Interview: John A. Prestbo
The executive director of the Dow Jones Sustainability Index analyzes how the biggest companies in the world have been dealing with issues such as transparency in management, social responsibility and corporate sustainability.
In order to be sustainable, a company must have consciousness of its presence in society and it should be one of the defining guidelines in the way business is conducted”. The affirmation was made by John A. Prestbo, executive director of the Dow Jones Sustainability Index (DJSI), a ranking determined annually since 1999 by Dow Jones Indexes, the renowned U.S. firm specialized in research and socio-economics studies. The DJSI defines which corporations, among the biggest 2,500 firms of the world, are at the forefront when it comes to sustainability.
To understand more about the DJSI and the issues related to corporate sustainability, Petrobras Magazine went to the company’s headquarters in New Jersey (USA) to talk with John Prestbo. The journalist is a recurring figure in debates on the topic in the U.S. media and coordinates the DJSI since its inception. He outlines a broad overview of sustainability – its economic and social implications, its influence on corporate financial performance and the return (be it tangible or not) that comes from the investment in sustainable practices.
1_For starters, what is the Dow Jones Sustainability Index definition of sustainable development?
John A. Prestbo: We call it corporate sustainability. It’s about companies that incorporate sustainability practices into its business strategy, to increase shareholders value. A company that simply does good, but makes no money is not sustainable in itself. So you have to do well to do good. And you can do good by doing well. The issues related to sustainability –whether is the environment, workers policies or protection of intellectual capital – must be taken into account when making decisions to move ahead.
2_Regarding the financial performance of the large companies, is it worth investing in sustainability?
John A. Prestbo: It is worth, for a number of reasons. In many cases, sustainability practices actually save money for the firms, by reducing costs, or these procedures can open new markets. In sustainability circles, there’s the concept of a company’s “licence to operate”. That means the social acceptance of that corporation, of its influence in the communities and in the life of the population, of their customers and employees. So firms stay in business in common consent of those who deal with it and work for it. In order to be sustainable, a company must have consciousness of its presence in society and it should be one of the defining guidelines in the way business is conducted.
3_How do you assess the results of the survey and define the Index ratings? Are the companies constantly observed or just for a certain period?
John A. Prestbo: We have our annual assessment. It starts in February, when we send a letter to the 2,500 largest companies in the world inviting them to participate in our process. Then they get a password to our website, to which they can go and sign up, or not. Since we started in 1999, we’ve seen a steady increase in the number of companies participating in the survey. We also have seen an increase – but at a lower level – of companies that publish their sustainability reports and put out the kind of data that we can use to answer the questions on their behalf. The evaluation is done in Switzerland, using score mechanisms that help our judgement. Each one of our analysts is very familiar with the details of a specific industry. Those specialists know what the trends are, what the little problems are. They compile the scores and the DJSI takes the top 10 of each industry segment. The Index is put together in September. Then we monitor those companies through websites that gather information not only from news services, but also monitor NGOs websites. If a company comes into a situation in which it is discovered to have behaved improperly, not handling the situation in a forthright and transparent manner, this is noticed by our analysts and brought to an overside commitee that will rule if that company remains in the Index. At the beginning of 2011 we had to eliminate (Japan’s) Tokyo Eletric Power – not because there was an earthquake, but because obviously they didn’t have the safety procedures in hand as well as they claimed, and they were a little chaotic in responding to the situation (an earthquake in Japan in March 2011 caused severe damage to the power supply in the country, including leakage of radioactive material in seven nuclear power plants). So we removed them. And we did that publicly, and we announced why. It usually happens when something pops up and exposes weaknesses that weren’t evident before.
4_The DJSI was launched in 1999. How do you view the changes that have occurred since then considering company’s attitudes towards sustainability?
John A. Prestbo: They’re still in progress. When we started, Europe was by far the place where corporations had adopted sustainability more widely than anywhere else in the world. In the United States, we had to explain what sustainability was; it wasn’t a word that was very much used. We were a country of socially responsible investing, which is a slightly different concept, and it was accomplished mainly through the exclusion of some industries from the investor’s portfolio. But we believe you can be in any legal segment of business and still practice sustainability. Sure, being in certain types of business, such as tobacco or firearms, pose some risks to the company. And sustainability practices are dealing with these risks, how these risks are being managed and mitigated. Likewise, sustainability can bring opportunities to companies. For example, some oil companies now are involved in the research of fuel cells, or batteries. It’s an opportunity in the renewable energy field that they don’t want to pass on. They could think very narrowly and stay restricted to the oil and gas business. But if they think more broadly, they’ll see that they are in the business of energy, not just the oil business. They don’t want their shareholders to miss this opportunity. So, sustainability is not an exclusionary concept. It is inclusionary and is related to the management of risks and the exploitation of opportunities that present themselves in an environmental, social or economical manner. And it is always evolving, moving forward.
5_Speaking specifically about the energy market, how do you see the companies in this sector? What were the main advances in the area of sustainability since 1999?
