Kids skipping school may not be able to change the world, but the climate-change school strikes started by Swedish teenager Greta Thunberg in November 2018 show how the sustainability debate is heating up. By the end of May this year, student protests had affected 131 countries, and politicians worldwide have been snapping selfies with the young activists.
It’s not just kids. Everyone’s expectations are changing: 62% of 30,000 consumers in 35 countries surveyed by Accenture in late 2018 want companies to take a stand on issues such as sustainability, transparency and fair employment practices. Today, 90% of CEOs state that sustainability is important to their company’s success, according to the University of Michigan’s Erb Institute.
Companies, investors and banks are committing to sustainability.
In May, German auto manufacturer Mercedes-Benz made a promise to go carbon neutral by 2039—no mean feat for an auto maker. From 2012 to October 2018, assets managed in accordance with environmental, social and governance (ESG) principles increased 60%, to reach $1.05 trillion, according to Morningstar.
“Momentum is building,” says Eoin Murray, head of investment at London-based Hermes Investment Management, which has $44.4 billion of assets under management. “It’s not a fad.”
Sustainability isn’t just about climate change, which is clearly a bottom-line risk factor. Sustainability includes ethical governance, recruiting from the full talent pool and respecting the community that provides customers, suppliers and employees. How are companies, banks and investors responding to this cultural shift?
ESG criteria are becoming standard in credit analysis: Standard & Poor’s, Moody’s and Fitch Ratings now include ESG factors in their rating decisions. And Morningstar says the number of funds adding ESG criteria is “exploding”: 73 included such criteria in the first quarter of 2019, compared to 51 in the whole of 2018.
Last year, BlackRock CEO Laurence D. Fink said he expects “every company” in which his firm invests to “show how it makes a positive contribution to society”—effectively aligning the world’s largest investor with sustainability.
Some firms are putting their money where their mouth is: Legal & General, one of Europe’s largest asset managers, with $1.3 trillion under management, voted against the election of 3,000 directors globally in 2018, for example.
What’s driving change? There are two commercial imperatives. First, millennials are nearly twice as likely to invest in funds focused on social or environmental outcomes, according to a Morgan Stanley report. Investment firms want to capture these new investors. Second, investments in ESG-focused companies outperform because they have a lower cost of capital and a superior risk profile, according to MSCI.
A report from the Network for Greening the Financial System (NGFS), a 36-member group of central banks, makes it clear that climate change is an existential issue for financial institutions.
Last year, Standard Chartered also decided to stop financing new coal-fired power plants because of the climate crisis.
“It was not an easy choice,” says Daniel Hanna, head of Sustainable Finance at Standard Chartered in London. “For some people, the choice is using coal or no power.”
To help fix this problem, the bank set up a new sustainable finance team in October 2018. It is promoting solutions like blended finance, which mixes development finance with commercial capital. Standard Chartered has facilitated $5 billion over the past three years, but Hanna believes the sector will grow much larger.
Hanna is equally ambitious about the potential for capital markets innovation. He describes the $172 billion-plus green bond market as just a first step. If consumers are focusing on sustainability, and regulators are encouraging it, then smart companies will clearly look to improve their sustainability performance.
Beyond sustainability, some companies are already moving to the next level: circularity. The circular economy model is as straightforward as it sounds: Products are designed and manufactured in order to maximize economic value through reuse or recycling.
The economic benefits could be huge. A 2014 report for the World Economic Forum by the Ellen MacArthur Foundation and McKinsey says that circular manufacturing “could yield net materials cost savings of up to $630 billion per annum in the EU alone.”
The US is due to exit the Paris Agreement on climate change next year, dealing it a blow. But the EU and China are pressing ahead with the Sustainable Development Goals of the United Nations and driving regulatory change to spur investors, banks and companies to innovate and reconsider their business models.
Many entities, including in the US, are responding with gusto. Sustainability—in its broad environmental, social and economic sense—has unstoppable momentum. Certainly, some firms are guilty of “greenwashing.” They want to be seen as doing the right thing, but without really changing.
But the simple fact that sustainability is increasingly making the headlines—not just in eco-focused Europe, but also in the US and in fast-growing emerging market countries such as China and India—indicates that change is afoot. It may be that recent extreme weather events have shifted the threat from a future possibility to a present-day reality for corporate strategiests and consumers alike.
The more clients care about sustainability, the more service providers will explore sustainable opportunities; a virtuous circle has already begun.
Source Global Finance