The Climate of Business #54: Would ESG-aligned thinking help a business wave an upcoming recession?

Climate Change Reality

La Ni?a's shock return suggests important details are missing in climate models (Science Alert)

Meet the band of TV animals that’s talking to preschoolers about climate (The New York Times)

‘Superhero’ moss can save communities from flooding, say scientists (The Guardian)

Tribes are pushing to play a larger role in water-sharing agreements (NPR)

Protests held over climate crisis and energy rises (BBC)

Fossil fuel industry faces pushback in fight for hearts and minds of next generation (The Guardian)

The link between climate change and hurricanes is complicated (The Atlantic)

The sustainable future of food must bring everyone to the table (WIRED)

Five ways media and journalists can support climate action while tackling misinformation (UN News)

After disaster, Alaska town turns to science (NPR)

Business Climate Reality

The challenges of launching a sustainability startup in turbulent times (Forbes)

Jobs in clean energy in Nigeria to double by 2023 (Bloomberg)

? Join the Plan A Event in Paris on October 13, 6pm CET with Webhelp & Talan. ?

How SBTi could unlock billions of corporate dollars to protect forests (GreenBiz)

Pumpkin farms adapt to improve soil, lower emissions (Politico)

From hairy furniture to silk lamps, sustainable design reigns at PAD London (Financial Times)

IKEA's home deliveries will be fully electric by 2025, CEO says (Reuters)

Hedge funds may steer clear of ESG designations over EU rules (Bloomberg)

How Japan is becoming a responsible investment success story (GreenBiz)

Amid rising seas, island nations push for legal protections (AP News)

Reality Check

First and foremost, is a recession really coming? Survey released by WEF said 7 out of 10 private and public sector economists said a global recession was likely in 2023. Ned Davis Research raised the likelihood of a global recession next year to 98.1 percent. Another survey showed that more than 80% of CEOs expect economy contraction in next 12 months.

Clearly there is a consensus amongst many a storm is brewing.

The war in Ukraine, the resulting increase in energy prices, China’s pandemic policies, rising inflation, interest rates have all created a “perfect storm” of social, economic and environmental issues, rattling the economy. Unlike any other similarly economic situation, this time beyond the usual indicators of instability, the economy and its stakeholders cannot skip the other actual storm(s) - climate change - and a question comes - are we going to take a short- or a long-term view with our response to a potential recession?

The answer to this question will define the severity of the repercussions of climate change and the cost our economy will bare.

Should environmental considerations part of the response to a recession?

Questioning a continued focus on ESG-related considerations when investing or setting up the strategy for your company in a moment of instability is understandable. Many recently learnt what E, S and G stands for, started preparing for the regulatory framework and all of a sudden they need to combine this with an agenda in response to a downturn.

However, for those with a more in-depth view on the reasons behind the economic reality we face, there isn't any doubt the instability comes from lack of long-term view with key focus on resilience.

As the repercussions of climate change become even more evident in the coming months and years, so it will be clear we need:

• more resilient supply chains
• decentralised energy supplies
• climate risk budgets
• adaptable business planning practices
• stakeholder collaboration for effective adaptation

These concerns extend to the S (social) and G (governance) topics as although rightfully the overall healthiness of a company relies on stability across all these indicators (if one fails, the success in others is undermined).

The good news that this kind of thinking isn't an opinion, but rather fact-driven.

Why is managing Environmental, Social and Governance (ESG) issues relevant to a business?

What are the advantages to investing or planing with ESG considerations in mind in the face of a recession?

Environmental, Social and Governance investing and strategy development look at previously thought of intangible assets in the same light as financial assets.

• They look and focus on factors which others see traditionally as the intangible assets, such as employee engagement, customer satisfaction, the quality of the supply chain, environmental management, and so on.
• These assets actually can be a better indicator of the company’s stability long-term.
• They help anticipate some of the key challenges for management quality.
• Allow for more stable budget planning.

ESG investing or strategy development inherently focuses on the long-term perspective versus the short-term. 

• Recession is episodic and it will end eventually meaning that planning for long-term emergence and sustainability is key if a company wants to come out future-proof and competitive.
• Part of the ESG framework enables companies to strategically allocate assets and create efficiency and cost reduction, which enables the portfolio to be able to weather unexpected recessions and volatility. 
• Therefore companies that follow ESG principles have been shown to be in general more resilient as they show stronger governance. 

ESG portfolios reduce volatility.

• Morningstar had the 2018’s most volatile stock market weeks analysed and it showed that in the US during those weeks 2/3 of all sustainable funds still ended up in the top half of their categories.
• ESG scores also have been proven to be a strong indicator of earning risk, meaning that companies with a higher score tend to have higher returns. 

If you look at it even through the lenses of different channels, a strong ESG profile has proven to be a good indicator of success, as even if the effects are not too strong at the beginning, they tend to last for several years, which is what is much needed in the given reality.

Case Study: Japan

Japan for example is becoming a responsible investment success story:

• Global Sustainable Investment Alliance report (GSIA) showed a 65.8 percent year-on-year increase in responsibly invested assets, representing a balance of $3.7 trillion at the end of 2021. 
• There is a strong collaboration between policymakers, companies and the financial services sector, which in turn creates a robust framework with ESG its core.
• 70 percent of Japanese asset management firms look at ESG factors since they will affect future corporate value.
• The nation’s Government Pension Investment Fund (GPIF), which is the world’s largest retirement plan with $1.6 trillion in assets, even has a dedicated ESG investor.

Even assuming a lower 15% growth in ESG assets it will still be a third of the projected $140.5 trillion global total by 2025.

With the green recovery efforts, plus EU pledges, the U.S. energy strategy and even China’s 2023 green-debt the growth is unlikely to slow down.

Planning for the short term might seem like the only option today, but only those businesses and investors who think with the longer term in mind can rely on success in the future, as reliance and adaptive mindset become key in a vulnerable to climate change economy.

“One day we will drop the word 'sustainable' because it will simply be the core of all great portfolios.”

Mark Wiedman from BlackRock

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