CFO Gerard Paulides on Vopak's ambitions and sustainability reporting
Based in Rotterdam, Vopak is the world's biggest independent storage company for liquid and gaseous bulk goods. The tank terminals where it stores oil products, chemicals and liquefied gases are an essential link in the global economy and its customers' supply chains. That gives Vopak an important role in making those value chains more sustainable and in facilitating the energy transition.
Joukje Janssen and Hugo van den Ende (both of PwC) spoke to CFO Gerard Paulides about Vopak's sustainability ambitions and choices, about the value of internal checks and balances versus external assurance in the associated reports, and about the impact of climate change on the company. "If we are limiting the debate about sustainability to compliance, I am afraid it will end up being squeezed into a corner where it is no longer effective. Society and Vopak have much to gain if the company is led with a sharp focus on sustainability."
What are Vopak's sustainability ambitions?
Gerard Paulides: "It used to be that a company could look at things very much from its own perspective: what are our strengths and how can we use them to achieve success? These days, as companies we are much more inclined to take the entire setting as our starting point: what does society want, and what is the best way to provide it? That places our sustainability ambitions in line with our purpose: storing vital products with care. Effectively taking on this fundamental role for our customers and society means that we can be successful, achieve good returns and at the same time contribute to our stakeholders' interests. So we are very much aware that to remain successful we need to be a responsible corporate citizen."
"Vopak has identified two major trends that guide us in addition to our purpose: the energy transition and the digitisation of society. This is encompassed by the theme of sustainability, which is relevant throughout the company. To embrace sustainability and identify our strengths, what is coming our way and the best way to respond to it, we focus mainly on the sustainable development goals (SDGs) of the UN and the Climate Agenda. We also endorse the TCFD (Task Force on Climate-related Financial Disclosures). Translated in practical terms, this means that we are investing forty million euros to prevent product emissions; we also have an energy-saving programme, ambitious safety targets and aim to be climate-neutral by 2050."
Your sustainability report does discuss four SDGs, but not SDG 13 for climate change. Was that a conscious choice?
"Yes, it was. Our reporting on the SDGs covers what we as Vopak can do to make the biggest contribution based on actively using our value creation model to demonstrably achieve something. Climate change is addressed in many of our reports from various angles: risks, opportunities and impact. It is also reflected in our materiality index, in which we take stock of what is important to our stakeholders. That shows that we take a comprehensive approach to climate change: not just under the umbrella of the SDGs, but broadly from our stakeholders' perspective."
You pay a lot of attention in your sustainability report and management report to the physical risks of climate change: drought in Sydney, subsidence in Jakarta and rising sea levels. What impact do these risks have on Vopak?
"This is an important subject for us because our terminals are located on the coast and can't be moved. That is why we constantly identify and analyse risks such as these, ranging from the enhanced risk of extreme rainfall and hurricanes to changes in sea currents and wash. If you store products at the scale we do, this could have an enormous impact. It is already a fact that climate change has a direct impact on our terminals. So far it's still manageable, but only if you keep working on it. If you are caught by surprise, you are facing a big problem."
"The big question is what is going to happen in the next few years. I think the good companies will redouble their efforts and accelerate because they are the ones that have already set their course and created the necessary space."
You mentioned how important sustainability is to Vopak as a general theme, and more specifically the energy transition. How are developments in this area affected by the Covid-19 crisis and the sharp fluctuations in oil prices?
"The world of 2020 is being turned upside-down. We are all having to face the fact that some of our assumptions no longer hold true and that we are exposed to risks that we hadn't foreseen; that we as a society are less in control than we thought. This makes us stop and think carefully about where we as a company can become stronger and move forward more quickly, and which weaknesses that were not being given priority need to be addressed now after all. Relating this to the sustainability agenda and the energy transition gives rise to the big question of whether Covid-19 will slow it down or speed it up. In evaluating this question the present year should not be taken into consideration: everyone is focusing mainly on getting on an even keel. The big question is what is going to happen in the next few years. I think the good companies will redouble their efforts and accelerate because they are the ones that have already set their course and created the necessary space. Those companies will ultimately come out stronger. In recent years we have been working very hard to identify opportunities in the energy transition: can we facilitate hydrogen and innovation, can we use ammonia as a climate-friendly marine fuel, and can we acquire an interest in companies with an agenda in line with our strategy? We are conducting these discussions very intensively and aspire to be at their forefront."
Your report is partly integrated, but you still report on sustainability in a separate section. Why did you make this choice?
