Beyond sustainability reporting: Embedding ESG in strategy
When finance and accounting professionals think about ESG, it shouldn’t be limited to churning out sustainability reports. To enable real change in a company’s impact on environmental, social, and governance issues, they need to be part and parcel of long-term strategy. But how can that be done?
In this episode, we hear from Michael Bueker, senior vice-president of finance for Middle East markets at Siemens Energy. The company’s businesses are in both traditional fossil fuel and renewable energy. Embedding ESG in its strategy means having internal ESG targets that are tied to KPIs, such as executive compensation, and, externally, incorporating ESG into its product and service offerings, such as providing low-carbon energy options to its customers.
What you’ll learn from this episode:
- How Siemens Energy kick-started its ESG reporting and the growing pains of the process.
- Risks and opportunities in the company’s strategy after including ESG criteria.
- How ESG is a corporate social responsibility but that companies must steer clear of greenwashing.
- Changes to the finance team and IT that can enable them to track and report ESG metrics.
Play the episode below or read the transcript:
— Alexis See Tho is an FM magazine associate editor. To comment on this episode or to suggest an idea for another episode, contact her at Alexis.SeeTho@aicpa-cima.com.
Alexis See Tho: We started this series of podcasts on ESG issues a few weeks ago, and in this episode, we look into how a company incorporates ESG into its strategy. What this means is ESG issues are not merely something to do with corporate reporting, but they are embedded into a company's culture and operations, and are tried to certain KPIs. To get an inside look at how ESG is merged with strategy, I speak to Michael Bueker, the senior vice-president of finance for Middle East markets at Siemens Energy.
Siemens Energy is an energy technology company listed on the Frankfurt Stock Exchange. It has 91,000 employees globally, and its businesses are in both traditional fossil fuels and renewable energy. It's involved in developing and building power plants, power grids, and manufacturing turbines. It's a heavyweight in the renewable energy sector, including wind power and green hydrogen.
As you would imagine, the company is a part of the supply chains of many companies that want to reduce their carbon emissions, and internally, the company had also set targets to consume 100% green electricity in two years, and to be climate neutral by 2030.
ESG issues have become inseparable from their corporate strategy, and Michael will share how that process started a few years ago and the growing pains of their journey. Here's my conversation with Michael.
Welcome to the FM podcast, Michael.
Michael Bueker: Thank you very much, Alexis. I'm happy to be with you today.
See Tho: So Siemens Energy is a new company just spun off from Siemens, the parent company last year. But Siemens had been involved in the energy transition industry for quite a while. Can you tell us more about that? When did it start and why?
Bueker: Siemens of course, is a 160 years old company and Siemens Energy used to be a part of it. So in this regard, Siemens Energy isn't really a new company. It has been spun off and stock-listed just last September. Since then, we operate our own businesses globally.
In this regard, we have been exposed and have been leading the energy transition since its beginning, which means energy transition is, from our perspective, decarbonising the entire value chain of the energy generation, transmission, and distribution.
In this regard, with our portfolio, be it the power generation equipment or be it transmission and distribution equipment, we are at the forefront, and that had started many years ago.
See Tho: Siemens began investing into these energy transition services about 16 years ago. Why did Siemens get into this green energy industry back then?
Bueker: Yeah, you're referring to our investment into the wind business, which started in 2004, with the acquisition of Bonus Energy that used to be a small wind turbine manufacturer.
And this has grown into the world leading wind turbine company. It's called Siemens Gamesa Renewable Energy. Later in 2008, Siemens decided to acquire another company based out of Israel, which is active in the solar business.
Back in that time, it was very clear already that the generation part of the Siemens Energy portfolio in the conventional piece wouldn't be enough to satisfy all the needs that would be coming from the renewable space.
So at that time, we decided to go actively into this market to complement our standard portfolio and traditional portfolio with the renewable generation part. Since that time, we have developed massively our portfolio.
See Tho: From what I understand, your renewables businesses make up about half of your total revenue. When did Siemens begin to include ESG considerations in the corporate strategy? When was the time when your company started thinking about ESG risks, opportunities, and how they fit into the strategy? Could you share what was the process like internally?
Bueker: We see a very important element of our activities is to develop societies towards a more sustainable, affordable, and robust energy system. So with that, it was always part of our DNA.
When it became part of the strategy was when we understood that the investors space, both on the equity and on the debt side, is very much expecting us to embed ESG into our strategy.
See Tho: When did that begin, that demand from investors?
Bueker: I couldn't point to a particular date on the calendar, but it definitely started, seven, eight years ago in the Paris agreement, which was actually the starting point of many, many initiatives both on the industrial side as well as on the capital side.
