Consumers, companies and investors alike are increasingly recognising that environmental, social and governance considerations are becoming vital to businesses’ long-term success. The benefits for wider society are also likely to be far-reaching.
Why sustainable investing is here to stay
There has been an increasing amount of chatter in the press about sustainable and socially responsible investing (SRI) over the past few years. Just as today’s shoppers want to consume more sustainably, today’s investors are starting to recognise that better corporate practices are likely to enhance a company’s long-term competitive advantage.
After all, greater transparency and improved corporate behaviour make companies better to work for and shop at. It makes sense that this should ultimately translate into better returns.
SRI assets across the world’s five biggest regional markets stood at $30.7 trillion at the beginning of 2018. This represents a 34% increase in just two years.
Earlier this year the Morgan Stanley Institute for Sustainable Investing reported that $12 trillion — a quarter of US assets under management — is invested in line with environmental, social and governance (ESG) factors.
The UN-backed Principles for Responsible Investment (PRI) are driving the same cause. The PRI promotes ESG factors when analysing returns and managing risk, and its influence is rapidly growing. It currently has over 2,300 signatories worldwide, representing roughly $80 trillion of invested assets.
Opportunities lighting up
Many investors sleep better in the knowledge that their money is being spent ethically. Yet there are also financial incentives behind sustainable investment.
Towards the end of last year Forbes reported that the cost of developing renewable energy generators across the US had fallen below that of maintaining existing coal-fired plants (the cost of solar is said to have fallen 88% since 2009). This milestone heralded considerable savings for consumers and marked the start of a fundamental shift from traditional to sustainable energy in the US market.
The same Forbes article explained that some US energy providers were planning to retire a significant percentage of their coal capacity ahead of schedule, in favour of lower-cost solar and wind facilities. One major utility, MidAmerican, announced it would be the first to offer 100% renewable energy by 2020 without raising consumer tariffs. Investment opportunities are lighting up as the commercial benefits of low-cost renewables become clear.
Some sectors are investing in sustainable technologies to drive down costs. The construction industry is becoming more sustainable as it realises that increased energy efficiency reduces operational expenses.
A more sustainable approach is also changing the market and pricing strategies of global supply chains, where low-cost procurement is beginning to align more with ESG. For example, freight carriers like UPS are switching their fleets to cheaper, renewable fuels — a move that reduces the cost of global logistics, cuts harmful emissions and offers long-term savings for consumers.
Making a splash
Reputation plays an important role, too. Those companies taking the ESG route may be making a better name for themselves than their less sustainable peers, ultimately leading to better financial performance.
Global water technology company Xylem has become a market leader in water risk management through its development of innovative “smart water” technologies. These improve the quality and quantity of water, as well as the efficiency of wastewater management. Most importantly, understanding the non-financial benefits that smart water brings to communities is a fundamental part of the business and one that is doing Xylem’s reputation litres of good.
Businesses are increasingly aware of the potential financial and reputational damage of serious ESG failures. The deadly dam collapse in the Brazilian mining town of Brumadinho was the second fatal disaster in four years to hit Vale SA, the world’s biggest iron ore producer, and saw the company’s market value drop by $18 billion. In March this year Vale’s CFO reported that its 2019 iron ore sales forecast could be reduced by as much as 75 million tonnes.
There are plenty of other examples of poor corporate practice damaging results. Revelations about abusive working conditions at Sports Direct not only had a negative impact on the company’s share price but also posed searching questions about the retailer’s business model and labour policies. Sports Direct subsequently offered zero-hour contractors guaranteed hours, gave its workforce a meaningful voice at boardroom level and dropped its controversial “six strikes” dismissal policy, which punished employees for alleged offences such as “excessive talking”.
It should now be clear what the press has been chattering about. Better corporate governance drives better corporate practice and a better reputation, ultimately improving long-term financial performance. Investors also benefit from a more responsible approach to consumerism, safe in the knowledge that their money is not driving unethical businesses and practices.
It therefore seems reasonable to assert that companies with strong ESG practices are likely to prosper over the long term. We think that sustainable investment is here to stay.