and their shareholders?
EH: I think it depends on the duration of your shareholding. If you’re a private equity company with a shareholding in a large corporation, then maybe you’re not that worried about the risks that will emerge 10 years out, because you’re going to have sold the shareholding by then. But if you’re a pension fund who is due to pay out, or you’re an insurance company that is looking at these things, then you’re probably going to take a more long-term view on it.
AS: Can reporting on the investment or the nature of the investment help companies to have a longer term approach?
EH: Reporting can be very useful – as long as it’s benchmarked, and that the data in the report is explained properly. So, if a profit and loss statement drops 20% because the company has invested in a market that the following year is going to deliver them a return of 35-40%, any investor would say, “Yes, that’s absolutely the right thing to be doing”.
In the sustainability world we need to approach it in exactly the same way. If a company is making lower carbon reductions this year because they’ve not yet been able to implement a piece of kit which they know will enable them to cut double the amount of carbon in the next year – and that the longevity of those reductions will be considerably greater – then they are also making the right choice.
AS: What do you think the future outlook for investment is?
EH: I think impact investment is going to be an increasingly important function of mainstream investment portfolios, largely because there is a growing market of financially sustainable opportunities. For instance, the market for solar in Sub-Saharan Africa is huge. There are 600 million people without grid electricity, the cost of solar is coming down, and the access to microcredit and payment systems is rising. There are commercial returns available.
AS: Do you see investment moving away from companies that aren’t thinking in terms of that long-term value creation?
EH: I think we are already seeing that. Companies that are actively seeking to develop products and services for low carbon and resource constrained economies and thinking about a time when the license to operate will be getting increasingly constrained, which is absolutely likely to happen. Just look at the fundamentals: fewer essential resources available in a world with a growing population. Recognising this and tailoring goods and services accordingly is absolutely the right way to go.
Edward Hanrahan is CEO, ClimateCare.
ClimateCare is a Forum for the Future partner.