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Being purposeful is financially responsible

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Being purposeful is financially responsible
By Liam Farnworth, Radley Yeldar and Paulina Lezama 

Delivering wider value beyond profit has never been more important for businesses to stay relevant and viable. We’re seeing a growing demand across stakeholder audiences for companies to demonstrate their wider value creation, not just profits.

That isn’t to say that the two are separate – the evidence to support a link between purpose and profit is growing all the time. Being purposeful is far more financially responsible than only focusing on short-term returns.

Having a purpose is necessary to articulate a company’s long-term commitment to its customers, employees and investors.As BlackRock CEO Larry Fink puts it “without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders. It will succumb to short-term pressures” and jeopardise its long-term growth[i].

 What is purpose? 

Purpose is actually quite simple. It’s the reason why a company exists, and how it delivers a benefit to individuals, society or the world. Those who are unfamiliar with the concept think it’s part of the CSR or marketing bucket, but that’s not what purpose is about.

A company’s purpose should be embedded into every aspect of the business, aligning the brand story, strategy, employee experience and vision under a central idea. When a company does purpose right, it becomes part of the identity of the business and differentiates why an investor, consumer or job candidate should choose that company over another.

Purpose leads to employee engagement 

Purpose helps crack a big challenge for businesses, employee engagement. This isn’t another woolly concept, there are strong financial incentives for having engaged employees. Being purposeful improves employee engagement by giving them a clear sense of contributing to something more meaningful to the world than shareholder value. And in many ways, having engaged employees contributes to a better financial performance.

A 2013 survey by Deloitte found that 73% of employees working for purpose-driven companies reported being engaged versus 23% at companies that weren’t purpose-driven[ii]. And a 2012 meta-analysis by Gallup of 49,928 business units found that those in the top quartile for engagement were 21% more productive, 22% more profitable and had 37% less absenteeism than those in the bottom quartile[iii].

 The same meta-analysis by Gallup found that business units in the bottom quartile for engagement level had 65% higher turnover than those in the top quartile[iv]. And a 2012 study by the Centre for American Progress puts the cost for replacing employees anywhere between 16% of their annual salary for lower paid workers to 20% for upper-mid-range pay levels, and as high as 213% for the highest paid workers like senior executives and highly skilled specialists[v].

 Millennials and responsible investing are the future of financial services

In the US, millennials now have the most spending power of any demographic and will make up three-quarters of the global workforce by 2025[vi]. Along with that, millennials are twice as likely as the overall investor population to invest in companies with social or environmental goals[vii]. On the other end of the spectrum, institutional investors like pension funds are increasingly demanding Sustainable and responsible investing to bring stability to the financial system and play their role in tackling the sustainability challenges that are now firmly on the agenda.

Many financial services companies are embracing responsible investment, both to remain viable and because they recognise that there’s value in it. Since 1995, the assets under management by responsible investment funds have grown by 1364%, from $639 billion to $8.72 trillion in the US alone[viii]. Responsible investment involves the inclusion of non-financial (environmental and social) data in the investment valuation process and a more active relationship with companies being invested in. Good responsible investors even engage with their investee companies around environmental and social issues to ensure any risks are being managed and opportunities are being seized appropriately. It’s a new way of investing – one which is very purposeful and aims at long-term growth.

Responsible investing is also correlated with better financial performance by pushing investors to consider ESG criteria. A review by Oxford University and Arabesque Asset Management of more than 200 sources found 88% of the research showed solid ESG practices improved operational performance.The review also found that 80% of the studies showed that a company’s stock performance is positively influenced by good sustainability practices[ix]. Investments that consider ESG criteria are naturally more viable long-term because they account for social and environmental impacts, and it protects your reputation from the negative publicity.

How do we know the financial services sector is among the least purposeful?

To help quantify our position on who’s being purposeful, we’ve developed an annual index that measures how well a company’s purpose is integrated across the business. Radley Yeldar’s Fit For Purpose Index assesses some of the largest publicly traded brands on the FTSE and PwC 100, as well as a selection of privately held companies. Our most recent index shows the financial services sector to still be lagging behind the index average.In fact, the only sector to be less purposeful on average is the Oil and Gas sector.

