Growing Momentum
The momentum is building as Greta Thunberg’s recent speech at the United Nations demonstrated, that climate change and sustainability now lead global agendas – from a political, corporate, and increasingly, personal perspective.
Indeed, terms like climate change itself, as well as sustainability and ESG (Environment, Social and Governance) issues are ubiquitous in boardrooms, newsrooms and debating chambers alike, where just a few years ago they would have been fringe concerns.
In 2015, 195 countries committed to keeping the rise in world temperatures below two degrees Celsius for the first time ever in the breakthrough COP21 Paris Agreement. When it came into force a year later in November 2016, that commitment seemed like a far-away decarbonisation project, with plenty of time to tackle it further down the line, but time is running out to fully implement its intentions.
The view today is very different.
Media coverage, especially over the past year, has led to climate change and its potentially catastrophic implications. Demand for action on climate change, sustainability and ESG is higher than it has ever been, and is growing at a rapid rate. And a company’s environmental performance – that is, the ‘E’ in the ESG principles – is now a key factor in the decisions made by consumers and investors, as well as employees.
Corporations and financial institutions are increasingly expected to have an overriding sustainability strategy that includes sound environmental practices, as well as specifying their progress towards producing sustainable products. In fact, a May 2019 KPMG survey of 1,300 CEOs globally found climate change and its implications are considered to be both the greatest concern, and the greatest risk to their business.
So what changed?
A new consumer revolution
In part, it is the public consciousness that has changed. In a shift that built fairly gradually but manifested suddenly, consumers have begun scrutinising the sustainability credentials of the brands they buy and use.
According to a Unilever study (January 2017), one in three consumers are basing their purchasing choices on the social and environmental impact of brands.
But that study also suggests that the trend for purpose-led purchasing is greater among consumers in emerging economies than in developed markets. For example, 53% of shoppers in the UK and 78% in the US feel better when they buy products that are sustainably produced. This number rises to 85% for shoppers in Brazil and Turkey, and up to 88 %in India.
The personal becomes political
But it goes further than interrogating the brands – the traditional mediators in passing on sustainable practices to all sides, from consumers through supply chain and manufacture – to the behaviours of those consumers in daily life. Another UK/US consumer survey by Futerra found that 96% of people feel their own actions – such as donating, recycling or buying ethically, ”can make a real difference in the world”.
Meanwhile, and perhaps most startling, more than half of consumers believe that they can make a big difference personally.
But it also revealed an overwhelming demand, consumer-side, for brands to step up on sustainable lifestyles. 88 % of the respondents said they’d like help from their brands to improve their environmental and social footprint. Perhaps more immediately concerning for brands, 43 % claimed companies are actually making it harder for them to be environmentally friendly in their daily life.
Forward-looking brands are beginning to respond, not just with policies in small-print or bits and pieces of corporate social responsibility (CSR), but with companywide change. As mentioned, high street fashion brand Zara announced recently that 100 % of its products will be made from sustainable materials by 2025.
In this, sustainability isn’t just a nice-to-have, but a defining feature of the business.
Changing forces in the investment landscape
This shift is mirrored by a huge global growth in sustainable investing assets
At the recent launch of an industry-wide consultation on sustainability and responsible investment by the Investment Association – the UK’s trade body representing asset managers – CEO Chris Cummings saw the asset management industry “at a critical juncture in embracing sustainability as a defining feature of the investment landscape”.
The numbers bear out Cummings’ observations, with evidence from the 2018 Global Sustainable Investment Review suggesting that sustainable investing now constitutes a major force across global financial markets.[2]
At the start of 2018, sustainable investing assets in the five major markets stood at $30.7 trillion, a 34 % increase on the 2016 figure.[3] Sustainable investment now commands a sizable share of professionally managed assets in each region. Europe, the US and Japan top the rankings based on the value of their sustainable investing assets totalling $28 billion with Europe leading the way.[3]
In Europe, total assets committed to sustainable and responsible investment strategies grew by 11 % between 2016 and 2018, reaching €12.3 trillion ($14.1 trillion). This increasing demand is also highlighted by the growing issuance of green and social bonds globally: there is now more than $600 billion in issues outstanding.
In 2019 so far, $173 billion in green bonds have been issued up to 30 September, with the expectation that over $250 billion will be issued by the end of 2019. As a result, over $1 trillion Green bonds are now outstanding globally.
