Sustainability is an ethical and economic imperative
I have been talking to a number of business leaders recently about sustainable development. Apart from the fact that sustainability is nowadays on everbody’s lips, I can divide companies into (a) those that do not comply with the law, (b) those that comply with the legal minimum, (c) then come companies that try a bit more; and (d) companies that have integrated sustainable development into all pores of the business. In the end, we have a handful of pioneers who focus on their sustainable mission, setting an example for others. Simply put, there are reactive companies on one side and proactive ones on the other.
If you are wondering whether it’s worth investing in sustainable development, let me give you a few facts.
The Mega Report by Oxford University and Arabesque, which examines the economic performance of sustainability-oriented companies, has shown, based on more than 200 academic studies, books, articles and case studies, that ESG-oriented companies have demonstrated performance on the following economic parameters:
- in 90% of the cases studied, it resulted in a lower cost of capital,
- in 88% in a better economic performance,
- in 80% of the cases the price on the stock market increased.
There are some key mechanisms how an intelligent management of the social, environmental and governance aspects (hereafter ESG) can lead to a competitive advantage.
1) Risks are reduced
On the one hand, there are risks associated with a particular company, such as oil spills, financial fraud, or the use of toxic materials. So a company that is ESG oriented should never be in such a situation.
On the other hand, we have external costs that can directly affect production, supply chain disruption, etc. This is priceless natural capital (e.g. clean air, favorable weather, biodiversity). The company does not usually pay for this, but the costs can rise sharply when natural disasters occur.
2) Productivity improves
Sustainable development improves productivity through process and product innovation. Good examples of this are Walmart and Desso.
Walmart has long had a goal of getting renewable energy, becoming carbon neutral, and selling sustainable products. To that end, they have also implemented a sustainability index that they use to decide which suppliers to work with. This has saved them a few hundred million dollars in just one year.
Desso is a prime example of how a long-term sustainable strategy driven by innovation can lead to commercial success. Desso is a Dutch company that manufactures woven carpets. From its founding in 1930 until 1990, the company was very successful economically until it went through a very difficult time due to the decisions of new owners who started using unhealthy materials. Fortunately, in 2007 a new owner arrived and the new managing director, Stef Kranendijk, took over. He immediately realized that the development of a company had to be based on innovation and that sustainability could be a key differentiator in the eyes of architects and designers. Therefore, he set the goal of becoming the first company with a “Cradle to Cradle” certificate. This means that the goal was not just to reduce negative impact, but to leave a positive environmental footprint. They introduced healthy materials and decided to recycle products, both their own and those of competing companies. Although the investment was high, they have shown better economic performance in the medium and long term.
3) Reputation increases
A better reputation for the company attracts many stakeholders – customers, investors and, most importantly, employees. The latter are an important source of a company’s success. Finance professor Alex Edmans from London Business School has shown in a study that companies with happier employees are more successful financially.
4) Investor interest is on the rise
Socially responsible investing, which got its start in the 1980s, wore the badge of ethical sacrifice. Now, investing in sustainable assets is emerging as a new megatrend. The latest Global Sustainable Investment Review 2020 report shows that the value of sustainable investments has increased by 50% from 2016 to 2020, accounting for more than a third of total sustainable investments essets under management. However, the growth in value varies across continents. In Europe, it has declined, but only due to stricter rules and definitions of what sustainable means.
Source: Global sustainable investment review, 2020
* Note: In Europe and Australasia, the definition of what means sustainable investment has changed.
Investment in sustainable assets continues to grow in most regions. The largest increases over the past two years have been in Canada (+48%), followed by the US (+42%), Japan (+34%) and Australia (+25%). In Europe, investment in sustainable assets fell by 13% between 2018 and 2020, due to revised definitions of such assets already enshrined in European legislation.
So we have evidence that sustainable companies are more profitable and more attractive to investors. I do not know what you have in mind when you read this article. Maybe someone will say that sustainability is something for the rich, meaning rich countries, rich companies and rich buyers. Sustainability is by no means just for the rich, but it is true that many wealthy countries and companies have chosen to make this transition even though they acted unsustainable before.
However, economic success, talented employees and the great interest of investors, customers and others will not help us much if we do not do everything in our power to prevent planetary collapse.
Although the need for sustainable development is great, progress is slow.
The latest Sphera Sustainabity report, based on a survey of 218 experts from companies across a range of industries, shows a clear management commitment to sustainability (51%), but implementation lags behind (21%). In this respect, large companies lag behind medium-sized companies.
Why do we need to think about this in companies in particular?
Simply because about 70% of the world’s purchasing power is on the corporate side, not the country side. In corporations, we can influence how and what resources we use, we can innovate, educate consumers, and develop new, healthier habits. And even if one of those habits is to encourage consumers to buy less or to consume more sustainably and healthily.
Slovenian version of the article was published in Svet kapitala.