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Transforming Sustainability into Growth Opportunities
Note:The following dialogue was held on May, 2023.
The fourth meeting of the NEC Sustainability Advisory Committee, newly established in fiscal year ended March 31, 2022, was held under the theme of "Transforming Sustainability into Growth Opportunities”. The session was attended by CFO Fujikawa and four other agenda leaders from growth businesses in the Mid-Term Management Plan 2025. Outside sustainability experts provided feedback on NEC's initiatives, as well as suggestions from various perspectives on points to be aware of for transforming sustainability into growth opportunities.
Positioning of Sustainability in the Mid-Term Management Plan 2025
Fujikawa Until now, the positioning of sustainability in the Mid-Term Management Plan 2025 has been primarily an initiative to contribute to the reduction of risk in the cost of capital, according to the formula for calculating corporate value (see figure below). However, if we aim to increase our corporate value, we believe it is necessary to communicate more clearly our intention to view sustainability as an opportunity to accelerate business growth. Therefore, we have positioned the social and environmental themes that the growth businesses in the Mid-Term Management Plan 2025 aim to resolve as " Growth Materiality”. We have designated the past materiality as "Fundamental Materiality," and we would like to track the status of both approaches and show the results, which will lead to the improvement of corporate value and the growth of our business.
Sustainability as the Fifth Axis of Competition
Pedersen I appreciate the direction of management, to not only position sustainability as a risk-centered, management-oriented issue, but also to strengthen its integration with business strategy.
However, the world is changing rapidly. It is necessary to understand social issues not only in terms of efforts to enrich people's lives, such as the development of telecommunication infrastructure, but also in terms of social and environmental constraints that can be expected in the future. Therefore, the major premise of future corporate strategy will be to maximize both corporate value and social value. In this context, the meaning of innovation will be qualitatively transformed. In other words, innovation must be based on the social context to be sustainable. To build a strong brand, it is required to demonstrate not only QCD (performance excellence) but also social excellence (social excellence).
In addition to the traditional four axes of competitive advantage - self-improvement, market share, price, and quality - a fifth axis of competitiveness is emerging: sustainability and innovation. The most important issue is how NEC can strengthen its competitive axis through its business.
Arai Sustainability is becoming increasingly important as a concern for diverse stakeholders. If a company is not valuable to society, investors and customers will not accept them. The prevailing view of the role of business in society is changing.
Stricter requirements for non-financial information disclosure in response to the evolution of ESG investment
Arai Investing in companies leading the way in environmental, social, and governance aspects was just the outset of sustainable investment. Still, nowadays, investors, are expected to measure the results of companies’ endeavors correctly. Therefore, investors require companies to disclose non-financial information as accurately as financial information. In addition, non-financial information shows how financial information is produced as a result of company's actions. Investors are looking at the extent to which non-financial factors turn into financial data and whether the disclosure confirms this connection. After watching NEC’s ESG briefing video I felt that NEC was taking this seriously. The issue for future reporting will be demonstrating this linkage more clearly.
Pedersen We believe that the idea of dividing into financial and non-financial is old-fashioned. Value cannot be created unless strategy, innovation, and marketing are integrated.
The reason why we need to act consciously multi-stakeholder
Nagai The EU has decided that sustainability reporting, which includes environmental, human rights, and social issues, must be reported accurately, and the pressure for information disclosure is increasing. In Europe, legislation has been passed to mandate not only information disclosure but also risk reduction efforts. Companies must control the area of high risk based on understanding what kind of environmental and human rights impacts exist from upstream to downstream in the value chain.
The reason this has emerged is that the EU's sustainability legislation is multi-stakeholder in nature. The single stakeholder approach was to just look at investors and shareholders, but the concept of capitalism has shifted.
How to Make Sustainability Opportunities for Growth
Nagai While the world is changing fast, I hope that instead of creating business opportunities as an extension of the past, we will go back to the question of how many social and environmental issues there are in the world that need to be solved, and what kind of things we can do to address them.
If we think that we can get closer to solving social issues by making a few more changes to what we are doing now, we will not be able to fully grasp the opportunities. By deepening our understanding of what specific social and environmental issues we are facing, we will be able to find a direction for our business that can make a greater contribution to society.
Yoshizaki As the person in charge of products and services at NEC, I am promoting initiatives to achieve carbon neutrality, including the operation of data centers that are 100% powered by renewable energy. I felt that the addition of an ESG perspective to these activities would further increase opportunities and lead to business growth. We can accelerate the process by sending out messages both internally and externally. When we are sending out messages, we would like to clarify the target time frame and common indicators that NEC is aiming for.
Pedersen Backcasting the megatrends from 2030 to 2050, there are innovation drivers, regulations, and changing values, where new fields of value are to be found. At the same time, there are directions in which NEC's existing portfolio and strengths will evolve. Sustainability is the spice of a new value field that exists where these backcasts and forecasting overlap. To make sustainability opportunities for growth, we need to deepen such discussions.
Fujikawa In response to the comments that our financial and non-financial activities are not linked, we would like to present the social value clearly, which is created by the growth business in the Mid-term Management Plan 2025. Moreover, we would like to show that our business strategy and sustainability strategy are not separate, and we believe that we can create value for society through the successful achievement of our business plan.
However, efforts to address this issue have only just begun. For example, in terms of “Fundamental Materiality”, we have begun analyzing how investment in human capital results in corporate value, but it has yet to fully confirm the linkage with financial indicators.
Again, as CFO, I would like to work on each element of the corporate value calculation formula in an integrated manner from the viewpoint of sustainability, to achieve the enhancement of corporate value. I believe that this will lead to the "realizing a sustainable society where everyone has the chance to reach their full potential" as stated in NEC Purpose.