But this isn’t just a story about changes among larger corporates and financial institutions. Investors are also recognising the potential for start-ups to generate positive social and environmental impact alongside financial returns. The so-called ‘impact investing’ segment might be small, but it is vibrant, and more importantly, growing quickly. Its value is expected to pass $300 billion globally by 2020 – with over half of that coming from Europe – and to grow at an annual rate of 17.3 %.
The rise of sustainability performance metrics
The research and data show how climate change will continue to impact our daily lives. But since it will also impact the performance of our investments and savings, comprehensive climate rating systems are likely to grow in use and popularity.
One current example is Climetrics by CDP. Climetrics is an investment fund-rating scheme that delivers an independent climate impact analysis of investment funds. This enables investors to compare the climate-related performance of asset managers, while providing asset managers with a climate rating to highlight their climate-related focus or strategy. But by no means is this the only one – a new industry is evolving grappling the complexity of measuring and combining climate-metrics with broader social and governance factors.
While pressure is rising, so are opportunities
A new breed of business is emerging that recognises these new priorities. They understand that the transformation to a sustainable economy is a unique, if not unprecedented opportunity to innovate and create new solutions for a market of gigantic size.
Rather than ‘tackling’ climate change issues, and treating it as a challenge or a risk as many traditional businesses have tended to, these early movers are proactively embracing the historic chance to benefit from the creation of new markets and products.
This allows for much easier selling compared to the effort of launching a product in a mature market because some of the high-entry barriers have eroded.
A steadily growing number of green and clean-tech start-ups are now focusing on building a profitable company, while simultaneously helping to solve environmental problems. Often supported through publicly and privately funded accelerator programmes, these green enterprises – often with flatter organisational structures and quicker turnaround times – are also able to create shortcuts with their innovations.
Given the speed of the ESG evolution, this agility is crucial. It not only helps these early movers to take advantage of the climate-related opportunities; agility also lets them capture and build profile quickly in the minds of consumers or asset owners.
Size still matters in terms of influence
We underestimate the willpower – and the firepower – of well-established corporations and financial institutions at our peril. The move to change their business models and strategies to include sustainability throughout is significant. And in the beginning at least, it’s chiefly their widespread products, and the changes and innovations they make to them, that will enable customers, employees and suppliers to make the most difference the quickest, ultimately reducing greenhouse gas emissions and the carbon footprint.
Financial institutions are a very good example of this shift to incorporating sustainability – within the full spectrum of ESG – into their business models. As they re-align lending policies, enhance their data collection and encourage supply chains to follow suit, they are changing business models while keeping climate change and social concerns front and centre.
As Mark Carney said during his Mansion House address in June 2019, “Firms that align their business models to the transition to a carbon-neutral world will be rewarded handsomely; those that fail to adapt will cease to exist.”
And indeed, the rewards look handsome. Research shows that adopting a greener agenda can not only boost sales, but can bring broader financial and non-financial returns too. A recent Hermes study found that companies with the weakest ESG credentials tend to trade with the widest credit default swap spreads. This is an indicator that a corporate focus on ESG reduces a firm’s risk, and therefore its cost of debt capital. Meanwhile, another survey covering 2013-2017 showed that green bond issuance can lead to share-price outperformance. It also reported an improved return on assets and ESG metric outperformance – attracting more long-term investors.[4]
Is sustainability an indicator of corporate strength?
It does seem as though there is a correlation between sustainability and better performance across the board, too.
As more plentiful data becomes readily available, equity investors are suddenly able to track and highlight enhanced returns from investments in ESG-focused companies in ways they often weren’t before. And that data is revealing some surprises.
Using back-tested returns, BlackRock’s research showed that ESG-focused indices consistently either matched or exceeded the returns made by their standard counterparts, amid comparable volatility.[5] Furthermore, ESG portfolios were also more resilient in market downturns, partly because of the greater vigour associated with their sustainable strategies
And empirical evidence shows that organisations that are thoughtful when making strategic decisions (whether that’s concerning their products, employees or customers) increase their financial returns.
These correlations are especially strong in the current environment, amid the sea-change that has seen long-term effects starting to be considered and valued versus short-term financial gains.
A company’s success will be measured by its ability to react quickly to the ever-changing technology and consumer needs. But alongside this, to satisfy investors and customers alike, it needs to take into consideration the long-term implications of its own decisions.
And to become future-proof in this way, it means incorporating an environmental and social lens, alongside strong governance.
This new world is still evolving. Many of the sustainable economy rules, its ecosystems and key players are still to be defined. But it’s already clear – in the attitudes of the public and investors alike – that the time for waiting to see is over.
