The Bruce Column — Boosting the bottom line with integrated thinking, sustainability and value

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01 Jun, 2018

In a forthright interview with our regular columnist Robert Bruce, the CFO and sustainability chief of chemicals giant Solvay, Karim Hajjar, explains how connecting and integrating financial and what he calls extra-financial information creates value and feeds directly to benefits for the bottom line.

For Karim Hajjar, the link between sustainability and value is clear, though he might quibble with the strict use of the word sustainability. ‘If people ask me if I am a strong believer in sustainability I will say no’, he says. ‘I am actually a big believer in sustainable value’. And he made the difference clear in a statement he made in Solvay’s latest integrated report. ‘With over a 150 years of history we are deeply aware of the importance of value that stands the test of time’, he wrote. ‘Sustainability without strong profits is unsustainable, while strong profits to the detriment of sustainability undermine the longevity of a business’. He is also increasingly clear on the strong links between ESG, environmental, social and corporate governance factors, and share price and returns.

In a video interview, he explains how integrated thinking should be the driver for integrated management, how investors are catching up, slowly, with an understanding of how all these ESG factors feed into the bottom line, and the value that non-financial, (what he calls extra-financial), measures create when strongly linked to the traditional financial measures. And he talks of how all these benefits provide much greater clarity in the quality and effectiveness of management.

Things changed when he realised that he could ‘make a much clearer link between sustainability and the bottom line, and risk’, he says. ‘That created a very strong imperative for me’. For example remuneration began to be dependent not only on financial goals but also on extra-financial goals, variable remuneration based on, for example, CO2. ‘CO2 is part of remuneration short-term and long-term’, he said. ‘That is one very obvious way to ensure people integrate’. This consistent measurement connecting the established financial processes with the measurement and monetisation of, for example, emissions reductions (e.g. through taxation) and safety (e.g. through reduced absence), leads to rounded decision-making. ‘It is now part of our performance dashboards on a quarterly basis’, he said. And the cost of emissions taxation is now part of Solvay’s investment decisions. ‘It does impact decisions. It does impact resource allocation’.

And being bold in your own decisions is part of the process. ‘For us the starting point had to be integrated thinking, integrated management, in fact’, he said. ‘I want to ensure we are very transparent...Materiality is key’, he said, ‘even if you don’t have all the answers. For example we are one of the early signatories of the Task Force on Climate-Related Financial Disclosure requirements. We did that knowing that we had a couple of holes in our racquets’, he said. ‘As a finance person I get anxious that I publish things when I don’t have the answers’. But he felt the important point was showing intent. ‘I am proud of the fact that we did that, because what we were saying to the investors is that we don’t have all the answers but we are working on it and I’m hoping that next year I’ll have more answers than now’. Being honest about the direction of travel tells people more than any number of boxes that have been ticked.

‘CFOs’, he points out, ‘are motivated by facts more than anything else’. And, as he says, ‘there are a lot of facts that say that ESG helps to enhance risk-adjusted returns’. As an example he looks at earnings-per-share volatility. ‘EPS volatility for over a thousand companies across ten years shows that the top 20% of ESG companies have an EPS volatility of 32%, the median is 47%, the bottom quartile is 93%. So factually EPS volatility, which is an indicator of rate-adjusted returns over time, is better for ESG companies’.

Hajjar is following the facts. And he sees investors as showing an increasing interest. ‘Investors care about how extra-financials link with and influence the financials’, he says ‘There is more engagement’, he says. At Solvay’s annual general meeting, just before our interview, investors had asked ‘some incredibly important strategic questions on CO2’. ‘That’s the first time’, he says. ‘I believe that there is an opportunity for investors to take note and to really engage with companies far more proactively’. But he accepts that there is a long way to go. ‘Investors need to engage in these conversations far more than they do’, he says, ‘and be much more strategic and long-term’. But there is a problem for investors. ‘They don’t know how to integrate it at the most elementary levels into their economic models of companies’. He wants companies and investors to work together more in this new world for investors. ‘One of the issues they are faced with is that in finance we have a big advantage. And that is called IFRS. We have real, common standards which are audited. The role of extra-financial indicators is huge but it is still evolving. We don’t have standards. We don’t require auditing and external verification’. And that is why Hajjar insists Solvay does. ‘I make sure that everything we publish is verified’, he says. But it will take time to build confidence.

And he can also come at the question from a different angle. ‘As a leader of a major corporate which has over Euro4bn of pension scheme assets we have an indirect influence to work via our pension stewards to influence asset managers’, he says. ‘And here is what we intend to move towards, engaging, asking our asset managers to ask companies a) to disclose [extra-financial indicators] where they are not, and b) to ensure that the information is verified externally, and if there is reticence on either of those two I would like to take that as a signal of risk that we should best avoid. As a corporate, as CFOs in particular, we have a major opportunity to shift the needle in this regard’.

After all, as he says, there is ‘a direct link between the extra-financial indicators and the financials. Extra financials is what we talk about and that is where we define value’. It is the connection between profits, cash and returns and planet, issues like emissions, people, safety, and societal issues, which shows where the value really lies. ‘It’s good for our customers. It’s really good for the bottom line and it actually happens to be very helpful and positive for the planet’, he says. ‘To my mind that link between bottom line, top line, and sustainability, it is music. That is what completely motivates and propels us to integrate and embrace the subject ourselves’, he says. ‘We have just taken the trouble to measure it and have it audited’.

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