See Tho: Could you share what are the environmental, social, and governance metrics that you're looking at internally?
Bueker: Well, I would start again with the fact that the ESG criteria has become an important part of our strategy and of our business development going forward.
And ESG means we are talking about diversity, gender diversity. We talk about climate targets, about decarbonisation of our own electricity consumption of our own product portfolio. But also on the side of the governance and of the health and wellbeing of our people. So zero tolerance to injuries, zero harm to our people are important elements as well.
So I'm saying all these because this reflects in all parts of our company now. It is part of the management remuneration system. It is part of our targets. It is part of our reporting to the external world and to the capital markets and to our stakeholders. So it goes all over the place.
See Tho: What about your business model? Has it changed because of the ESG targets that the company had committed to?
Bueker: I would phrase it even more broadly. I would say that our whole value chain and then supply chain and value creation has to be climate oriented, has to be ESG oriented in order to fulfil our targets, which are ambitious. In addition to that, new business models are being created by our customers.
Our customers and we innovate in regard to how they can fulfil their targets. So we look into models, where we would actually rather actively develop and sell carbon neutrality, as an output, as a service, rather than only an equipment that would later enable our customers. In this regard, business models are being innovated.
Customers look at us as being an important part of the value chain, of value creation, towards more sustainability. So we take it very seriously in this regard as well.
See Tho: When you said carbon neutrality as part of your service, can you give an example of that. How does that look like?
Bueker: When we engage with our customers, they are not only talking about costs, positions, about capex involved with our products or solutions. They ask, "What is your contribution to my CO2 to reduction?"
What is your contribution? How we can make better use of our existing assets? So we talk about storage, storage in terms of electricity, or in terms of hydrogen now as a new means to store energy. This adds, from the eyes of the customers, to their own business targets.
See Tho: So, in this process of including ESG in the strategy, what were some things that your company realised? Were there risks that you thought you never would see or find in the business? And what were the new opportunities for business growth?
Bueker: Absolutely. I would start with a clear statement that we have always seen those risks and opportunities. What has changed is the speed and the scale of those to mature and to develop.
We clearly saw that since the Paris agreement, and maybe a few years before, the capital side as well as industry have changed heavily. Now with COVID being an accelerator particularly of the stimulus programmes to be directed into more ESG and sustainable areas, this has improved or accelerated.
So dynamics have heavily increased. That's one. Secondly, the risks that we see in traditional businesses in the kind of conventional part, have increased. So we decided to exit coal, for instance, and it's a very clear and strategic decision to do so.
At the same time, the opportunities that come together with the energy transition in our domain of energy transmission and distribution, by adding more renewable energy sources to the grid is also increasing at a very fast speed.
And on top of it, which is now one of the latest developments, hydrogen is one of the fuels of the future, one of the feedstocks of the future for big fuels, for ammonia and as others, has now become much more interesting to everybody.
We have a nice portfolio in this regard as well, and we will definitely see a very strong development and this is part of our business activities.
See Tho: Can you give us a sense of how it's like behind the scenes? How did it look like internally after the switch to include ESG considerations? So I'm thinking of the additional metrics you have to track. Do you have more accountants just focused on these nonfinancial data? Were there new IT systems put in to capture and analyse the data?
Bueker: You're absolutely right. The external reporting, the internal reporting and controlling on those ESG metrics definitely adds a lot of complexity and data points to our whole organisation.
That is not purely a financial activity. It is a broad activity that crosses to procurement, to manufacturing, to sales part, even our customer side.
So, yes, additional data points are added to our reporting system and that increases complexity. In addition to that, we have had to build and continue to build a whole new knowledge base with our people.
Our people have to understand sustainability criteria much better. They have to be able to accumulate the right data, to bring the right statistics, and also report those externally.
Last but not least, we are engaging with auditors on the same. So they also have to get our reporting and understand it and follow it and give us an opinion.
When it comes to the IT side, I have to say, I think it’s a mid- to long-term shot, because it is complex. It touches many different parts of our IT and to combine all this into one structured database will take years.
See Tho: So at the moment, who heads this department that does all this reporting and analysing of data?
Bueker: Well, we have decided as Siemens Energy that sustainability is a CEO target. Our president and CEO Christian Bruch is at the same time, our chief sustainability officer.
Of course, as already indicated, ESG criteria are going beyond. So our chief diversity officer is Maria Ferraro, our CFO.
So both of those elements are clearly sitting with the highest level in our organisation, and this is where it starts.
The respective departments working on all the details, providing the sustainability reports, providing all the controlling aspects to it, are sitting in those two areas of responsibilities.
