INVESTMENT COMMUNITY PERSPECTIVE

Hurricane Season

Depending on the industry in which you work, the emerging importance of ESG (Environmental, Social and Governance) issues has either been a slow evolution or has blown into town like a hurricane. For businesses where it has been the latter, the dramatic impact of external pressures likely has everyone in every industry looking both inward and outward wondering: could these shifting winds impact our business in the future and if so, how?

An industry obviously hit like a hurricane has been energy in particular by the social and environmental movement against oil sands development. In rather short order, the movement has shifted from focusing on operating locations (where environmentalists had little impact) to the system of product transportation, rail and pipelines (where environmentalists have had a dramatic impact). Quite simply, it is this form of supply chain disruption that is impacting the operations of nearly every energy business, either directly or indirectly. Through the use of social media, the movement has gone from a rather grass roots environmental initiative to one that has become social and governmental in nature.

Perceptions Trump

As we learn early on in our business careers, perceptions are sometimes more important than the facts and, in extreme cases, perceptions can influence the facts by bending and changing them. An investor relations professional who is not concerned with market perceptions does so at his or her own (and the company’s) peril. 

Shifting winds are impacting investment returns and thus the way investors look at companies and entire industries. It would be easy to simply say that commodities prices (oil and gas) are lower and that this has been the driver of lower stock prices. Such a view would be far too simplistic and ignore a number of growing movements that are likely to shape the energy industry. Consider the increasing use of shared transportation (Car2Go, Uber and Uber Driverless), the trend to battery-powered vehicles (everyone thinks Tesla but all auto manufacturers are working on this) and the trend to renewable energy (even if it is more expensive). And these examples only consider the demand side of the equation.

In fact, the more closely one looks at the energy sector, the more areas are evident where the traditional model is changing quickly; morphing into a business model that must consider (and embrace) ESG as an emerging and critically important aspect of the industry. And the bigger the business, the more important ESG becomes. Institutional investors are starting to take into account far broader issues with respect to energy; if not due to pressure from clients then certainly driven by potential future economic returns. The same types of trends are emerging in many industries. ESG is of growing importance – not just in Canada but globally.

Behind Nearly Every Shift: Technology

Behind nearly every shift in business there is an important thread and that is technology. Armed with technology, groups within society are finding that they can reach the masses easily, quickly and at minimal cost, and they are learning to shape societal views of a business or industry. Perceptions are trumping. Investors are watching and listening and their views, too, are shifting.

Corporate or Industry

One problem an IR professional faces is whether the winds of change are so powerful that they cannot be contained by the company’s resources. If this is the case, how does one company deal with these forces? In the past, corporations tended to address ESG issues on their own, as they were more manageable. Today companies must seriously consider two things; how do we adapt, adopt and cope internally and, if the issues exceed the scope of our capabilities to respond effectively, how do we adapt, adopt and cope as part of a larger group? In response to the growing pressures of ESG, companies may need to seriously consider acting together on these issues, while otherwise competing.

Do Not Play Ostrich

At one time, the Eastman Kodak Company was the king of photography. Today it no longer exists. Yet Eastman Kodak was well aware of the pending shift to the digital world, a shift driven by the dramatic differences in picture costs and quality for the average consumer. It is nearly mind-boggling that a company could be aware of such a dramatic shift and yet miss acting in response on the staggering business opportunities it represented. The company was so caught up in history that it was unable to adopt or adapt. Seismic shifts like digital are not lost on investors, who are ever more likely to think about how the future could look and position themselves accordingly.

VUCA! Say What?

The U.S. Military coined an acronym to describe a post-war environment, one that is:[1]

• Volatile – The nature and dynamics of change, and the nature and speed of change forces and change catalysts.

• Uncertain – The lack of predictability, the prospects for surprise, and the sense of awareness and understanding of issues and events.

• Complex – The multiplex of forces, the confounding of issues, no cause-and-effect chain and confusion that surrounds an organization.

• Ambiguous – The haziness of reality, the potential for misreads, and the mixed meanings of conditions; cause-and-effect confusion.          

Does this sound familiar? The acronym not only fits the energy industry today but also nearly every industry in some measure. And one of the leading causes of VUCA is the growing importance of ESG issues. How is your company dealing with the (seismic) shifting sands – ignoring, denying, monitoring or dealing with it?

Questioning Your Foundations

Get ready for investors questioning the historic foundations of your corporation. Be prepared to address head on questions about this. Consider that the way your business looks today could be fundamentally different in five years. Ten years ago it was unthinkable to consider homes without landline phones; today they are common. Ten years ago banks without ‘real estate’ were unimaginable; today they are growing very quickly. Ten years ago people felt they ‘needed’ a car, while now many just rent or hire as needed. Ten years ago nearly everyone read a newspaper. In 10 years will we be buying electricity from the grid or selling it to the grid? What else will my phone be able to do for me that it does not today? What is a Robo-advisor (or robo-anything for that matter)? Yes, with every risk there is potential opportunity. Is your company really thinking about its future? If not, why not?

Dirk Lever is Managing Director, Institutional Equity Research, AltaCorp Capital Inc.