Nowhere to hide in the sustainability landscape
Jessica Robinson looks at evolving attitudes around sustainability, and what responsible investors are looking for when they weigh up their options
Over the last five years or so, the momentum around sustainable business has been building steadily around the world. The world faces some pretty big and challenging issues. Our air is polluted, so is our water, our natural resources are rapidly depleting, and our biodiversity is under threat. At the same time, about one in five people in the developing world live below the extreme poverty line.
The UN’s Sustainable Development Goals – a collection of 17 interlinked global goals designed to be a “blueprint to achieve a better and more sustainable future for all by 2030” are the closest thing we have to a global strategy for the future. They look at everything from climate change to gender and racial inequality. The Paris Agreement on climate change also gave us a global carbon budget, and we are seeing widespread climate commitments being made by corporations and small businesses alike to help reach this. At the end of last year, COP26 pulled together some significant private sector commitments, particularly around driving trillions of dollars towards climate solutions.
The momentum is clear. It is increasingly unlikely that companies not aligned with these global initiatives will be successful in the future. Changes in consumer behaviour are also helping to drive this. Consumers increasingly make choices on which brands to support and what products to buy based on the company’s sustainability credentials. Sustainability is also becoming key to attracting talent – nearly half of people would accept a pay cut to work for a company that’s environmentally responsible.
Shifting investment landscape
The global policy agenda is shaping the business world, but it is also changing the investment world – changing what many investors are looking for when deciding where to invest their money. This is a fairly recent change. Even five years ago, the mainstream investment community was largely disengaged from discussions about sustainable investing. Investors would decide which companies to invest their money in based on the potential to reap financial returns in the future.
But this is shifting dramatically. Big names in the investment industry are getting more vocal about sustainable investing. Perhaps a pivotal moment happened in early 2020, when Larry Fink in his annual letter famously stated that Blackrock would put sustainability at the centre of its investment strategy. With all this momentum underway, investors are strengthening their ESG commitments and have begun to look beyond financial returns.
Most big investors also now believe sustainable investing is good risk management and leverage the practice to help manage risk in uncertain times. 2020 was somewhat of a game changer in this regard. When the Covid-19 pandemic hit many people feared the worse for sustainable investing’s trajectory, as governments, regulators and investors switched attention to short term recovery measures. But sustainable investments actually outperformed non-sustainable investments. It turns out that companies that manage sustainability risks better, manage other risks better as well. The buzz around sustainable investing has therefore only grown louder. Sustainable investing is no longer seen as a nice-to-have. Investors are now seeking to use their power to change corporate behaviour.
This is also being driven by new regulations. The European Union is leading the charge, with its Sustainable Finance Action Plan a sea change for investors. This includes new requirements to disclose the sustainability credentials of funds, and regulations aimed at boosting transparency. Other countries around the world are watching closely on its success and are likely to follow suit in the months and years to come. As a result, a company’s sustainability credentials are becoming increasingly key to its ability to attract and retain investors.
Meeting investors’ criteria for sustainability
Sustainable investing isn’t just about avoiding investing in companies that do harm. A new class of investors are actively seeking out companies that address daunting social and environmental challenges. These companies fall into a wide range of industries and sectors – ranging from food to transportation, from healthcare to education.
Investors are prioritising the issues they care about and translating their priorities into sustainable investment beliefs. These are the guiding principles that spell out what they want to achieve with their investments and which companies they decide to invest in.
Sustainable investing is not philanthropy or charity. Sustainable investors are still looking for financial returns, but they seek other impacts at the same time. For the environment, for instance, an investor may look at what impact a company has on the resources that sustain it. They may look at the company’s contribution to climate change – say, GHG emissions. Or the investor may seek out companies looking to solve the climate challenge – such as clean energy or climate tech companies.
On the social aspect, investors are increasingly thinking about how companies translate their role in society – for example, how a company treats its suppliers or the local communities it operates in. A sustainable investor would be concerned about labour standards and illegal child labour. A sustainable investor would also care about issues like diversity. The Black Lives Matter movement is bringing into sharper focus the lack of meaningful progress on racial equality and progressive investors are considering what action they can take.
We have also seen the growth and traction of gender-lens investing – an approach that integrates gender-based factors into investment strategy, process and analysis, in order to deliver positive benefits to women and girls.
Businesses need to address all these sustainability factors within their business, assess where they need to improve and clearly communicate how they are going to do this and by when. Investors are taking note when companies aren’t doing this and are increasingly willing to force companies to take action. For instance, there’s been huge push back against high-carbon companies, especially Big Oil. Last year, a number of global fossil fuel giants suffered embarrassing rebukes over their lack of climate change action, with investors pressuring them to reduce their carbon dioxide emissions quickly. And greenwashing won’t cut it. Sustainable investors do their research, check against third-party sources and increasingly undertake thorough due diligence.
About the author
Jessica Robinson is a leading expert on sustainable finance and responsible investing, and author of ‘Financial Feminism: A Woman’s Guide to Investing for a Sustainable Future’.
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