AMDP Proposal: Neste Corporation

TO: Clark Hansen, CEO, Anima Mundi Development Partners

FROM: Ryan Traynor, Investment Manager R&D

DATE: October 18^th, 2019

SUBJECT: Neste Corporation Investment Opportunity

You asked me to recommend a business or social enterprise that is committing to corporate social responsibility, supporting the principles of the triple bottom line, reducing their carbon footprint, and developing social enterprise. After my extensive research, I recommend the Neste Corporation, from Espoo, Finland. It produces, refines, and markets oil products, offers engineering services, and operates internationally. In this memo, you will find:

• The Anima Mundi Development Partners Investment Guidelines
• A General Overview of the Core Values and Background of Neste
• Appraisals of the Future of Neste Corporation from Industry Sources
• My Personal Recommendation for Investing in Neste Corporation

The AMDP Investment Guidelines

Before evaluating Neste Corporation’s investment potential, let’s go over the values that AMDP looks for in potential investment partners:

·      Triple Bottom Line (TBL)

o   In the past, business leaders were only concerned with one bottom line: their profits. But in today’s evolving world, we must expand “the traditional accounting framework to include two other performance areas: the social and environmental impacts of a company. These three bottom lines are often referred to as the three P’s: people, planet, and profit.” (University of Wisconsin 1) This framework establishes a groundwork so that businesses can begin to develop positive interactions with their staff, their publics, and the environment.

·      Corporate Social Responsibility (CSR)

o   CSR guidelines exist to “hold a company socially accountable—to itself, its stakeholders, and the public” (Chen 1) This principle makes companies responsible for the impact that their actions have on their surrounding communities, whether they bring good or bad consequences.

·      Social Enterprise

o   The Social Enterprise Alliance defines a Social Enterprise as: “an organization that addresses an unmet need or solves a social or environmental problem through a market driven approach”. (What is a Social Enterprise? 1) This type of organization centers its business model around an important social issue.

·      Carbon Footprint

o   This is defined as “the amount of greenhouse gases and specifically carbon dioxide emitted by something (such as a person's activities or a product's manufacture and transport) during a given period” (Merriam-Webster 1) This carbon dioxide is primarily released through the burning of fossil fuels.

General Overview of Neste Corporation 

Background

Neste is an oil and gas company that was founded in 1948 as the state petrol company of Finland to develop refined fuels. They operate in 14 countries and employ over 5,000 people, currently leading the market in renewable diesel production (Marketline Profile). It wasn’t always at the top of the sustainable fuel industry however, and it took a considerable amount of effort for them to make it there: “Until very recently it was a fossil fuel company refining oil to be burned and creating greenhouse gas emissions in the process, says Heaps. But the firm shifted, and now more than 50% of Neste’s investments are into the development of products like renewable biofuels. As it stands, 25% of the company’s revenue comes from biofuel refining, and it’s aiming to increase that figure in the coming years.” (Strauss 3) This remarkable transition in such a short period of time shows the incredible potential that Neste has to further develop over the coming years and corner the international sustainable fuel market. “Neste’s biofuel business represents 50% of its profits, says Heaps. ‘So, they’re earning a higher margin on their biofuels business—even though it’s only a quarter of their revenue, it’s half their profits. Neste shareholders aren’t bemoaning the company’s shift, as share prices have risen 300% in the past five years” (Strauss 3) Clearly, their new approach of shifting their target demographics and corporate image to a sustainable model is working marvelously, as indicated by the 300% increase in stock price. Although only 25% of their revenue comes from developing biofuel, it represents 50% of their profits, showing that their continued expansion into this market and away from their non-sustainable fuel development will only result in further growth of the company. 

Core Values

Sustainability is at the heart of Neste’s business model, making Neste a Social Enterprise focused on filling the demand for eco-friendly oil products. Seeing the lack of sustainable fuel products available and understanding that their CSR makes them responsible for the carbon emissions of the products that they sell, Neste invested heavily in developing alternative biofuels and sustainable oil product development in order to make a positive impact. Their central claim is that: “Everything we do at Neste serves one purpose: to create a healthier planet for our children. Over the past ten years, Neste has transformed from a regional oil refining company into a global leader in renewable fuels and one of the most sustainable companies in the world. Our purpose pushes us forward to search for new ways to reduce the amount of carbon released into the atmosphere, and to innovate circular solutions to reuse carbon again and again. Our aim is to become a global leader in renewable and circular solutions.” (“Creating a Healthier Planet for Our Children” 1) This focus on filling the gap in renewability and circular solutions leads Neste to become an innovator on ways to reduce and reuse waste as well: “Our goal is to do more with less. That is why we continuously are searching for new renewable raw materials, such as waste and residues.” (“Sustainability” 1) This commitment to the environment and the company’s various publics shows that Neste is committed to the principals of TBL. This approach has worked for Neste for the highly acclaimed Forbes business magazine ranked Neste #3 on its list of “The Most Sustainable Companies In 2019”: an annual list of the most sustainable companies from any industry worldwide. Their commitment to improving the earth for future generations is very unique in the oil and gas industry and has brought the company much praise.