We found that, although the financial services companies in our index have improved, they still have a long way to go to be considered truly purposeful. Of the 5 financial services companies that made the top 100, only 2 actually talk about it in a compelling way. More to the point, none did a very good job of demonstrating purposeful behaviours and outcomes. This was surprising, as the top 2 financial services companies in particular were operating in the responsible investment space. On the other hand, this sector is typically conservative in communications and less transparent than others.

Helping financial services companies become more purposeful 

Our three recommendations

Firstly, financial services companies need to focus on getting their purpose story right. This means working it into how you describe yourself, what you do, and your vision for the future. This should go beyond a standalone campaign or siloed section of your website. To get the maximum benefit from purpose, it has to be across everything you do and say. Action without words goes unnoticed, and words without action get exposed as fictions. Getting the story right is critical for focusing your actions, and making sure it doesn’t come across as tokenistic or just another case of purpose-washing.

Second, financial services companies also need to improve on their ability to measure and demonstrate progress on their purpose. We look for companies to set clear short, medium and long-term targets for their purpose because this gives a transparent roadmap for their intentions. Alongside future targets, immediate KPIs are another way to build credibility in the commitment to purpose by framing it as part of the measures for performance.

We’ve always found this to be an area where many companies struggle, regardless of sector. Purpose can seem quite qualitative, leaving companies bewildered as to how it might be measured. A great starting point is to look at the potential relationship between their purpose and sustainability approach and see what kinds of short-term targets are reasonable. From here they can think about setting sustainability goals beyond 2020. Ultimately, performance measures are crucial for credibility because they demonstrate a business is taking actions and shows its purpose is more than just a strapline.

Thirdly, financial services companies need to show they’re taking action to be more purposeful. Whether that’s investing in communities, supporting sustainable initiatives or developing talent in under-represented demographics, they need to be doing more to show their purpose stands for something. Along with that, employees need to be involved in purposeful actions – we don’t advocate throwing money at a problem. To get the engagement value out of the purpose, companies need to give employees opportunities to get involved and be able to see their contribution and impacts towards the purpose.

Finding inspiration nearby 

Financial services companies can look to the banking sector for inspiration. Here, purpose is taking hold as part of a sector-wide trend towards serving society and the consumer. Banks are seeing the battle for millennials’ hearts, minds and wallets intensify alongside the rise of digital-first start-ups aiming to disrupt their market. Financial services face these same considerations, but we’re not seeing them step up to this competition in the same way the banking sector is.

Lloyds Banking Group is a standout example. It isn’t just a leader for purpose amongst its peers, it leads all companies alongside Unilever as a textbook example of doing purpose really well. Since the launch of the Helping Britain Prosper plan in 2014, we’ve seen several other banks begin their own purpose journeys. Banks around the world like Royal Bank of Canada and Santander are following Lloyds Banking Group’s lead in embedding purpose and supporting their customers and communities as part of a double bottom line – valuing profits and people.

What the Lloyds Banking Group example captures perfectly is how purpose can contribute to growth – more prosperous people, communities and business have more money to invest and manage, growing their market share. This is a brand that lives its purpose in almost every communication and has defined targets and performance indicators that prove it’s working towards helping Britain prosper every day.

With a north star like Lloyds Banking Group, banks and financial services companies can follow a path laid out towards long-term profits for themselves and the people and communities they serve.

Bringing it all together

Purpose should be on every company’s agenda. Frankly, not being purposeful should be seen as financially irresponsible given the mounting evidence for its value. Being purposeful is strongly correlated with better performance and sustainable long-term growth.

The demands for purpose are coming from all angles, pushing companies to demonstrate to stakeholders that they’re good corporate citizens. Adapting to these demands will be the only way to maintain licence to operate, especially if the sector as a whole has a reputation for putting profits above people. The risk of bad reputation to share prices can’t be underestimated, and purpose is the perfect inoculation against this risk.

Beyond the just “doing the right thing”, we’re seeing long-term commitment to purpose differentiate companies. More to the point, investing in being purposeful is investing in profits. And if the financial services sector should understand one thing, it’s profits.

