Five reasons why sustainability improves the bottom line
Sustainability issues have long been regarded as an afterthought, or as a ancillary plugin tacked onto a wider business model. Approaching sustainability with such a mindset is a recipe for disaster, as sustainability has become a core requirement in all aspects of business planning. By focusing on sustainable business models, firms are able to mitigate a host of risk factors. This reduced risk profile in turn translates into easier access to capital, as sustainable investment portfolios have rapidly become must haves for both private and public sector investors.
Sustainability can be a daunting concept, especially for legacy firms: it is easy to get wrong, and its benefits are often not immediately apparent. Lauren Turner, research and outreach coordinator at Canadian Business Ethics Research Network (CBERN) highlights this conundrum.
“The price of sustainability sends managers spinning when they are faced with the up-front capital expenses and slow pay-back period for retrofits, consultants, bench-marking, GHG reductions, and certifications. What they forget is that there are monetary benefits recouped along the way; reduced difficulty in securing debt financing, improved ability to issue equity, increased trust from key stakeholders, government rebates, and many others.
This is in addition to the long-term energy savings and general cost reductions that sustainable firms enjoy for many years after initial investments are made. Though it may seem counter-intuitive, the numbers definitively show that it pays to be sustainable, and that it will cost more in the long-run if firms ignore trends and refuse to change.”
Businesses employing sustainable practices are linked to superior stakeholder engagement, as a focus on transparency leads companies to better report their aims and strategies to stakeholders, thus reducing informational asymmetry. Increased confidence among stakeholders and customers in turn insulates sustainable companies from social, environmental, political and other risk factors.
This is especially important given the rise of ecologically and socially responsible consumption habits. Companies which have not made sustainability a core consideration in their business strategy are at risk from consumer backlash, as well as unable to access the growing sustainable investment sector. Brendan May of Weber Shandwick Worldwide noted back in 2007 that “for an investment industry whose main currency is risk, social and environmental short-term abuse no longer adds up to an attractive investment opportunity.”
By coupling basic assessment measures with sustainability related concepts, investors now have a new perspective with which to assess companies along five traditional considerations:
- Product /Service Offering: Are the company’s products / services sustainably sourced and produced via sustainable business practices?
- Financial Track Record: Have all of the firm’s business sustainability risks been taken into consideration in past and future reporting?
- Competitive Differentiation: Is the company an industry leader or laggard when it comes to sustainable practices?
- Strategy: Are sustainability concepts fully integrated throughout the company’s business plans or just a subset of traditional planning?
- Credibility: Does the company’s reputation inspire consumer awareness and does it drive consumer behavior towards specific products or services?
The sustainable investment boom
Companies must perform well when confront with these questions if they hope to access the rapidly growing sustainable investment sector. As of 2015 one in every six dollars under professional management in the U.S is now part of a responsible investment strategy. Indeed, between 2005 and 2012 socially responsible investment (SRI) assets grew by 34% as opposed to 3% for other professionally managed assets. Part of this growth has been the rapid expansion of green and climate aligned bonds, with the global green bond market growing from $11 billion in 2013 to $118 billion in 2016.
In total the global climate-aligned bond market now stands at $694 billion. New standards for climate bonds have clarified issuer requirements and reporting models to ensure the green credentials of climate bonds, thus facilitating growth. Another benefit is that green bonds are quickly oversubscribed, resulting in faster access to capital. Green bonds also firmly move sustainability into the CFO’s realm, thereby raising awareness and further tying sustainability to the company’s financial considerations. Another development that companies need to be aware of is the growing number offinancial institutions which are becoming signatories to agreements like the Carbon Principles and Equator Principles. These financial institutions in turn will be pulling out of loan syndicates or charging higher interest rates on loans for risky firms that are not implementing sustainable practices.
What is important to note is that green bonds are moving out of their traditional homes in development banks and sovereign wealth funds, and into the private sector. Indeed Unilever’s $389 billion green bond made international headlines, with the company seeking to use the monies to produce more efficient factories. Sustainability is not an alternative or ancillary approach – it is now firmly entrenched in the mainstream. This trend is highlighted by the fact that 1,500 signatories with a combined asset pool of $60 trillion have signed on to the Principles for Responsible Investment (PRI). By way of comparison total global GDP for 2016 is calculated at $75.2 trillion.
Other initiatives include the Montreal Pledge, which calls for signatories to measure and report the carbon footprints of the listed equity in their portfolios. As of 2015 the Montreal Pledge has attracted signatories with a combined $10 trillion in managed assets. Similarly, the Portfolio Decarbonization Coalition is pushing for diversification away and divestment from carbon intensive investments: signatories with $100 billion under management have pledged their support as of 2015.
Sustainable business practices reap concrete benefits, notably the easier access to capital, further poking holes in tired Manichean arguments that growth and social and environmental concerns are adversaries, instead of partners.