Citi Perspectives Spring 2020

Citi Perspectives  | 23 For instance, as recently reported in the media, Brazil’s major iron-ore mining company posted losses in the first quarter of 2019, driven by $4.5 billion in compensation expenses relating to the bursting of an earth dam holding iron mining waste. Several prominent institutional investors also sold their holdings in the company as a result of the incident, leading it to commit to investing in improving its extraction processes. As outlined in the risk and cost framework in Figure 1, firms need to define an action plan to comply with requirements within stated timelines and model the cost of ongoing compliance. As a next step, companies must review their business and operational models end-to-end. This may reveal a need for fundamental changes to business models, including potential reconfiguration of supply chains inline with circular principles, and the adoption of eco- design principles that champion resource recovery and product reusability. Corporates will also need to devise their own ways of measuring sustainability risk and of monitoring its impact on business performance and share price. Guidelines such as the Taskforce for Climate-Related Financial Disclosures and carbon pricing regimes are useful references for measuring and monitoring sustainability risk. Ultimately, corporates need to model the financial value generated by pursuing their sustainability strategy, in terms of expense savings, return on investments in future-ready infrastructure, products and processes, and the incremental financial value of newly-harvested resources from waste, into a net-present value-equivalent metric. This can then be tracked and reported to shareholders as part of regular updates on business strategy: ESG considerations will thus become just another component of business as usual. FIGURE 1