John A. Prestbo: The energy companies have become more cognizant that energy means more than merely oil and gas. In 1999, certain larger companies in USA, Europe, Asia and probably in Latin America as well, were very focused on oil exploration and production and they equated that to energy. Now they have come to see that energy is a bigger thing. So, a broadening of horizons has definitely taken place. They’ve become more conscious of workers’ safety. The industry woke up and increased the safety in areas where accidents can happen. But it hasn’t become as sensitive to what we can call “environmental unintended consequences”. The consumption of energy has environmental repercussions, and in 1999 they seem to be saying “Hey, this is not our problem!” Now the companies are becoming more aware that, yes, they are part of this society, and they are part of the planet. So there has been a shift of thinking, and in many cases, a shift of attitude. But it’s uneven, and it’s uneven for every industry, because the priority of surviving until the next year takes precedence. Also, a lot of sustainability processes require constant work. You need to build information systems that tell about things like emissions, or workers’ practices in different places. And information takes time to gather, and it takes time to be put into a data system that speaks intelligently to the people who make the decisions. A lot of progress has been made just by having the right information at the right place. But it’s not enough being able to gather the information; it must be delivered in a meaningful way to those who make the decisions.
6_One of the mottos that guide the DJSI is the sentence “What gets measured gets done”. What are the principal issues when measuring exactly how sustainable a company is?
John A. Prestbo: Metrics are very important. They establish a baseline and they are a way of keeping score. Investors keep score by the stock price. Executives keep score by the company’s income and their own bonuses. But when it comes to actually running a business that gets more and more complex the larger you get, unless you have ways of checking your progress or the results of the decisions you’ve made earlier, you will lose track of all the stuff that happens around you. With the right metrics, you can not only measure your needs, but also the results of your choices. What gets measured gets done, and overtime, gets done better.
7_Within the general panorama of concerns about corporate sustainability, which areas have progressed most and which areas still need more attention?
John A. Prestbo: Not all industries have the same exposure to sustainability issues. A mining company has very large issues regarding environment, workers’ safety, transportation and all sort of stuff. A media company doesn’t have them; its safety issues are office issues. Quite frankly, I think the most visible progress has been in industries that have the tougher exposure to sustainability issues. They just got the wake-up call earlier and they had to start to make choices, or they wouldn’t be able to hire anybody, or public goodwill would turn against them. They’ve made the most progress in dealing with the risks.
8_Can we say that the concern about projects connected to social responsibility is now the main factor to be taken into account in companies’ strategies?
John A. Prestbo: Some companies are quite good at handling the matters of social responsability. Corporations such as 3M and Intel give their employees a percentage of their labor time for them to apply on anything they want. This adresses not only the workers’ morale, creating good feelings towards the company, but also opens the drawers of innovation. And is that socially responsible? Well, innovation creates jobs. And creates jobs not only on the local where the firm is, but also in places that could really use some good jobs. Putting those opportunities out there is another decision, and it comes from being aware of the needs. The corporations have to be aware of the need for jobs, or the desire of economic growth, in the communities where they operate. So innovation becomes a socially responsible thing to do. They are not trying to fix things, they’re just pursuing their corporate strategy, but with an awareness of needs and opportunities. Social responsibility can take many forms.
9_Regarding the responsibility in relation to their investors, how is the investment in sustainability beneficial and desirable for the big companies? Also, in relation to the transparency of the decisions dealing with corporate governance, what is the weight of transparency in your analysis?
John A. Prestbo: We are big fans of transparency. People misinterpret it sometimes. They say: “We don’t wanna put all our secrets out there.” But that’s not what transparency is. It simply means being open about the way decisions are made, and being candid about the considerations taken into account when making these decisions. That is important to shareholders. Everything that has been identified as a sustainability practice has a direct bearing on the health and the future of the company. Governance is a big part of the transparency process. Companies not always can tell you what they are going to do next month, or next year, but they can tell you that they have people in their board of directors and in their executive suite with a good background, representing this and that segment of the stakeholders base. So they can assure that governance is not going to be hijacked by someone who runs off to some strange direction. But when this does happen, what I see now is that people are more and more asking: “Where the heck was the board of directors on that one?!” The shareholders and stakeholders expect the companies to act in their interest, and not in the interest of some executives. Responsability, or accountability, is now being identified as an important feature of well-managed companies. And I think the sustainability movement has helped to raise the awareness among a greater portion of the population.
10_Have you observed any change in the behavior of investors – seeking investment returns in the long range instead of in the short range?
John A. Prestbo: No. I think investors are investing because they want returns. And their timetable is frequently different from that of the companies. They don’t like the market to go down and are unhappy when it does, and they are especially unhappy when the stock they hold is down and the rest of the market is up (laughs). Their focus is on steady growth and returns. By contrast, sustainability practices and their return are on a much longer term. These two perspectives would equalize if companies combined or integrated their social responsability and financial reports. Investors still have not acquired the capacity of evaluating sustainability practices in a vacuum, and to extract from that information to guide them in their investments.
11_Does a new trend influence the surveys you use to compose the DJSI? Could you name one of them?
John A. Prestbo: One of the questions included in the questionnaire and that will be present next year in more details is the scarcity of water. In 1999, it was something that we did not pay attention to, and it has become a key issue since then. We now make questions about water use in companies, how they protect their water supplies... Therefore, this is an example of a trend that has been incorporated over the last years.
On the index for six years
For the sixth year in a row, Petrobras integrates the Dow Jones Sustainability Index, standing out on issues such as environmental policy, social impacts on communities, biodiversity, climate strategy and transparency. The company also ranks among the energy companies with the best management practices in the world. According to the Index’s most recent evaluation, Petrobras has improved in the evaluation of the economic and social dimensions and maintained its good performance in the environmental dimension. And for the fifth time, the company earned the top score on transparency.
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By: Marco Antonio Barbosa and Monique Benati
Photos: Alcir da Silva