[i]https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter

[ii]https://www2.deloitte.com/content/dam/Deloitte/us/Documents/about-deloitte/us-leadership-2014-core-beliefs-culture-survey-040414.pdf

[iii]http://www.gallup.com/file/services/176657/2012%20Q12%20Meta-Analysis%20Summary%20of%20Findings.pdf

[iv]http://www.gallup.com/file/services/176657/2012%20Q12%20Meta-Analysis%20Summary%20of%20Findings.pdf

[v]https://www.americanprogress.org/wp-content/uploads/2012/11/CostofTurnover.pdf

[vi]http://www.catalyst.org/knowledge/generations-demographic-trends-population-and-workforce

[vii]https://www.morganstanley.com/ideas/sustainable-socially-responsible-investing-millennials-drive-growth

[viii]https://www.ussif.org/blog_home.asp?Display=75

[ix]https://arabesque.com/research/From_the_stockholder_to_the_stakeholder_web.pdf

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UK might need negative rates if recovery disappoints – BoE’s Vlieghe

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UK might need negative rates if recovery disappoints - BoE's Vlieghe 1

By David Milliken and William Schomberg

LONDON (Reuters) – The Bank of England might need to cut interest rates below zero later this year or in 2022 if a recovery in the economy disappoints, especially if there is persistent unemployment, policymaker Gertjan Vlieghe said on Friday.

Vlieghe said he thought the likeliest scenario was that the economy would recover strongly as forecast by the central bank earlier this month, meaning a further loosening of monetary policy would not be needed.

Data published on Friday suggested the economy had stabilised after a new COVID-19 lockdown hit retailers last month, while businesses and consumers are hopeful a fast vaccination campaign will spur a recovery.

Vlieghe said in a speech published by the BoE that there was a risk of lasting job market weakness hurting wages and prices.

“In such a scenario, I judge more monetary stimulus would be appropriate, and I would favour a negative Bank Rate as the tool to implement the stimulus,” he said.

“The time to implement it would be whenever the data, or the balance of risks around it, suggest that the recovery is falling short of fully eliminating economic slack, which might be later this year or into next year,” he added.

Vlieghe’s comments are similar to those of fellow policymaker Michael Saunders, who said on Thursday negative rates could be the BoE’s best tool in future.

Earlier this month the BoE gave British financial institutions six months to get ready for the possible introduction of negative interest rates, though it stressed that no decision had been taken on whether to implement them.

Investors saw the move as reducing the likelihood of the BoE following other central banks and adopting negative rates.

Some senior BoE policymakers, such as Deputy Governor Dave Ramsden, believe that adding to the central bank’s 875 billion pounds ($1.22 trillion) of government bond purchases remains the best way of boosting the economy if needed.

Vlieghe underscored the scale of the hit to Britain’s economy and said it was clear the country was not experiencing a V-shaped recovery, adding it was more like “something between a swoosh-shaped recovery and a W-shaped recovery.”

“I want to emphasise how far we still have to travel in this recovery,” he said, adding that it was “highly uncertain” how much of the pent-up savings amassed by households during the lockdowns would be spent.

By contrast, last week the BoE’s chief economist, Andy Haldane, likened the economy to a “coiled spring.”

Vlieghe also warned against raising interest rates if the economy appeared to be outperforming expectations.

“It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.

Higher interest rates were unlikely to be appropriate until 2023 or 2024, he said.

($1 = 0.7146 pounds)

(Reporting by David Milliken; Editing by William Schomberg)

 

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UK economy shows signs of stabilisation after new lockdown hit

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UK economy shows signs of stabilisation after new lockdown hit 2

By William Schomberg and David Milliken

LONDON (Reuters) – Britain’s economy has stabilised after a new COVID-19 lockdown last month hit retailers, and business and consumers are hopeful the vaccination campaign will spur a recovery, data showed on Friday.

The IHS Markit/CIPS flash composite Purchasing Managers’ Index, a survey of businesses, suggested the economy was barely shrinking in the first half of February as companies adjusted to the latest restrictions.

A separate survey of households showed consumers at their most confident since the pandemic began.

Britain’s economy had its biggest slump in 300 years in 2020, when it contracted by 10%, and will shrink by 4% in the first three months of 2021, the Bank of England predicts.

The central bank expects a strong subsequent recovery because of the COVID-19 vaccination programme – though policymaker Gertjan Vlieghe said in a speech on Friday that the BoE could need to cut interest rates below zero later this year if unemployment stayed high.