"I think it would be a step too far to fully integrate our report at this stage. Integrating every chapter and aspect of the report would make it less transparent. This also has to do with the fact that we serve different target groups: parties that are purely financially oriented on the one hand, those primarily interested in ESG on the other, with parties that are more or less integrated between them. We want to enter into a dialogue with all these parties, and that is reflected in how our report is structured. Is it aesthetically perfect? No. Does that overly concern me? No. It is not that we do not want to integrate any further. It is just that doing so would make the report almost too difficult to interpret, not least because the standards are still so far apart. But give it a few more years and the standards will be integrated to the extent that we can also provide a fully integrated report. Five years would be a good target. This might be feasible for us, for the large group of companies ten years will be more realistic."
Why did Vopak choose to base its report on the TCFD guidelines, and what are your ambitions in this area?
"The most important argument for me is that TCFD takes an inclusive approach: we would like you to consider these issues and formulate an opinion on them that you can clearly explain. This makes companies much more willing to embrace the guidelines than if you were very strict and selective from the start. I think the opening they have created through this approach is very realistic. They have done that very well, smartly and constructively."
Non-financial information still tends to be somewhat less reliable than financial information. That is because the systems and data needed for this have not quite reached maturity. How does Vopak stand in that area, and what are you planning to do to take it a step further?
"Basically, we use the same internal reporting process for our non-financial information as for the financial information. Our external auditor prepares a review report on our sustainability data that gives limited but in our opinion sufficient assurances. More would not serve any useful purpose as far as I am concerned, and this is not the time to give discussions about compliance the upper hand. This is the only way to continue to move ahead and give sufficient direction."
When an opinion has limited assurances, the auditor does look closely at the reliability aspect.
"Yes, the reliability of the process. And to be perfectly honest, I think that is enough. We are confident that we can rely on the data to the extent that we can use it to manage our operations and our other objectives. It is true that we have a different level of assurance than with our financial data, but I can't see what is to be gained by us or our stakeholders if we increase assurance. One of the reasons for this is again the limited maturity of the standards. I also have to take care that this discussion, which is all about quality and an area in which we can make great progress for our company, our stakeholders and society, does not end up losing its practical value. That sometimes happens in financial reports. The quarterly figures, for example, show that all sorts of details can be interpreted differently, whilst at the same time we are held accountable for managing the long-term. If we are limiting the debate about sustainability to compliance, I am afraid it will end up being squeezed into a corner where it is no longer effective."
"If we are limiting the debate about sustainability to compliance, I am afraid it will end up being squeezed into a corner where it is no longer effective."
Unfortunately that is something we see happening now. Important stakeholders such as rating agencies, for example, want more assurance on both the processes and the underlying data for non-financial reporting. And in the current round of consultations on the harmonisation of ESG reporting standards by the World Economic Forum and the International Business Council, we are being explicitly asked whether we should move towards full assurance.
"I think that would be counterproductive. I prefer to concentrate on content and the question of where a company wants to go. Reports on the actual results and plans must of course be of sufficient quality, but that is what all a company's robust internal checks and balances are there for. My concern is that if you start enforcing this externally with an intensive compliance check, you end up concluding that it has been verified that the data is correct. That is all well and good, but I think we can already achieve what we want to achieve with that data. As a company, I would much rather have a dialogue about this with the aim of creating value."
The AFM recently questioned the reliability and accessibility of information on sustainability. Do you support that?
"It goes without saying that a report must be accessible, transparent and reliable. The requirements set in that regard must be proportional and functional. The way I see it, it is perfectly all right for the result to be a report that is open to questions being asked: How do you interpret the results and what connections do you make? Which figures do you have the most confidence in, what is difficult to measure, and which calculation models did you use? Why do you think the one is more important than the other? This requires such a high level of dialogue and expertise that it is no easy task to make it more transparent. I believe sustainability is first and foremost a subject for dialogue. If you don't have that dialogue and manage by data alone, you miss the opportunity to put in place an effective global sustainability agenda. This is a complex issue, something that can't only be viewed ideologically and dogmatically: it is not something that you can force and set strict deadlines for. You have to maintain the dialogue. What's more: if we focus too much on data we end up being swamped by discussions about liability, and nobody dares to do anything at all. That way you end up with an auditor's report containing so many disclaimers that the data may be open to interpretation, but the report is totally unreadable. The AFM can play a very positive role in this, as can other regulators and governments worldwide. The UN does this very well and is a good link between agencies. But the most important role lies with the companies themselves and with society as a whole."
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