Growth and Future

GlobalData’s SWOT analysis of Neste lists focused R&D Activities as one of the company’s main strengths citing a focus on “broadening of the product portfolio, renewable aviation fuel, low sulfur marine fuels, and new bio based plastics and chemicals” (GlobalData 24) They have a huge head start on the rest of the industry when it comes to research and development of new sustainable products. GlobalData points out that in 2017 Neste spent 44 million euros on R&D which is only 0.3% of its revenue yet managed to grow its total revenues by a whopping 7.3% from the previous year, which is the mark of a very successful R&D department. This focus on new product development will give them a significant edge when other corporations attempt to muscle into the renewable diesel market. The SWOT analysis lists Neste as the world’s largest producer of renewable diesel, stating: “Its share of the world’s total renewable diesel production capacity is approximately 60%” (GlobalData 24) This lead gives them a huge jumpstart on new competitors entering the industry. In the future, Neste intends to reduce its carbon footprint even further. The company’s website states that: “We also aim at managing and minimizing on the emissions from our production. In 2019, we set ourselves two new ambitious climate targets: To reduce our customers’ greenhouse gas emissions with its renewable and circular solutions by at least 20 million tons CO2eq annually by 2030, and to reduce the carbon footprint of Neste’s production ahead of EU’s climate and energy targets” (Neste Impact 1) These very ambitious goals show that Neste is not afraid to make these sorts of promises, and continually delivers year after year. Neste’s promises of reducing carbon emissions aren’t mandatory requirements by the government, and their ambitious commitment to reducing their carbon footprint shows that the value of corporate social responsibility is deeply engrained into the company’s culture.

Recommendation

I understand that past negligence from other companies in the oil industry may make it hard to believe that an oil refinery could ever possibly practice sustainable business at all, much less become one of Forbes’ “Most Sustainable Companies in 2019”. But over the course of my research I have learned that Neste not only applies its rigorous sustainable values to its own operations but includes them in the products and services they provide and looks for the same values in the people they decide to partner with. As countries are beginning to recognize the importance of reducing greenhouse gas emissions and governmental regulations are becoming tighter within the industry, Neste doesn’t resist these changes and regulations like the other oil companies but rises to the challenge and exceeds expectations time after time. Neste has proven itself to be a Social Enterprise with a reduced carbon footprint with a strong commitment to TBL and CSR. For these reasons, I highly recommend investing in Neste. They are a household name in the sustainable business sector and have turned around their entire business model by shifting from a regional oil refinery to an international leader in pioneering renewable sources of fuel.

Works Cited

“Carbon Footprint.” Merriam-Webster Dictionary, Merriam-Webster, www.merriam-webster.com/dictionary/carbon%20footprint.

Chen, James. “Corporate Social Responsibility (CSR).” Investopedia, Investopedia, 12 Mar. 2019, www.investopedia.com/terms/c/corp-social-responsibility.asp.

 “Creating a Healthier Planet for Our Children.” Neste Worldwide, 6 Sept. 2019, www.neste.com/corporate-info/who-we-are/purpose.

 “MarketLine Company Profile: Neste Oyj.” Neste Oyj MarketLine Company Profile, July 2019, pp. 1–30. EBSCOhost, search.ebscohost.com/login.aspx?direct=true&db=bth&AN=138313718. 

Neste Corporation (NESTE) - Financial and Strategic SWOT Analysis Review. GlobalData plc, London, 2018. ProQuest, http://libproxy.usc.edu/login?url=https://search-proquest-com.libproxy2.usc.edu/docview/2214834336?accountid=14749. 

“Our Impact on the Climate.” Neste in North America, 28 May 2019, www.neste.us/about-neste/sustainability/climate-and-resource-efficiency/our-impact-climate.

“A Simple Explanation of the Triple Bottom Line: University of Wisconsin.” University of Wisconsin Sustainable Management Degree, 2019, sustain.wisconsin.edu/sustainability/triple-bottom-line/.

Strauss, Karsten. “The Most Sustainable Companies In 2019.” Forbes, Forbes Magazine, 22 Jan. 2019, www.forbes.com/sites/karstenstrauss/2019/01/22/the-most-sustainable-companies-in-2019/#394ddf0e6d7d.

“Sustainability.” Neste in North America, 6 Mar. 2019, www.neste.us/about-neste/sustainability.

“What Is a Social Enterprise?” Social Enterprise Alliance, 2019, https://socialenterprise.us/about/social-enterprise/.