Who best drives advancement in sustainability – governments or corporations? In Sweden, this question is being turned on its head. The answer is not ‘traditional’ government regulation.
The Swedish government is among the nation’s largest employers. It controls more than 50 corporations and holds large positions in well-known companies such as power company Vattenfall, the telecommunications firm TeliaSonera, Scandinavian Airlines and iron-ore producer LKAB.
In 2007, Sweden became the first country in the world to require that state-controlled companies report on their sustainability activities in accordance with the Global Reporting Initiative (GRI). Now it’s going further, requiring these companies to make sustainability a core consideration in their businesses.
“Enterprises that are wholly or partly owned by the state are expected to set an example,” says Peter Norman, Sweden’s Minister for Financial Markets,” The Government’s next step involves each company formulating its own sustainability goals. While the companies’ goals will differ, they will all be concrete and relevant to their own activities.”
The initiative requires all 54 companies within the state’s sphere of influence to set measurable sustainability goals, tailored to their respective industry and business models. Importantly, these must be defined at board level. Starting in the second quarter of 2014, each company must report its goals to the government and provide annually progress updates.
The reasoning, according to Norman, is straightforward. “As owners, we see an obvious link between sustainable business practices and value creation,” Norman stated in his launch speech in May 2012,” to survive, and secure strong long-term value growth, companies must therefore prioritise sustainability issues.”
In fact, over the long term, sustainability is a prerequisite for profit. As an investor, the government sees a fiduciary duty to incorporate sustainability into boards’ mandates.
Publicly owned companies represent an equity investment of about €70 billion, a major position for the population of Sweden as owners (equivalent to a C$12,000 shareholding per capita). Sustainability-related risks and opportunities need to be identified and managed to ensure long-term value creation and stable returns.
Managing sustainability and communicating achievements can materially impact company risk and shareholder value. It’s instructive to see the difference between companies that do this and those that don’t.
Learning the hard way
In the last few years, the Swedish government has undergone a steep learning curve on how to better manage its holdings.
TeliaSonera, a telecom operator partly owned by the Swedish and Finnish governments, is still reeling from allegations that it paid family members of Islam Karimov, president of Uzbekistan upwards of $300 million in bribes in order to break into the Uzbek mobile-phone market. This story has had huge brand implications for the company, with a direct hit on the company’s share value. Large mutual funds sold their shares in the company and major clients, including the City of Stockholm, decided to re-tender their contracts.
If there is a thorn in the side of the Sweden’s low carbon vision, it is state-owned Vattenfall, one of Europe’s largest generators of electricity and heat. Highly criticised in its major markets in Germany and Sweden in 2009 for lack of transparency, mismanagement of its nuclear holdings and stubborn reliance on coal—in 2012, 46% of electricity was generated through fossil fuels—Vattenfall was supposed to spearhead the development of a sustainable energy system but is falling well short of its mandate.
The state also has a number of success stories to tell. LKAB, one of Europe’s largest iron ore producers, consumes 1.5 percent of Sweden’s electricity and emits 1 percent of its greenhouse gases. In its quest to reduce its impact, the company developed a process that requires half the energy to produce the iron ore pellets used by steel producers worldwide. In high demand, these “green pellets” have been enormously successful and sell at a premium due to the lower embedded energy. The company has also craftily managed stakeholder dialogue in what could have potentially powder keg issue. The company is transplanting two entire northern cities to continue its operations, amid little contention among the local population.
In requiring companies to set goals and report on sustainability, the Swedish government is doing much more than demanding transparency through reporting. It is effectively requiring companies to integrate sustainability into their businesses. Sustainability goals are supposed to be general in nature, but also measurable and relevant to business operations, and the Boards are accountable. CEOs and chairmen are expected to discuss progress with the Minister of Financial Markets when they meet annually.
Sweden’s decision is interesting for two reasons. Assigning board responsibility and mandating targets is a tool that can be used by long-term investors, such as pension funds and governments, who believe that sustainability enhances risk management and corporate strategy.
The Swedish approach also presents a novel policy tool for governments looking to provide leadership on sustainability issues, while avoiding “traditional” regulation that may be perceived negatively or rejected by voters. Putting sustainability front and centre is the future — it’s how the public sector can drive the market.
Originally published on Corporate Knights
This article is a combined effort of both Astrid von Schmeling and Francisca Quinn
Francisca Quinn is the President of Quinn & Partners, a Canadian sustainability strategy and integration advisory firm. With almost 20 years in corporate strategy and sustainability, Francisca has a track record of assisting large corporations to implement industry leadership initiatives and excel in sustainability disclosure. The results include cost savings, high employee and customer satisfaction, media coverage, industry awards and improvement in ESG analyst rankings. You can follow Francisca on Twitter @franciscaquinn or she can also be reached at firstname.lastname@example.org
Astrid von Schmeling currently heads up One Stone’s work on sustainability leadership, stakeholder engagement and masterclasses. With nearly two decades in sustainable business publishing and corporate communications, Astrid has worked with a wide range of companies to raise awareness of sustainability, integrate it into brand, strategy and organization, and effectively engage stakeholders. She specializes in materiality assessment, GRI reporting, training and benchmarking.