Appealing To ESG Investors: A Q&A with Pirelli’s Maureen Kline

by | Apr 26, 2017

Tires are deceptively simple, Maureen Kline, vice president of public affairs and sustainability for Pirelli Tire North America, points out. A great deal of R&D actually gets rolled into them. For Pirelli, that means developing environmentally friendly materials that won’t affect performance or safety. This and other strategies have helped the tire manufacturer appeal to environment, social, and governance investors.

Kline will be discussing how to respond to the demand for ESG investing at the 2017 Environmental Leader Conference in June. We recently caught up with her for an in-depth conversation about tracking the value of sustainability and communicating it effectively to investors.

What does environment, social and governance reporting mean for Pirelli?

Pirelli and many large multinational companies do sustainability reports using the Global Reporting Initiative. Our sustainability report is integrated right into our financial annual report. The GRI framework gives you a process. It’s not just a checklist. You need to involve your board and in doing this reporting, you are actually extending sustainability within your organization.

Pirelli is a European company headquartered in Italy. A majority of the shares were recently acquired by Chinese company called ChemChina. We delisted from the Milan Stock Exchange for reorganization, and we will relist the company within the next year or so. Right now we’re delisted, but there has been continuity in our approach to reporting.

We decided years ago that we wanted to have more long-term international institutional investors among our shareholders. So we approached European investors — mainstream and socially responsible ones — with actions that were helpful to our appeal. In 2009, 16% of our shares were held by international institutional investors. By the end of 2014, 43% were, which helped with the stability of our shareholder base. And 25% of our shares at the end of 2014 were held by investors that signed onto the Principles for Responsible Investment (PRI).

What was the impetus for approaching those European investors?

Sustainability is more of a tradition in Europe. Our company was founded in 1872, and has a long history of stakeholder engagement. As sustainability investing was growing in Europe, that was a good fit for us. They’re known as SRI investors — socially-responsible investing. In the United States, you use the term ESG.

Were there any challenges you faced?

Sustainability managers are often tasked with changing the culture of an organization. We have a sustainability department in our headquarters and regional sustainability managers. We link targets to performance goals. Then we have specific targets for each region and area. The targets reach across HR, R&D, supply chain management — throughout the organization.

Another is it’s challenging to talk about sustainability to investors in the language of mainstream investing. We’ve worked with a UN Global Compact model called the Value Driver Model to talk about the value created by sustainability.

How do you frame that value?

We talk about green performance tires revenue — tires that are more environmentally friendly without sacrificing performance or safety. We have targets every year for the percentage of our overall revenue that comes from that category of tires. We announce those targets and measure our performance.

On the cost-saving side, we track energy efficiency, water savings — any cost savings from sustainability initiatives. Then we track our risk management, which is less easy to quantify but you can see when companies have a reputational risk or other type of risk emerge how quickly they lose value. Having a strong risk management program means you’re financially stronger and you protect your value.

Has that been effective?

There’s a lot of work — not only in Pirelli, but in the investor community and among groups that track performance like Bloomberg or MSCI — to quantify this better and make the numbers comparable across companies. In the US, the Sustainability Accounting Standards Board (SASB) has been identifying indicators by industry to help investors compare how different companies are doing on sustainability.

Do you have an example of how Pirelli is appealing to long-term institutional investors?

You think of a tire as being a fairly simple product. It’s round and black. But there’s a lot of research and development. The more environmentally friendly we can make the tire, the more other issues we can help to solve. For instance, if we get more organic materials into the tires and reduce the toxicity of any chemicals, we are moving towards a cleaner environment. Pirelli has been doing research on using a plant called guayule. You can get a natural rubber equivalent out of this cactus that would grow in the desert with very little water.

Are there lessons Pirelli has learned during this process that would be useful to share?

Don’t be afraid to think systemically. That’s what we’ve done and it’s paid off. We bring all of our regional sustainability managers together once a year in the headquarters. We have a couple of days of meetings with the heads of each department. They come before the sustainability leads in the company, and it’s a time when they reflect on how successful they are in integrating sustainability into their daily work and department. Sustainability managers from around the world can get the whole picture, ask questions, and link the individual regional targets to a big overall plan.

What does the future look like for this type of investing and engagement in stakeholders as well?

There are times when, in terms of sustainability, it seems like there’s one step forward two steps back. But I’m hearing there’s a lot of demand for sustainable investing, especially from Millennials. They want to invest in something they believe in. Companies need to show how they fit into that, and be scored on their environmental, social, and governance performance. As we get the frameworks clearer and more broadly adopted, we’re going to see a huge wave in this direction.

Maureen Kline will be speaking at the Environmental Leader Conference in Denver June 5-7, 2017. Her track, Responding to the Demand for ESG Investing, starts at 11:20 am on June 7.

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