Prime Minister Boris Johnson is due on Monday to announce the next steps in England’s lockdown but has said any easing of restrictions will be gradual.

Official data for January underscored the impact of the latest lockdown on retailers.

Retail sales volumes slumped by 8.2% from December, a much bigger fall than the 2.5% decrease forecast in a Reuters poll of economists, and the second largest on record.

“The only good thing about the current lockdown is that it’s no way near as bad for the economy as the first one,” Paul Dales, an economist at Capital Economics, said.

The smaller fall in retail sales than last April’s 18% plunge reflected growth in online shopping.

BORROWING SURGE SLOWED IN JANUARY

There was some better news for finance minister Rishi Sunak as he prepares to announce Britain’s next annual budget on March 3.

Though public sector borrowing of 8.8 billion pounds ($12.3 billion) was the first January deficit in a decade, it was much less than the 24.5 billion pounds forecast in a Reuters poll.

That took borrowing since the start of the financial year in April to 270.6 billion pounds, reflecting a surge in spending and tax cuts ordered by Sunak.

The figure does not count losses on government-backed loans which could add 30 billion pounds to the shortfall this year, but the deficit is likely to be smaller than official forecasts, the Institute for Fiscal Studies think tank said.

Sunak is expected to extend a costly wage subsidy programme, at least for the hardest-hit sectors, but he said the time for a reckoning would come.

“It’s right that once our economy begins to recover, we should look to return the public finances to a more sustainable footing and I’ll always be honest with the British people about how we will do this,” he said.

Some economists expect higher taxes sooner rather than later.

“Big tax rises eventually will have to be announced, with 2022 likely to be the worst year, so that they will be far from voters’ minds by the time of the next general election in May 2024,” Samuel Tombs, at Pantheon Macroeconomics, said.

Public debt rose to 2.115 trillion pounds, or 97.9% of gross domestic product – a percentage not seen since the early 1960s.

The PMI survey and a separate measure of manufacturing from the Confederation of British Industry, showing factory orders suffering the smallest hit in a year, gave Sunak some cause for optimism.

IHS Markit’s chief business economist, Chris Williamson, said the improvement in business expectations suggested the economy was “poised for recovery.”

However the PMI survey showed factory output in February grew at its slowest rate in nine months. Many firms reported extra costs and disruption to supply chains from new post-Brexit barriers to trade with the European Union since Jan. 1.

Vlieghe warned against over-interpreting any early signs of growth. “It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.

“We are experiencing something between a swoosh-shaped recovery and a W-shaped recovery. We are clearly not experiencing a V-shaped recovery.”

($1 = 0.7160 pounds)

(Editing by Angus MacSwan and Timothy Heritage)

 

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Oil extends losses as Texas prepares to ramp up output

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Oil extends losses as Texas prepares to ramp up output 3

By Devika Krishna Kumar

NEW YORK (Reuters) – Oil prices fell for a second day on Friday, retreating further from recent highs as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather.

Brent crude futures were down 33 cents, or 0.5%, at $63.60 a barrel by 11:06 a.m. (1606 GMT) U.S. West Texas Intermediate (WTI) crude futures fell 60 cents, or 1%, to $59.92.

This week, both benchmarks had climbed to the highest in more than a year.

“Price pullback thus far appears corrective and is slight within the context of this month’s major upside price acceleration,” said Jim Ritterbusch, president of Ritterbusch and Associates.

Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude production and 21 billion cubic feet of natural gas, analysts estimated.

Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.

Companies were expected to prepare for production restarts on Friday as electric power and water services slowly resume, sources said.

“While much of the selling relates to a gradual resumption of power in the Gulf coast region ahead of a significant temperature warmup, the magnitude of this week’s loss of supply may require further discounting given much uncertainty regarding the extent and possible duration of lost output,” Ritterbusch said.

Oil fell despite a surprise drop in U.S. crude stockpiles in the week to Feb. 12, before the big freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]

The United States on Thursday said it was ready to talk to Iran about returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons. Still, analysts did not expect near-term reversal of sanctions on Iran that were imposed by the previous U.S. administration.

“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” said StoneX analyst Kevin Solomon.

(Additional reporting by Ahmad Ghaddar in London and Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; Editing by Jason Neely, David Goodman and David Gregorio)

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