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Engaging stakeholders for the long term

Stakeholder engagement is important for listed corporations. In the 2018 revisions to the Code of Corporate Governance, a new pillar and principle was added for “Managing Stakeholder Relationships”. A stakeholder is here defined as a party that has an interest in the corporation and can either affect or be affected by it.

Many people associate stakeholders with the employees, customers, suppliers and, of course, shareholders of the company. However, companies should take note that their material stakeholders should extend beyond these mainstream groups to include the gamut of interest groups at the fringes of the community – who are increasingly demanding to be heard.

Activist stakeholders

In recent years, a new stakeholder group has emerged that uses the power of capital to actively lobby corporations to move away from businesses that are not environmentally sustainable or perceived as “dirty” by virtue of their carbon footprint.  These fringe stakeholders are most active in using their financial muscle to lobby for change and make an impact in the climate change agenda.

Corporations like Royal Dutch Shell have had to respond to such stakeholder pressure by setting a target to halve their carbon footprint by 2050.

Similarly, commodities group, Glencore, has committed to restrict its coal production in response to such pressure. Earlier this year, Glencore announced a cap on its production of thermal and coking coal at 145 million tonnes per annum – essentially, its 2019 production levels.

Mining company Rio Tinto has gone further, and totally exited the coal market, turning its focus to iron ore, aluminium, copper and bauxite. In so doing, it has earned itself a reputation of becoming a “greener” corporation.

Stakeholder alliances

In recent times, the push by environmentalists and non-governmental organisations to lobby businesses in this environmental sustainability journey has garnered support from other financially powerful allies – asset managers, pension funds and sovereign wealth groups, among them. In many respects this is a reflection of the old adage, “he who pays the piper calls the tune”.

Many pension funds now require their asset managers to make climate change a priority item in their discussions with investee corporations. While on the surface this has emotional sway, the focus is very much founded on economic returns. Businesses affected by climate change will pose greater investment risks and thus provide poorer returns in the mid to long term.

As pension funds are all about generating returns for their stakeholders in retirement, investing in businesses that are environmentally “clean” and sustainable is a key investment criterion.

Some of the asset managers involved in this active lobbying have not been the usual players. In the case of Glencore, the Church of England led the effort on behalf of the Climate Action 100+ initiative – representing an investor group with assets under management in excess of US$32 trillion (S$43 trillion).

These asset managers and pension funds have also reached across the aisle to co-opt the support of financial institutions and banks, who now have sustainability committees that enjoy a status on par with their credit committees. They are effectively tasked to decide whether to fund businesses on the basis of their environmental sustainability score. 

The likes of Hongkong and Shanghai Banking Corporation proudly state their aspiration to be “a leading global partner in financing, managing and shaping the transition to a low-carbon world”. More recently, all the three major local banks, DBS, OCBC and UOB, have declared that they will no longer fund coal-fired power plants.  

At first blush, this approach appears radical but in fact reflects sound banking fundamentals. Lending to corporations that have sustainable businesses – be it in financial or environmental aspects – increases the probability of the loan being repaid.

Effective engagement

Whilst the above trends have principally targeted corporations in the western hemisphere, it is a matter of time before these lobbyist activities find their way to Asian shores. The challenge for corporations is to be prepared when this arrives and determine how best to engage effectively. 

The fundamentals of effective stakeholder engagement can be summarised as follows:

  • Social responsibility. Identifying and engaging with socially responsible stakeholders is a key requirement for corporations. Those who prioritise meaningful stakeholder engagement and make it a core organisational value will enjoy the benefits of improved stakeholder relationships. 
  • Risk management. Active engagement and on-going dialogue with stakeholders allow corporations to anticipate potential issues and challenges that loom beyond the horizon. This provides an opportunity to mitigate the risks before they become full-blown problems.
  • Solutions orientation. Dialogue with stakeholders allow corporations to be part of the discussion to identify solutions, thus staying ahead of the curve and allowing a company to adopt a position of leadership, as in the Rio Tinto case.
  • Positive results. Increasingly, there is a strong connection between how a corporation responds to sustainability issues and the perception of its employees to these responses. Many millennials value working for a corporation that contributes positively to the planet. For a corporation to behave otherwise is to risk disengaging or losing its next generation talent pool.

The challenge for corporations is how to identify this emerging group of sustainability- sensitive stakeholders early, and to effectively engage them for the collective benefit of all – and in so doing, achieve the triple bottom-line of People, Profits and Planet.

The writer is a member of the Advocacy and Research Committee of the Singapore Institute of Directors.