See Tho: Going back to a few years ago when you first started reporting on these ESG metrics, who did you turn to, to kickstart the process? How did you train your accountants? Was it mostly internal? Poring over government documents, finding out what is required by the EU, because you're headquartered in Germany, and then figure out what frameworks, whether it's TCFD or GRI? What was the process like? There's so many sustainability reporting frameworks and standards out there. It can be a challenge.
Bueker: I think it's still a journey, to be honest. As we know, there's not this one standard. There is a strong initiative coming from the capital markets, coming from the industry to harmonise and standardise. We are not there yet.
We have clearly understood that a robust reporting is crucial and the transparency and comparability are important for the industry, so that everybody really talks about the same with us in the same language.
And that also is true for our own organisation and for the way how we got to where we are today, which is we are highly committed to the highest standards in terms of reporting. Just the other day, we communicated that we are adhering to the climate targets verified by the Science-Based Targets Initiative.
We definitely subject ourselves to the highest standards. Is it possible only with internal resources? No. We have engaged with consultants, with advisers, with peers, with standard setters to frame our thinking and also understand better what is important, what is not so important.
See Tho: What been some of the growing pains in this process?
Bueker: The growing challenges are twofold. One is operational. On the operation side we really have to change the operational aspect of our activities. We are the middle of it and we definitely are fully committed to it, and we will continue to do so.
What is equally important is to take the people along, and this is the second element. It's not a pain, but it's definitely an important task for us as managers, to make sure that our people understand the journey we are in as a company. It's a transformation, in a positive sense of transformation.
We have so many opportunities and we definitely should talk more about it and show the positive outcome of all of this — for societies, for our customers our own businesses. In order to do so, we need to give our people a clear path forward and also show them and guide the way that is positive for them as well as an individual in our organisation.
We are spending a lot of time and effort to train the people, to give them a clear perspective in our company, so that they understand that this is a positive journey for all of us.
See Tho: Can you give an example of the change in thinking for your operations?
Bueker: Yeah, just to give a recent example is we committed ourselves to reduce the non-green electricity consumption down to zero by 2023 in our own buildings and factories.
So how do we do this? Our real estate organisation, our procurement organisation have to learn more about how to procure our certificates, how to procure green energy. We have to engage with policymakers, because in some of the countries there's not even a policy which would allow you to buy, as a private company, green electricity from the grid. This whole thinking has to arrive in all places of our organisation.
See Tho: We're all familiar with the term CSR, corporate social responsibility. It was coined by an American economist back in the 1950s, and CSR became more prominent in the ’70s and ’80s, and we see CSR activities in most companies today. Would you say that ESG is a new kind of CSR?
Bueker: Yeah, in a way it is. With the ever increasing science-based and knowledge that climate change is a reality and is going to stay with us, and that it is a need to transform the energy landscape as one of the most important positive and negative contributors to the climate change, it is definitely part of our corporate social responsibility. And we see it as such.
And at the same time, ESG means also affordable, reliable energy, it's not only sustainable energy. We are talking about 800 million people, globally, who don't have access at all to electricity.
So we need to make sure that the responsibility that we as corporates have to those that live all over the place. And we are not discriminating the ones that are already behind in terms of economic development even more, by adding climate policies which benefit only the countries that are already developed.
So in that regard you're absolutely right. It is a new dimension of it. It's a faster development now, but it is probably rooted back into those times.
See Tho: But one of the criticisms against CSR, and I think, to a certain extent ESG as well, is that, it's just another form of greenwashing or a PR exercise.
Companies are putting out sustainability information or committing to certain ESG goals, diversity and inclusion at the top management or board level, or climate-related goals — net zero by 2030 or 2050. So the focus so far has been on companies' intentions to change, and there's less transparency and accountability on actually making sure that the change happens.
What do you see happening, and what is Siemens Energy doing in order that it's not paying lip service to these issues?
Bueker: Yeah, you're absolutely right, the greenwashing. You can also look at it as a kind of the bubble in the sense of, how are the capital markets reacting and acting to those reports and those initiatives.
It is absolutely critical that all the responsible members of the industry, for all the responsible participants — and we are one of the major and leading players in this field — that we adhere to the highest standards of reporting, of ethics, when it comes to the ESG part of it.
We apply actively, a very prudent approach, and we actively seek to standardise and harmonise the activities in this regard. Because we know it is critical. If we lose the reputation of transparency, honesty, robustness in our reporting, we lose a great opportunity to change the capital allocation, to change the way businesses are being managed and that definitely is not in our interest.
And already indicated, our own strategy is embedded into ESG. So it would not be wise if you weren't able to relate strategy to numbers and to reporting.
It's in our own interest as a company as well, in the interest of our shareholders, of our stakeholders, our employees, to make sure that our approaches are in this regard also very strong and very robust.
