The future looks different to the past and a sustainability opportunity is emerging.
This opportunity is broad and deep, but it will not be answered through outsourcing investment decisions to ESG ratings providers. Instead, we need to disrupt the shift to sustainability in its tracks and stall the ESG melting pot from bubbling over.
We need to be brave and admit that there is more to sustainability than decarbonising portfolios and outsourcing investment decisions to external ESG ratings providers. We need to evolve and deliver real value to customers and real world impact.
For years the business school mantra was shareholder supremacy, often placing companies in conflict with other stakeholders. We’ve seen price gouging of customers for short-term profit boost, anti-trust investigations leading to fines and industry disruption from regulators, and expensive high staff turnover and industrial action.
These conflicts can prove to be very expensive in the long-term, with many of the international oil companies today grappling with the significant negative externalities their operations impose on environment and struggling to – profitably – reinvent themselves.
Thankfully it doesn’t have to be that way – the best companies realise that. No longer is it optional for companies to consider their impact – externalities – on the society and environment around them; it is now essential. These externalities are increasingly being valued and priced by a financial system moving away from a narrow shareholder focus.
There is a growing understanding that negative externalities need to be accounted for, and positive externalities create a great long-term growth opportunity for companies who reinforce and invest behind them.
The world’s measure of success – and failure – is changing. Governments, consumers, and employees reward companies that create value for society. For example, the US government has established tax breaks for green energy product manufacturers in the recent Inflation Reduction Act. Additionally, we are seeing fiscal incentives for high R&D companies, and loyalty from consumers driving lower customer acquisition costs and purchasing decisions in favour of better businesses, and employees are motivated and engaged for longer at businesses with strong corporate cultures. We are starting to see a wind of change.
Moreover, this is not isolated to one sector or geography, companies from every sector and market are embracing the view that long-term value creation depends on all stakeholders:
- The US industrial Trane Technologies has committed to reduce their customer carbon footprint by an impressive one gigaton of carbon equivalent by 2030, attracting environmentally conscious customers in the process.
- European pharmaceutical Novo Nordisk is setting to work fighting obesity, bolstering both the health of the population and their return profile.
- -Asian insurer AIA is hiring experts across the field, delivering world class customer service to their policyholders, with strong retention driving long-term growth.
However, to invest with this perspective, fund managers and clients must be brave. To capture this sustainability opportunity – one which is changing the outlook and values of the financial markets – we cannot rely on metrics, and we cannot rely on old tools.
Investors must develop new analytical frameworks to combine both qualitative and quantitative elements and work to price those things that stakeholders value. We can’t just look at those datapoints available and nor can we outsource the decision making to external ESG ratings agencies.
We need to be braver, long term, and comfortable to engage with our portfolio holdings to deliver real world change and sustainability with substance. This is sustainability disruption in action.