See Tho: It's popular nowadays for companies or organisations to say doing good is good for business. Is this Siemens Energy's reality? What are some evidences you’ve see after setting ESG targets or UN Sustainability Development Goals (SDG)?
Bueker: Doing good is good for business for many reasons. One, it's very economical. We know that CO2 if you stay with ESG part, with the carbon neutrality part of ESG, that CO2 has a cost, directly or indirectly. So saving CO2 is a cost-saving measure. That's number one.
Secondly, being strategically aligned with your business and company development towards those targets simply gives you the opportunity to develop your company in the right direction, because the future is going to be decarbonised and we want to be part of it.
Number three is our people. We are driven by purpose; we want to do something that is purposeful. And it is very clear to us, with our ambition to be the most valued energy company in the world and with our purpose to energise society, we definitely want to be positively regarded, and we are being positivity regarded by customers and stakeholders.
So yes, it has the economic benefit, but also a bigger benefit for everybody involved.
Diversity, to add this as well to the dimension. We all know, it's already science, it's not even a guess that diverse teams, more agile teams, are more powerful. They are more innovative. They are more higher performing. They are able to deal with complexities is better. And this is one of our goals you want to be more diverse. So, yes, again back to your point in all dimensions, 100% agreed.
See Tho: Can you give an example, on your point earlier that it's more economical to run a business with ESG in the strategy?
Bueker: A very practical example is a more efficient turbine is burning less fuel, is emitting less CO2, which is a very simple, straightforward exercise. Burning less means less operating costs when the machine is running.
The next example is CO2 has a cost. So if you are able to reduce your CO2 emission to zero, you will be free of buying certificates in some of the geographies where this is already a policy.
And we know, for instance, that airlines are facing an issue; they are going to see more and more tax. So they land at an airport in Finland, for instance, and if they don't come with synthetic fuel or CO2-reduced emissions, they will be heavily taxed. So for them it's a cost element that is critical.
See Tho: One big concern that companies have is, it’s more costly to be sustainable, whether it's shifting to green energy or in the ways they create products.
Because perhaps for a century or two, we've been in a linear economy; we extract raw materials, we make products out of it, we sell it to consumers, and consumers use it, and then we throw it out, creating a huge waste problem, which is no longer sustainable.
And a lot of companies have this business model. So switching to more sustainable models will be more costly in the beginning. As an energy company, what do see on the horizon in terms of energy costs?
Bueker: I have a very clear view on this. If a company wants to sustain the business going forward in the long term, it must decarbonise its own operations and must decarbonise its products or services because the world is going to go there, the capital is going to go there.
Is that going overnight? No. Of course, it is a transition, and each and every company has a different starting point and has to find its own ways through.
But it's going to come and the one example that you mentioned is CO2 as a cost to any product which is one way to deal with this topic, which may come. It will come in some places, maybe not in all, but it will come.
The other element is what I already indicated, strategic element of managing a company in the right direction, and the third element is, I’m very much positive and confident that many of our future products, though fully decarbonised, will be cost competitive. It's just a matter of scale.
If you look at what today green hydrogen would cost it, we are talking about any number between $3.50 maybe $5 per kilo, which is four times the market price of a grey hydrogen. However, with scale, with the reduction in cost on the renewable energies, it will come down. And we talked already today about costs of $1.5, maybe $2 per kilowatt.
There is a lot of potential in cost from scale, from more investment in R&D. And with technology companies like Siemens Energy, we are heavily investing into those new technologies, try to scale them with our partners, with our customers in the markets, so that this economic benefits will also come in.
And with that, all those three elements, from my view, will make the difference and make sure that going forward, there is not necessarily a cost increase as what you might expect if you look at it today.
See Tho: What are you looking out for or watching for in this ESG space at the moment? Is it more regulations or up-and-coming technologies?
Bueker: Yeah, it goes beyond watching. Personally I'm very much involved in the policy part of it. So actively engaging with the H2Global initiative in Germany. And with a lot of policymakers here [in the Middle East] I'm actively working with ministries in the neighbouring countries to make sure that there is also a policy that supports their journeys, starting maybe from coal, starting maybe from oil-burning power generation assets going into the gas, all the way to the renewable area. So it is more than watching. It is really actively engaging and forming and shaping the future.
This is what is on my day-to-day agenda at the moment.
See Tho: Wonderful. This is my last question to you, Michael. What is your one piece of advice to fellow finance leaders when it comes to ESG and including ESG in corporate strategy?
Bueker: Be curious about it. Be positive about it. It is going to change many of our activities on a day-to-day basis in the future. So look into this, have a good understanding, and develop a long-term plan, and you will see the benefits coming in.